2009: The Year Wall Street Bounced Back and Main Street Got Shafted

In September 2008, as the worst of the financial crisis engulfed Wall Street, George W. Bush issued a warning: “This sucker could go down.” Around the same time, as Congress hashed out a bailout bill, New Hampshire Sen. Judd Gregg, the leading Republican negotiator of the bill, warned that “if we do not do this, the trauma, the chaos and the disruption to everyday Americans’ lives will be overwhelming, and that’s a price we can’t afford to risk paying.”

In less than a year, Wall Street was back. The five largest remaining banks are today larger, their executives and traders richer, their strategies of placing large bets with other people’s money no less bold than before the meltdown. The possibility of new regulations emanating from Congress has barely inhibited the Street’s exuberance.

But if Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption.

It is commonplace among policymakers to fervently and sincerely believe that Wall Street’s financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009.

Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did.

It’s easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart.

But if 2009 has proved anything, it’s that the bailout of Wall Street didn’t trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can’t get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating. Top executives and traders on the Street will soon be splitting about $25 billion in bonuses (despite Goldman Sachs’ decision, made with an eye toward public relations, to defer bonuses for its 30 top players).

The real locus of the problem was never the financial economy to begin with, and the bailout of Wall Street was a sideshow. The real problem was on Main Street, in the real economy. Before the crash, much of America had fallen deeply into unsustainable debt because it had no other way to maintain its standard of living. That’s because for so many years almost all the gains of economic growth had been going to a relatively small number of people at the top.

President Obama and his economic team have been telling Americans we’ll have to save more in future years, spend less and borrow less from the rest of the world, especially from China. This is necessary and inevitable, they say, in order to “rebalance” global financial flows. China has saved too much and consumed too little, while we have done the reverse.

In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up — had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share — most Americans would not have felt the necessity to borrow so much.

The year 2009 will be remembered as the year when Main Street got hit hard. Don’t expect 2010 to be much better — that is, if you live in the real economy. The administration is telling Americans that jobs will return next year, and we’ll be in a recovery. I hope they’re right. But I doubt it. Too many Americans have lost their jobs, incomes, homes and savings. That means most of us won’t have the purchasing power to buy nearly all the goods and services the economy is capable of producing. And without enough demand, the economy can’t get out of the doldrums.

As long as income and wealth keep concentrating at the top, and the great divide between America’s have-mores and have-lesses continues to widen, the Great Recession won’t end — at least not in the real economy.

Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

7 Responses to "2009: The Year Wall Street Bounced Back and Main Street Got Shafted"

  1. economicminor   December 28, 2009 at 11:18 am

    It took Robert Reich until now to figure this out? I have been writing about this for a few years now while some have criticized me as waving a banner for class warfare.The reality is that we have had class warfare going on for probably 30 years. Those with capital used it to influence the Powers in Washington DC to change the laws slowly over time so that they could have more and more of the pie. With the excuse that capital accumulation in the hands of those who knew how to put it to work would benefit everyone.Well, did it benefit everyone? Not hardly. They sold our jobs off to foreign enterprises and they sold us loans to make up the differences created by our lowering incomes.Then when our loans were going bad, they convinced the Powers in Washington to bail them out. Not us, but them.. So they get even more of the pie while we got the debts… All in the name of saving America..Where will this end?I imagine that it will eventually end in violence because it is obvious that those at the top of the economic ladder have no intention of sharing now that they pretty much have total control of the country’s financial resources. I am encouraged that some in Congress are talking of replacing Glass Steagall but I will believe that when it happens. There are a few talking about forcing transparency at the FED. I will also believe that when I see it.I don’t know whether the realization of potential consequences is finally occurring to a few like R Reich, Krugman and others and will spread but they will have an up hill battle against well paid entrenched interests who, like both the English and French aristocracy of three centuries ago were also unable to see the consequences of their selfishness.Minsky was so right. Not only about economics but also about politics.. In periods of low risk is when the pot starts to boil and few are noticing. Our pot is boiling and if the fire is not turned off, it will boil over.Any institution, especially one that produces nothing and makes its income from gaming and debt, who makes so much that they can pay their top executives millions and then have extra for bonuses in a time like this should sent to the red queen of Wonderland to be dealt with. These TBTF institutions operate more like mafias than institutions that are critical to our survival.It is totally insane that they have this kind of profit when Main Street’s economy is in the sewer. Anyone with a even a small amount of common sense should know that this indicates a totally broken system. And that when a system is this broken, you don’t fix it by supporting the portion that is causing the imbalance. That just makes the system wobble even more…Does anyone on Capital Hill have any common sense left? If so, where is your back bone?

  2. richardindenver   December 28, 2009 at 12:46 pm

    Washington is now so politically corrupt and out of step with economic reality that only some “drastic” event can return the USA back into some semblance of believable and grounded economic fairness. Our congressmen and senators are so dishonest and gutless that asking them to reform this “moneyed and favor” driven ruling class is akin to asking Charles Manson to become a “real nice guy.” Yeah, right.

  3. Curtis Henson   December 28, 2009 at 1:21 pm

    China engages to destroy the U. S. in a financial war. They enlisted Wall Street as a traitor to the American people buy exploiting Wall Streets greed in shipping away jobs. China’s cheap goods have corrupted our sense of value through exploiting out excessive materialism. China prevents us from turning the tables by pegging their currency to ours.Does a service economy eat itself like cancer?Do labor union administrations lie to their members, artificially inflate wage rates beyond global considerations?Is immigrant labor rising because of an artificial minimum wage, excessive child labor laws, and a cronic “too-good-for-that-job” attitude?Is America over priced due to moral hazard inherent in the excessive use of insurance and credit?Do party affiliations mean anything in Washington as it seems both parties represent the wealthy, rather than the people?

