What, if anything, to do about Wall Street’s wealth
By Nicholas F. Brady,
The Occupy Wall Street movement is not the first time people have demonstrated against the establishment, but this situation is different. When many Americans marched against the Vietnam War, their anger was directed against U.S. politicians — and ultimately at the commander in chief and the military. This protest is aimed at private citizens.
Some of the protests have become unruly, and I have always been a proponent of order over chaos. But I understand the roots of this vocal resentment. When I came to Wall Street in 1954, investment banking was a profession, one that financed the building of this country’s industrial capacity and infrastructure. We financed pipelines that brought cheap natural gas to the households of New England. We financed the development of new drugs, which are now the mainstay of today’s health care. We financed inexpensive restaurants that made eating out affordable for families and do-it-yourself home stores that enabled people to improve their quality of life. We financed the earliest personal computers, which ultimately led to the Internet Age. All of this fit within a framework of activities that didn’t threaten this country’s finances, much less the world’s.
But year by year the industry’s emphasis moved away from this purpose and toward financial innovation for financial profit’s sake. According to the Federal Reserve’s Flow of Funds data, from 1980 to 1982, the financial sector accounted for an average 12.8 percent of U.S. total corporate profits. By 2005 to 2007, the three-year average was 23.8 percent.
The money was addictive. It drove people on Wall Street into activities that had no redeeming social value, and it disoriented executive pay scales. This enormity couldn’t be contained, and at its height in 2008 it blew up our financial system.
Has Wall Street been off course? It’s not just the crowds in Zuccotti Park, Freedom Plaza and other public spaces who think so; it’s the majority of Americans. But whose job is it to provide curative steps? The question is easier to ask than to answer.
In contemplating solutions, the first thing that needs to be understood is that we live in a reactive democracy, where the injustices of each generation are addressed within the rule of law. We can’t just point a finger at people and put them in jail. The laws we have on our books are more than equal to the task. Witness Dennis Kozlowski and Tyco. John Rigas and Adelphia Communications. Bernard Ebbers and WorldCom, Kenneth Lay and Jeffrey Skilling and Enron. Raj Rajaratnam and Galleon Group. Bernard Madoff.
There is no need to divide the country, as President Obama has done, by proposing to tax the wealthy as a punitive political measure as though they were the enemy. This said, additional revenue has its place in a sensible discussion as we take on the urgent task of addressing the budget deficit.
Let me state plainly that government spending is the cause of the problem by an immense margin. But as one of the principal architects of the Budget Act of 1990, I plead guilty to putting the question of additional revenue on the table before.
On a historical note, I would point out that the combination of reining in spending and increasing revenue produced budgetary sanity, economic growth and a sense of calmness in our country for more than a decade. As Evan Thomas and Richard Wolffe wrote in Newsweek in 2005, President George H.W. Bush “raised taxes in 1991 as part of a fiscal-reform package that was essential to the 1990s economic boom. The tax hike probably cost the senior Bush a second term in 1992. But it was the right thing to do.”
Decrying excess has been around for centuries, and certainly the United States has a history of trying to address it. There was Teddy Roosevelt’s trust-busting and Franklin Roosevelt’s Glass-Steagall Act. The invasive Sarbanes-Oxley Act of 2002 is an example of what not to do, and had to be amended. Most recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which left intact the very housing policies that helped spark the 2008 financial implosion, also has serious problems. (The exception is the Volcker Rule, where there’s an ongoing and much-needed discussion between the financial industry and regulators about when market-making becomes proprietary trading.)
Yet an essential question remains: Is there any way of legislating compensation levels? I think not. There is nothing wrong with seeking profit. But I’ve always been impressed by the military dictum, which is that the officers eat last.
The writer, a former U.S. senator and Treasury secretary, is chairman of Darby Overseas Investments Limited and a principal of Holowesko Partners.