Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Main Street, Meet Wall Street

By

A bank collapse could bring market very close to home

PrintPRINT
Bear Stearns collapsed last March and sold itself to JPMorgan Chase (JPM) for a piddling $10 a share.

Main Street yawned.

On July 11, federal regulators seized IndyMac, the second-largest independent mortgage lender in the United States. There was a run on the bank; it filed for bankruptcy protection August 1.

That's hitting closer to home, even for Main Street residents outside of California.

The general public's ho-hum reaction to the collapse of Bear Stearns underscores a basic point: Wall Street and Main Street are parallel universes.

Those who live on Main Street have immediate concerns: Prices at the pump, the ongoing expense of kids and school, plus paying the bills each month. In short, real life is tangible, and trumps red and green numbers flashing on a trader's computer screen.

It will take a black-hole event -- such as the collapse of a major commercial bank -- to get most people to think about the connection between Wall and Main.

Such a collapse may be in the offing; in fact, it could happen in the next few months. If so, it would eclipse IndyMac in size and importance.

"The US [economy] is not out of the woods," Kenneth Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard, told the London Times at a conference in Singapore. "I think the financial crisis is at the halfway point. I would even go further to say the worst is to come…We're going to see a whopper."

Rogoff did not speculate on which banks may be in trouble.

The housing slump has resulted in about $500 billion in credit market losses globally and brought down Bear Stearns, once the fifth-largest US securities firm. Fannie Mae (FNM) and Freddie Mac (FRE), the nation's largest mortgage-finance companies, are in deep trouble, and have lost about 80% of their market value this year.

Uncle Sam may be forced to bail out Fannie and Freddie, and the result may be something like nationalization. Whatever it is, it won't be cheap - and the government-sponsored enterprises probably won't exist in their present form.

But until a major bank fails, concerns about it are Never-Never Land stuff for most inhabitants of Main Street. However, inflation is an immediate threat.

Last month, inflation rose to its highest level since 1991, but the Federal Reserve has kept its key interest rate at 2% after an aggressive series of rate reductions. Rogoff says this will lead to higher inflation in the next few years.

Main Street understands inflation; anyone who cares to can read about the slow economic growth and high unemployment -- stagflation -- of the 1970s.

The disconnect between Wall Street and Main Street isn't because the inhabitants of Main Street are ignorant or uninterested - after all, many own mutual funds. It's simply because people get wrapped up in their own lives and have little time, or reason, to contemplate the glories of derivatives, options, hedging, bond spreads or, outside breathless tales in the general press, IPOs.

But most people know credit is drying up, and many homeowners are forced to sit tight before pursuing the dream of trading up to a bigger house in a better neighborhood. That dream may be about to get slammed by harsh reality: Banks repossessed about 3 times as many houses in July as they did a year ago, and the number of houses at risk of foreclosure increased about 50%.

But an even harsher reality could hit Main Street.

The dog that didn't bark helped Sherlock Holmes, Arthur Conan Doyle's master sleuth, crack the case of a stolen racehorse. So far, a major bank failure has been the dog waiting to bark for the American economy. If a major bank goes under, the fallout from the economic downturn will bite just about everyone.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE