Paul Krugman had an interesting column in the New York Times today. Krugman argues that Wall Street, like the insurance industry, is a victim of its own hubris. He believes that the administration will quickly boost job creation programs, and shift its focus away from the financial sector. In Krugman's opinion, this will lead to a lasting economic recovery.
While Krugman is right to say that job creation is what will ultimately save this economy, his contention that financial reform will spur job growth is too optimistic. The problem with the economy is a basic disconnect between Wall Street and Main Street. Wall Street doesn't understand that Main Street's resources are limited, and that bidding up commodities strains Main Street's economy. Main Street hasn't yet figured out how to tell Wall Street that stable commodity prices are ultimately in everyone's interests.
This gets to the basic problem with the economy as I see it: the commodity market turning into a Casino. What sparked last year's meltdown was not high risk mortgages--though the banks did peddle too many of those. It was a gas price spike which roughly doubled the amount Americans paid to commute to work in less than a year.
The oil market is under control for the time being. But the food market--also a commodity market--isn't. But this isn't a problem for the notoriously inflation-wary Wall Street because financiers have convinced themselves that food and gas inflation aren't really inflation.
Wall Street seems to have this idea that you can make endless money off of raising the prices for basic necessities (food and gas). In a culture where you get seven figure bonuses for doing the worst job that has ever been done in your field (see: AIG), I guess that makes sense.
But in regular America, people make a set amount. Wages have been stagnating, and hours have been declining (meaning take home pay is actually down). That meager, in Wall Street's eyes, $50 a week needed to pay for food for a family of four really shouldn't make that much of a difference. But to a family of 4 on a 40,000 a year salary--that's a typical family--that represents about 6% of their take home pay.
If they had a budget that allowed for entertainment, that budget is now being used to cope with the costs of basic necessities. So they're not buying the new TV. The salesperson isn't getting his commission. They're not buying a new car, and a whole line of people from the dealer through to the plant manager at GM have less work. They're not going on vacation (side note: if people want to know why August is such an angry month, there's your answer).
They're not going to the movies, so the theater is closing. They're not going to the ballpark, even if the team slashed prices. They're not purchasing DVDs. They're not eating out--and the waitress, chef, and restaurant manager are all getting laid off because of it.
The people who are getting laid off are defaulting on their mortgages and credit cards. The Financiers who bought those mortgages, and credit card loans. on the derivatives market desperately need to make a quick buck to meet "The Street's" expectations, so they bid up prices on the commodity market in order to make a quick buck.
And the cycle compounds itself. Our economy functions by making things. But we put people who have never actually made a single item in their lives in charge of it. The result is what is theoretical in their minds has disastrous real-world consequences. Wall Street's utter lack of understanding about American life causes a sick cycle that never ends.
Reform isn't even needed. What's needed is a massive tax increase on Wall Street: a Capital Gains tax increase, a trading tax (this would discourage speculation), and perhaps limiting the amount of commodities that can be bought if you do not intend to take delivery of the commodity.
These steps would provide consumers with stable prices. As long as consumers are worried about price shocks, they are not going to spend discretionary income. And if consumers aren't spending discretionary income, the sad cycle of layoffs, defaults, price shocks, consumer cut backs, and more layoffs and defaults will continue. But the chances of commodity reform happening are slim, which makes Krugman's viewpoint--for once in his life--too optimistic.