The Battle of Wall Street vs Main Street

Tallying Up Winners and Loser, in the dizzying whirlwind of programs and promises, the government is pushing trillions of dollars out through dozens of vehicles in an effort to keep what could easily be a depression at bay. Federal Reserve chair Jerome Powell has promised to create an unlimited supply of freshly printed money to make sure that the wheels of big business keep turning; Secretary of the Treasury Steven Mnuchin has hundreds of billions of dollars sent there by Congress to discretionarily juice corporate America balance sheets and paper their transition to recovery.

Aggressive Tactics

This unprecedented flood of cash and credit may well do what it has been intended to do, and shift what would almost certainly become a depression into just a recession, much as the remedial measures taken in 2008 likely accomplished the same. In fact, the reactions to the last economic crisis are serving as the rallying cry for the far more aggressive tactics this time around; the thirst for a faster, stronger recovery has lifted the constraints imposed a dozen years ago. Perhaps most stunningly, it has led to the radical pronouncement of Secretary Mnuchin — a Republican — that deficits are irrelevant, a statement that would have led to open revolution by that same party not a decade ago.

In the midst of all this largesse, it is easy to lose track of what changes are being wrought by the unprecedented actions taken by the government. There are fundamental changes to the role of our financial governance, including the merging of fiscal and monetary policy in ways unimagined just a few months ago. There is the coming reckoning of levels of the federal government debt piled far beyond any economist’s fevered nightmares. The value of money, the freedom of our markets, the acceptable levels of manipulation of our currency and key interest rates are all questions newly opened up, seemingly without forethought or debate.

The New Expectation by the Markets

There is, perhaps least understood, critical precedence being established for Congressional and Reserve responses to future crises, a new expectation by the markets and the marketplace of future government intervention and support. How will a future government reasonably claim limits on their ability to react and to provide resources; the actions of today’s government have forever proven that any limits are imaginary.

Some of these issues have been addressed in my previous articles; others are yet to happen or be understood. They can often feel academic as if they are abstract concepts and not something tangible; when we hear numbers in the trillions, can they even resonate with us? Certainly, for most people, the idea of a $1,200 credit to our checking account is far more real than the concept of a $30 trillion federal deficit, even while the cash will be gone in a moment, and the deficit will impact our lives for generations.

It is in this brave new world that a critical battle was waged and immediately decided. Perhaps it was a foregone conclusion, but the results may well determine much about how we live, where we work and what we buy. It was, and is, the battle between the stock markets and what we consider to be the general economy, a choice between Wall Street and Main Street.

To end the suspense, Wall Street won. It wasn’t particularly close.

To oversimplify matters, we can consider Wall Street the amalgamation of our largest corporations, those that are traded publicly and that we often refer to when we say stocks. On the other side, we can consider Main Street the massive proliferation of small businesses: the storefronts, the restaurants and hotels, the producers and services that we engage with daily.

In addressing the economic crisis, the government had — as they proudly acknowledged — truly unlimited assets and resources to devote to their solutions. The Federal Reserve and the Treasury determined to dedicate several trillion dollars in providing unlimited capital at zero interest rates to major corporations, and the stock market roared upward in appreciation. On March 23, as the Dow Jones Industrial Average bottomed out around 18,000, the government announced a variety of programs and new facilities. This led to a rally of 3,000 points over the next few days, and over 6,500 points in the next few weeks. The stock market went from a bear market to a bull market literally overnight and continues to point upward.

Paycheck Protection Program

On the other side of the ledger, the relatively tiny Paycheck Protection Program was set up to support small businesses. Funded with $250 billion, a wholly inadequate sum, it ran out of capital within hours, and the hastily thrown together distribution system collapsed under the weight of millions of applications. In a terrifically damaging PR moment, a portion of the funds from even this program was siphoned off immediately by larger and publicly held companies, at the expense of the businesses it intended to help.

Most notably, the terms and conditions of the funds were so mismatched to the needs of those that it was meant to support, that once they understood the drawbacks many businesses began rejecting the loans. By the time that Congress authorized addition funding, the appetite for the money had largely dried up.

So, the big guy wins, and the little guy gets punted. Nothing new there.

