Real world vs. Wall Street (09/18/2008)

There are banks.

And there are banks.

There is Main Street, and there is Wall Street.

And while one intersects with the other and their fates are often intertwined, it's important to keep in mind which is which.

The banks that most of us deal with, depositing our paychecks and taking out loans, are commercial banks. They're heavily regulated, and they tend to be pretty low-risk institutions.

The banks - or brokerage firms - we've been reading so much about the past few weeks are different. Investment banking has had higher potential rewards, but it has also had much higher risks. And, as we're all learning too late in the game, it has been loosely regulated when it's been regulated at all.

Lacking transparency and dealing in derivative types of investments beyond the understanding of most investors, these big city cousins of commercial banking forgot the fundamentals. They were so focused on making a quick buck they behaved like bettors at a casino, making wager after wager after wager, disconnected from the people at the end of the chain of transactions.

Short-term gain overruled long-term logic.

It's going to take awhile for this mess to sort itself out on Wall Street, and there's every reason to believe Main Street will share in the pain.

It may be small investors with mutual funds who see the value of their investments shrink, and it's sure to be ordinary taxpayers helping to fund the clean-up effort.

But, as The Wall Street Journal suggested this week, there's every reason to believe that Main Street will come out ahead.

That's because commercial banking - transparent, regulated, adequately capitalized, monitored by an army of examiners - is grounded in the real world.

And having watched the financial types deal with fantasy worlds - first with the tech stock bubble, then with the real estate bubble - we'll take the real world any day. - J.R.[[In-content Ad]]