Smash-Up at the Corner of Wall and Main

THAT CRASHING DIN you noticed (wherever you are in the world) was the sound of Americans’ 401(k)s and IRAs toppling inwards, like the mighty twin towers of 9/11. It was the price that everyday folks paid for the lack of transparency in the over-the-counter credit and credit derivatives markets.

Smarter minds have long since dissected last year’s subprime blow-up, which triggered this year’s meltdown in the wider capital markets. Essentially, institutional investors were driving blindly, and with reckless gusto, throughout the entire sleazy party, which lasted for about a couple of decades (the length of the party being a scandal in itself). Institutions either mistakenly believed they were buying docile financial animals (or at least hedged instruments, or risks with some kind of recourse), or they were fully aware they were shoveling cr*p in the faith that some greater fool down the line would be left holding the bag.

But let’s not pin all the blame on Wall Street, folks, for tens of millions of Joe the Plumbers were complicit as well. First of all, there are those moaners and groaners who called their congressmen to scupper Paulson’s initial bailout package because it seemed the bright boys and girls of Wall Street were being dealt jail pass cards at the expense of Main Street’s retirement savings.

Long-term money should not worry too much about this meltdown – assuming it’s really and honestly long-term. If you’re still at least ten years away from using your 401(k) or IRA, then relax: the markets should have recovered a long way by then – even if the world goes into a 1930s-style depression (and, frankly, I doubt the US will see a recession of more than a few quarters). Instead, you should seize the day: accumulate unusually-cheap assets with solid long-term prospects.

But if you’re set to retire in less than ten years, and your 401(k) or IRA got hit by the meltdown, then I have a question for you. Who forced you (at gunpoint even, perhaps) to overweight equities? Shouldn’t you have been moving your asset allocation towards more conservative vehicles? Whining is not allowed.

Second, many denizens of Main Street joined the party by spending beyond their means, and piling up consumer debt which could not be serviced. Americans can only blame themselves for taking on those huge mortgages, rolling over those credit card balances, etc. They certainly can’t plead that the devil (of Madison Avenue) made them do it. In the first place, Main Street provided the fuel for the wildfire. And so just as global warming has belatedly awakened America to the need for environmental sustainability, hopefully the ongoing financial debacle has also provided US households important lessons in financial and economic sustainability.

So as we gape, stunned, at the massive wreck at the intersection of Wall and Main Streets, let’s be mindful about pointing fingers over who was blinded by greed. The truth is, we all sped into this mess, and we all have blood on our hands. Let’s now roll up our sleeves and help one another clean up this detritus.