Authored by Mohamed El-Erian, chief economic adviser at Allianz SE, first published in Bloomberg
Just a few weeks into the coronavirus crisis, many are already pointing to the striking contrast between what has happened to the real economy and financial markets. This Main Street versus Wall Street tension is fueled both by legacy and current issues and sheds light on the state of economic and financial policies. It may also play a role in determining current and future well-being.
Two main factors are driving the tension.
On the legacy front, the memory of the global financial crisis is still fresh in many people’s minds. Unlike the current crisis, Wall Street caused an ugly shock in 2008 that resulted in a Great Recession for Main Street and almost tipped it into a depression. Wall Street was also the primary recipient of a huge bailout that enabled most of it not just to recover quickly but also to pay itself well during the recovery period. Adding to the sense of injustice, relatively few Wall Street leaders were seen to have suffered, let alone been held legally accountable or gone to prison.
Fast-forward to today and, again, there’s a huge disconnect between the fortunes of the two, and it has emerged quickly.
Main Street is dealing with historic collapses in employment (30 million workers have applied for jobless claims in just six weeks) and economic activity (a 4.8% contraction in gross domestic product at an annualized pace in the first quarter with a further 30% to 40% decline in the cards for this quarter). Wages are falling for many of those still lucky enough to have jobs. The pain and suffering associated with all this is visible not only in the long lines outside food banks around the country but also in reports of mounting domestic violence and mental anxiety.
Yet Wall Street is coming off the best month for stocks in 33 years. The capital markets are wide open for most listed companies to issue bond financing. A relatively big part of the financial sector has been immune from the wave of large layoffs and bankruptcies the rest of corporate America is experiencing.
The extent of this divergence has not gone unnoticed and is already raising concerns. Yet there are understandable reasons that make its resolution tricky.
Again in this crisis, the Federal Reserve has proved to be the most responsive and powerful policy-making institution. After an initial hiccup, it moved boldly and effectively to ensure that a 2008-like financial crisis did not amplify the real and present danger of a 1930s-like depression. But this could be done only by injecting trillions of dollars into capital markets, thereby also significantly boosting the prices of financial assets that are mostly held by the better-off segments of American society.
Fiscal policy has also been hard at work. But accomplishing things in this case is inherently trickier. Congressional approval is needed for virtually every action (unlike for the majority Fed policy measures), and there is the added challenge of building new pipes to get the assistance to the targeted places quickly. The result is unavoidably more haphazard and less effective.
The longer this divergence persists, the greater the fuel on the fire of other divisions in America: rich versus poor, corporations versus individuals, current versus future generations, connected versus alienated, etc.
The right response is for government agencies and the Fed to undertake efforts to close the gap from both sides in an orderly way through such steps as: making mid-course corrections to the relief efforts to ensure greater effectiveness; designing new recovery plans that target high, inclusive and sustainable growth, thereby avoiding a repeat of the 2008 mistake of winning the war but failing to secure the peace; and paying much greater attention to mounting moral hazard in financial markets and the associated risk of future financial instability that could contaminate the real economy.
The more fortunate segments of society also have an important role to play, motivated both by collective and individual interests. More companies should be stepping up their social responsibility efforts. Just like the public sector, this should focus both on relief (donations to food banks, for example) and on recovery (for instance, helping, both solo and working with others, in establishing retraining and retooling programs for low-cost jobs that are not coming back).
Some will be tempted to argue that the current stark contrast in the fortunes of Main Street and Wall Street is unavoidable. Forced by the structure of the economy and policy apparatus, it’s an unpleasant stop on a potentially successful recovery journey. Others will see it as a repeated illustration of the extent to which the system has been co-opted to serve those already privileged, both in the good and bad times.
Whatever your viewpoint, we should all agree on the urgent priority of doing more now to ensure an orderly recoupling that delivers a quick and more inclusive recovery in the context of genuine financial stability.