The Long-Term Main Street Bailout

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by John Tamny,  Toreador Research and Trading (Guest Contributor)

The rush among nominally healthy banks to pay back TARP funds has unsurprisingly generated a great deal of controversy. Commentators and politicians alike are bothered given their certain knowledge that once the money is paid back, banks will resume compensating their employees as they see fit.

The paybacks in no way absolve the banks that needed government funds to stay afloat, and which should have been allowed to go bankrupt. Still, it's a tautology to say that the only true assets banks possess are their employees, so in order for them to at least make a stab at credibility in a post-bailout world they must free themselves of government oversight so that they can keep their best people in their employ.

Basically it's time to acknowledge reality. All businesses - including banks - are in the business of profit, and as profits are always a function of quality workers generating them, banks are presently seeking to remove the compensation barriers that would make profits a more distant object.

The TARP paybacks have also led to the resumption of a particularly absurd line of thinking which suggests that Main Street was treated unfairly when the symbol that is Wall Street was bailed out. As the Wall Street Journal's David Wessel recently put it, "Wall Street got bailed out, and Main Street didn't."

Wessel's assertion raises many questions, most notably the one that asks if a senior reporter for the world's foremost business publication can get things so demonstrably wrong, can we really believe anything that we read? Indeed, was Wessel's suggestion that "Main Street" didn't receive a bailout in truth an unedited typo, or does he actually believe that Main Street was an innocent, hapless bystander unfairly ignored in the whole financial mess?

 Hopefully not given the simple truth that Wall Street's present struggles are to some degree a function of long-term efforts to redistribute wealth and credit to Main Street. Absent the collectivist instincts of politicians in favor of the average American, it's highly likely that Wall Street's problems wouldn't even be a news item.

First up, it should be said that Main Street quite simply did not bail out Wall Street. If by Main Street we're supposed to assume ordinary individuals in terms of wealth, the reality is that the ordinary in this country don't contribute a lot in tax dollars to the federal government. Instead, the top 1% account for 40 percent of federal revenues, which means ill-advised as the bailouts were, it was largely "fat cats" bailing out "fat cats."

Secondly, it should be said that judging by market returns, Wall Street's best years in the last four decades were the '80s and '90s when the dollar was strong. Conversely, Wall Street's worst years were the '70s and the present decade when, in a misguided and contradictory effort to bolster the fortunes of manufacturing firms staffed by Main Street workers, politicians sought dollar devaluation meant to goose exports. It didn't work, but this failed attempt at wealth redistribution weakened Wall Street to Main Street's alleged gain.

Furthermore, when we consider that a falling dollar has regularly correlated with rising home prices (the Case-Shiller Housing Index is up 146% since 2000 versus a roughly 7% decline in the S&P 500), the dollar devaluation that has always driven poor stock-market returns aided the average American homeowner as housing prices skyrocketed. These gains were largely illusory, but judging by headlines in the not-too-distant past about normal Americans borrowing against inflated home prices for all manner of consumption, it seems a currency devaluation utterly inimical to Wall Street's long-term interests directly aided the ordinary in our midst.

Looking at what made home ownership for the average American so attainable, what might explain this? Politicians and the commentariat regularly score points decrying the financial innovations such as mortgage securitizations that made ownership far more accessible, but none were bothered when those markets were buoyant and Main Street was achieving the alleged dream of home ownership.

One reason ordinary Americans pay so little in taxes has to do with tax breaks on housing which directly aid them. Politicians wail about "predatory" mortgage brokers, but they never acknowledge the "predatory tax benefits" such as the mortgage-interest deduction which made taking on a mortgage all the more appealing.

Looking at the capital gains treatment on home sales, "fat cats" tend not to live in houses worth $500,000 or less, but Main Street types do. The zero capital gains rate on those houses made home ownership on Main Street even more appealing, and was directly subsidized by the high earners who once again account for the majority of federal revenues.

Regarding Fannie Mae and Freddie Mac, it's safe to assume that if both didn't exist, that Lloyd Blankfein, John Mack and Jamie Dimon would still be owners of multiple homes. But to believe the GSE's top political patrons, Fannie and Freddie do make ownership a more realistic prospect for the average American. As for the Community Reinvestment Act which essentially requires banks to make non-economic loans in blighted neighborhoods, it's safe to say that the "fat cats" in our midst live where banks and loans have always been plentiful.

When the loans made to individuals on Main Street and our nation's rougher streets proved difficult to pay back, both the Bush and Obama administrations asked banks to "voluntarily" rewrite them. And if Main Street individuals heavily in debt still weren't able to pay them off, they were able to "walk" their mortgages while leaving banks and Wall Street to clean up their messes.

Contrary to the ramblings of David Wessel and others of his ilk, Main Street has been subsidized and bailed out for years given the desire of politicians to achieve unnatural, non-market outcomes that would never have revealed themselves in a completely free market. More to the point, the struggles of Wall Street and the banking industry more broadly are partially the result of politically correct measures (past and present) taken to redistribute wealth to Main Street.

This once again in no way absolves Wall Street for the bailouts that it needed, and which its firms tragically took. The bailouts merely served to weaken the economy more as politicians sought to erase their first mistaken attempts at central planning with more of the same.  All of this was certain to end in tears. 
Indeed, as the great libertarian Albert Jay Nock long ago observed, government efforts to create unnatural market outcomes always lead to consequences much worse. In short, Wall Street's crack-up was to some degree the market's rough justice in response to a long-held collectivist mindset which said Main Street should be coddled on the dime of those not residing there.

                              About John Tamny:
Mr. Tamny is a senior economic advisor to Toreador Research & Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channel.