    • 11b40   December 28, 2009 at 3:45 pm

      Great observations and questions. Just don’t forget to include Congress in there with Wall Street when drawing up the list of traitors. The “greed is good” mentality, expressed by Gordon Gecko in the movie Wall Street, that took hold of America in the 80’s has been a disaster. As one at the forefront of the boomers, I am ashamed of my generation the off-spring we sired.Everything is for sale now, it seems. You want a Congressman? Well, step right up and check out the price list. Let’s see. A House member can still be had for a relatively small sum, unless he is a ranking member on a Committee. Ranking members cost a little more, and Chairmen a little more still.The price goes up with a Senator, but you get so much more. Any one of those bozo’s can stop just about anything from happening, and they don’t even have to explain if they don’t want to. Ranking committee members are more, and if you want a Chairman, well be prepared to write big checks to his campaign…and the campaigns of others he orchestrates. Yes, it looks like a lot going in, but the long-term benefits are astounding – returns on investment like you have never seen! Just ask the Health Care industry how happy they are with Max Baucus?I don’t really mean to single out Max. He just happens to be very visible right now, and so much money is involved, but the same kind of crap goes on under the dome every day. The Federal budget is the biggest pile of money (credit, that is) on earth, and charlatans from every corner of the world look for ways to insert a feeding tube from it (us) to them. They even have a name – “special interests”, and it is so common that no one bats an eye anymore when they hear it. Our so-called leadership “serves” the country long enough to line up sugar plum jobs with lobbying firms or specialized contrators, then come back and peddle their influence with the conections they made while “serving”. Never mind if that special interst is a foreign government working against the best interest of America or a corporation looking for a loophole to be written into law for themselves. Just forget about the fact that by definition, a “special interest” is AGAINST the “general interest” (us).To answer your last question, no, party affiliations are only important around the edges. Both are bad in their own special ways, and both are bad in the same ways. Neither has the best interest of America at heart. Oh, they say they do, and many may believe it, but their actions belie their words.Nothing will change until the campaign laws are changed, which is about as likely to happen as term limit laws being passed.I have voted both ways in over 40 years, never missing an election that I recall. As much as it pains me to think about it, I am about to reach the conclusion that we need to vote against ALL incumbants. Just turn the apple cart upside down and start over. If enough House members and Senators got turned out in the next cycle, 2 things might happen.One, the rest of them would notice and we might see the voter’s interests catered to a little more.Two, the special interest money would not know who to safely bribe & by the time they figured it out, they may have been voted out, too.Some how, some way, we simply must figure out how get the criminal majority out of politics and find a better class of leadership…although, I fear it is too late already. We have already been sold.Independent Contractor

  4. economicminor   December 28, 2009 at 3:29 pm

    You are correct. We do not really have a two party system. We have a one party system that uses the appearance of separate ideology to divide and conquer the masses.The two parties represent a rhetorical difference only. They use their rhetorical differences to further divide and separate the populous while they fleece us. It is a con game as old as time. Three card Monte or bait and switch.The Republicans pushed thru Medicare prescription drug reform to benefit the insurance companies and the pharmaceutical industry. Now they scream and cry that the Democrats are trying to push thru what is called health care reform that will benefit the insurance companies and pharmaceutical industry.The difference is only in who they pretend to represent. Where were these same Republican Deficit Hawks when the Prescription Drug bill was passed or when GWB wanted to go to war in Iraq without just cause? Who was representing “We the People” at any time in the last 25 years?Which party represents Wall Street? Or should I say, which one doesn’t?Where is the Justice system when politicians can swear to defend and uphold the Constitution when it is obvious that they don’t?”We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

    • 11b40   December 28, 2009 at 4:07 pm

      Hear, hear, em!Congress is a complete tragedy. We would likely be better off without them at this point. Regardless of the the dire situation on the daily agenda, their solutions are consistently turning out to be worse than the original problem. As soon as the books are opened and newly revised laws start to be written, the lobbyists swoop in to insert their favorite loopholes. By the time a law is drafted, it has more holes than Swiaa cheese and ends up costing us way more while solving nothing and benefiting fewer.Repeat this until it becomes a mantra – Special Interests are against the Common Interests! There should be billboards with this on it. It should scroll across the bottom of TV screens on every channel. It should be taught in school. Special Interests…saying it should make one want to spit.Oh, and by the way. Why are corporations allowed to make ANY political contributions? Simply making it illegal to contribute to a campaign unless you are a registered voter would end a lot of this mess quickly. It would also mean that campaigns would cost a lot less and we might start seeing a much higher quality level of candidate. As it stands today, unless you have already sold out to some interest group, you can’t even give serious thought to running an election for National office. You must have the seed money provided by the financial industry, real estate industry, medical industry, lawyer’s association, etc., etc. A real reformer can’t get a second look. Special interests do not want reform – only more largess for thier members….and to hell with the rest of us.Independent Contractor

  5. Barry W. Shook   January 1, 2010 at 10:04 am

    Good points made here about the quality of our Congress and Senate. It’s time to replace all of them, regardless of the party they belong to. Replace them all, and the American public will make a point to big business. They’re next. There is no such thing as too big to fail.