Perhaps there is. Take the example of Walmart: during the first quarter of this year, Walmart set a record with some $4 billion in net income, led by its e-commerce section jumping 74% for the period. Armed with unlimited capital for expansion, and an expanded engagement with on-line shoppers, Walmart is poised for a period of rapid growth and an increased presence in the consumer playbook. We have seen the impact that the previous expansion of the chain has had on Main Street in normal economies; this time, with those small businesses trying to dig out from under the rubble, Walmart will have an open field to romp.

Critical Innovations and Solutions

Or, take Amazon, whose earnings rose from some $59.7 billion in the first quarter of 2019 to $75.5 billion in the same period this year, an increase of about 26.5%. Throughout America, the winners of this period have been the largest companies, the best-funded and most omnipresent. With the consumer landscape laid bare, and the small businesses devastated, there is a chance for a meaningful take over of Main Street by Wall Street.

That might seem like a curious statement. After all, small businesses are, well… small. Reality is that the small business universe is enormous, just composed of millions of small pieces rather than the monolithic entities of Wall Street. Small businesses, the majority of which have less than 20 employees and are privately owned, account for about 45% of all economic activity in America. Various studies have claimed that up to 80% of the new jobs produced in the United States over the past decade have come from this sector, as have critical innovations and solutions.

In the battle between Main Street and Wall Street, the two sides are fairly matched in size and economic impact. Despite that, the funding provided for Wall Street, and the effort of the government to support it, could not have been more disparate. While trillions are being pumped into large corporate coffers, small businesses — those on the front line of the shutdown — have received a couple of crumbs, and even those have been expensive and difficult to access.

Risk of Bankruptcy

It is suggested that as many as 7.5 million small businesses are at risk of bankruptcy today. The almost assuredly undercounted unemployment totals are approaching 40 million, well over a third of our participating labour force. Hunger is a presence in at least one in four households, and states and cities are facing dramatic and painful decisions over what cuts to make to the heroes of the time: hospitals, medical professionals, police, firefighters, teachers and public servants of all stripes.

Wall Street is doing quite well, thank you. Despite earnings that will surely decline for most, and plunging consumer spending and confidence, it sits at a level close to where it was just a few months ago. Optimism for a rapid recovery for those companies is rampant as investors worry about missing out on the next rally, and analysts predict new record highs in the coming year. The first battle was over before it began; Wall Street had champions throughout the government, the Treasury and the Reserve. Main Street had some human interest stories on the evening news, and little else.

There will be a price to be paid eventually, of course. The massive deficits will create their own existential crisis as they come to roost. The diminution of a strong entrepreneurial presence will destroy important industries in commercial real estate and construction. The concentration of purchasing power in fewer and fewer hands will cause producers to struggle with lower margins and continue their consolidation. The unemployment numbers will improve from here, of course, but will not recover as the distribution of jobs is skewed.

The face of America will most likely change, at least for a while. The vibrant colours of independent food, art, clothing and products will be muted as the omnipresence of the chains and dominants crowd out the singular and the experimental. Innovation will come more from the labs and focus groups, and less from the crazy with a dream. That is the path that the government has chosen, and that’s what will come.

American Entrepreneurial Spirit

The American entrepreneurial spirit is not that simple to defeat, however. History promises that the obstacles that this period presents will be met with the resilience and creativity that has marked this nation’s ascension in the world. There will be green shoots, then saplings, then trees that emerge in whatever grounds are left to plant. That, too, will come.

This battle went to Wall Street. It wasn’t a fair fight, and there is reason to worry that there was so little debate, such a lack of negotiated terms of surrender. The scars, the costs of this battle are yet to be understood or paid.

The war is a much longer thing, and the victor then is likely to be the same side who just lost, the people of America. We can still move the nation in that direction, through paying attention to the policies and positions of the next wave of politicians. We have the one weapon that neither the Federal Reserve nor the Treasury can wield or redirect: we can vote.

And so, we must. We can, and must make our too-quiet voices loud now. We can, and must rebalance the scales. We can and must take control of the direction of our country and its economy. We can, and must defend Main Street, and in so doing, save Wall Street from their own shortsightedness and appetites.

We can, and we must win this war.