How nice it would be if the 99 percent had never heard of Wall Street — perhaps if it didn’t exist at all.
There would be no need to be jealous of your college classmates’ $10 million paydays while you majored in sociology. No egg on your face if, as a hot-shot investment manager, you had poured $100 million of widows’ and orphans’ money into securities called collateralized debt obligations that you didn’t understand. There would be no collapse in the value of the home you bought in 2005. Several million people who lost their houses to foreclosure might still be proudly mowing their lawns. And your retirement savings would not be shattered because of all those high-flying technology firms that your mutual funds bought back in the 1990s.
Most gratifying of all, you might not be scrambling for a job that doesn’t exist, as up to 25 million Americans now are.
Wall Street jet-fuels capitalism and innovation, we are told, and that’s what makes America prosperous; Wall Street is full of job-creators. But Alfred Chandler, the respected business historian, argued persuasively that most investment during the nation’s industrialization came from corporate profits, not money raised by Wall Street bankers. There were exceptions, of course. In the 1920s and the ’90s, for example, countless initial public offerings for young, innovative companies came to market through Wall Street firms. But many, if not most, fledgling businesses were burned up by fevered speculation and disappeared in spectacular crashes within a few years.
The warm glow that Wall Street once seemed to have hid how much bad investment it made in the past 40 years. From the Federal Reserve bailout of bankers for bad South American loans made in the 1970sto the 1980s savings and loan crisis, from the 1990s East Asian financial crash to the bursting of the dot-com bubble in 2000 and the 2008 collapse of the housing and financial markets, Wall Street has been largely responsible for nearly every financial calamity — and yet has still profited off the next boom.
So do we need Wall Street? Could there be a smarter way to pick and fund a handful of winning companies?
We can’t do without Wall Street. Even the Occupy movement wouldn’t argue for its extinction. Someone has to keep our money safe. Making loans with savers’ money to businesses that need it is generally a good idea. Someone has to enable us to make check and credit card transactions, not to mention provide us cash. And someone should offer opportunities for small investors to buy stock and other investments at low costs.
I wouldn’t mind seeing investors required to buy only index funds that charge 0.5 percent a year in management fees. Some freedom to be foolish or make a lucky killing should probably be allowed, though investment managers and stockbrokers need tighter reins. And, most important, there should be ways to channel Americans’ savings into investment in business.
But that’s not the Wall Street we have. It has used Americans’ savings to make wildly risky trades that fed bankers’ profits. It has not abided by free-market practices. It has traded complex securities in secret; it is rife with conflicts of interest; it has charged monopoly fees to underwrite securities, advise on takeovers, manage portfolios and make loans. Wall Street has paid its workers to take risks and hasn’t penalized them when they were wrong. And, judging by the findings of a Senate investigative committee and the Financial Crisis Inquiry Commission, Wall Street has bought favorable credit ratings from Standard & Poor’s and Moody’s. Its practices have driven speculation through the roof in every decade since the 1980s, always ending with a crash.
Some say Wall Street must be allowed its mistakes. But on balance, few of its actions have led to more prosperity for America, as the losses enumerated above suggest. Herb Allison, a former president of Merrill Lynch and former chief executive of investment manager TIAA-CREF, writes in a new e-book, “The Megabanks Mess,” that big banks have been a net drag on the economy for years. Even when Wall Street was on a tear in the 2000s, fewer jobs were created than in any other comparable period over any business cycle since World War II.
But you needn’t make a progressive case against Wall Street — a conservative one would do just fine. You’d think those free-market advocates who claim to respect transparent competition and fair compensation, such as former Fed chairman Alan Greenspan or former Treasury secretary Robert Rubin, would have stopped the secret trading, restrained bonuses and limited the enormous levels of debt taken on by banks. But they were consumed with the erroneous idea that the markets are almost always right, and government almost always wrong.
Can we prosper without Wall Street? Sure we can. We need a smaller financial industry with serious capital and debt limits. Risky products that are hard to understand or easily abused should be prohibited. All trading should be aboveboard and transparent, and should be done on central exchanges. Conflicts of interest should be minimized by restricting firms to a handful of products designed for one kind of customer: a buyer or a seller. Now, firms represent both. Private credit-ratings agencies should probably be eliminated and their role taken over by the government.
And, surely, publicly traded firms don’t need to be reevaluated by the market every minute for hours a day. Reduced trading, fewer hedges, less volatility and much less attention to short-term stock prices might do more for the economy than any other financial reform.
As for bringing new companies to market, more sensible and measured markets may develop if investment bankers simply didn’t have the freedom to promote speculation in initial public offerings. American capitalism thrived before the era of venture capital and IPOs. With a smaller, less powerful Wall Street, it could thrive again. Maybe company launches could be handled privately as investment firms raise money from major institutions such as public pension funds and investment-management companies around the world.
We have come to believe that we need a stock market to set a price for a new company and find buyers for it. In fact, prices are typically set in a back room by manipulative investment bankers and driven to irrational levels by individual investors. At the least, the sales practices of current underwriters must be more closely scrutinized and their fees made more competitive.
If we began to believe that Wall Street is expendable, perhaps we would regulate it properly so that it would do what it should do, and only that. It should provide a place for Americans to put their savings and channel those savings into the most productive investments, not a round-robin of one casino-like speculation after another.
In case you have any doubts, Washington is not taking that path.
Jeff Madrick is the author of “Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present.”
Read more from Outlook’s “world without” series: