Wall Street Used Main Street, Let's Get That Straight

Money manager Peter Schiff is one of the only guys who called the financial crisis we are in years ago. Check out youtube and see him on Fox News in 2006 when the Fox hosts were making fun of him.

So I tend to check out his Euro Pacific Capital website to hear what he has to say. He tends to call it like it is. But I take his latest as just too simple:

"The president claims that his constituency is Main Street, not Wall Street. But for all the scorn heaped on the “fat cats,” we must remember that it took two to tango. Sure, Wall Street loaned out too much money, but it was Main Street that borrowed it. Average Americans used the windfall for the biggest shopping binge in world history. As a result our entire economy has been transformed from one based on savings and production to one based on borrowing and consumption."

Americans borrow too much. I get that.

Did Main Street package the mortgages, sell them around the world as securities, then invent derivatives and other risky instruments like credit default swaps, and force the big banks and investment houses to load up on all these risks? No, Wall Street did that.

Peter forgets that the Fed keep interest rates low for far too long. The Government let the derivatives markets go unregulated. Mortgages from across the country were allowed to be bundled to obscure the risk ratings, then sold as AAA rated to investors around the world. All that collusion, all those fees generated along the way, all the risk insured? Main Street did that?

Say I bought a house I couldn't afford at $100,000. I end up walking away from the house because the ARM got too high. At the same time the house depreciated by 40% and is now worth $60,000. Is that why Merril Lynch went under? Is that why AIG is bailed out. Is that why Lehman Brothers is gone? It's not like these companies had bad years and earnings are off. They don't exist anymore!

Mortgages became a new currency when cash was not good enough. The mortgages were made so easy to get because the holders of the debt could leverage it 20 to 30 times. Some big companies were allowed 40 times. It amounts to trillions of dollars in paper that simply have no value once a mortgage is defaulted or a company goes bust.

That is why we are in the mess we are in. The naive person buying the unaffordable house was part of the problem, but the much much bigger aspect was what was done by Wall St.

For Peter to say "two to tango" is disingenuous.

Source: Peter Schiff