I really do think that people are being much too premature about the death of Wall Street. Sure a lot of the stupid craziness is going to end, but that isn’t necessarily a bad thing. Yes the new institutions that are going to be running Wall Street may be much less highly leveraged, but you can make up for lack of leverage with volume and as long as the underlying economy is more or less sound, you can find volume.
This might sound odd. Two days ago, I was saying “Oh my God, we are doomed!!” and now I’m talking about the economy being fundamentally sound. It’s there a contradiction, here? Not really. Think of it as flying on an airplane. There isn’t that much difference between a smooth comfortable ride, and a life threatening situation in which you end up dying in a huge fireball. The sense that I had a few days ago, was that of a passenger strapped into an airplane seat, entering a massive thunderstorm heading toward a mountain, and then suddenly seeing the pilot with this crazed look that suggests that he might be drunk or suicidal. Once it becomes clear that the pilot isn’t drunk or suicidal, and once the airplane suddenly swerves and misses the mountain, then I can finish vomiting and try to relax.
The fact that there is no contradiction between “the economy is fundamental sound” and “oh my God, we are all doing to die” is what makes things like the Great Depression rather tragic. In the United States in 1929 (or Japan in 1988), there was a lot of craziness, but you had an economy with factories, jobs and employment, and the fact that things spiraled out of control shows how a financial crisis can turn into an economic crisis if that crisis isn’t handled very carefully. To use another metaphor, if you cut off someone’s oxygen, they are going to die. It’s true that if you are unhealthy, you are more likely to have your oxygen cut off, but if someone dies from lack of oxygen, that doesn’t mean that they were basically unhealthy to being with.