Many people have been quick to blame “Wall Street” for the current economic crisis. I believe that when the media refers to that term, they are talking about, broadly speaking, mortgage and loan underwriters, bankers that securitized products and investment professionals that purchased those securities. Without a doubt, “Wall Street” is one of the biggest reasons why we ended up in the mess we are going through.
“Main Street,” whatever that refers to, claims to have been victimized by “Wall Street.” Predatory lending standards were undeniably rampant, and the statement is true — but only to a certain extent. One of the biggest reasons why we are in this mess is the American consumer: precisely, “Main Street.”
From 2000 to 2007, American household debt as a percentage of disposable increased from roughly 100 percent to 140 percent. The expansion of credit led American consumers to purchase houses, draw home equity lines on their homes, get more credit cards, and take out loans on autos. I would characterize this sort of behavior as profligate at best and decadent at worst.
As commercial banks and loan servicers made these loans, “Wall Street” began to securitize these products — that is, package a whole bunch of loans or mortgages into new products and sell them to investors. They claimed this way the individual risks of single loans defaulting were effectively mitigated and transferred. And they did this just about as much as A-Rod did steroids while he was a player with the Texas Rangers. And just as A-Rod is guilty, so is “Wall Street.”
But before all the blame is placed on “Wall Street,” take a step back and consider what would have happened if the American consumer had been a little more prudent. Consider the story of the man in California who, on a $50,000 yearly salary, decided he could buy a $500,000 house. Also, look back at all the speculators who bought homes without even occupying them, looking to make quick, easy money by selling them later.
Had American consumers lived a little bit more reasonably, or wanted to work a little bit harder and earn a well-earned living, these “Wall Street” bankers would not have been able to securitize mortgages and loans. And maybe we would not be in the mess we are in today.
So the next time you feel schadenfreude when you read about another round of layoffs at “Wall Street,” be sure to also look at “Main Street” and shake your head in disappointment.
Marcelo Kim is a senior in Morse College.