Somebody Needs To Stand Up For Wall Street

Bashing Wall Street is a perennial pastime of the progressive politician.  Certainly, it's Bernie Sanders' favorite occupation.  His speeches are filled with accusations that it was "greedy bankers" that "drove the economy to its knees," and with calls to break up the big banks and to make "Wall Street billionaires" pay their "fair share" in taxes.  But he's far from alone.  Massachusetts Senator Elizabeth Warren has risen to the status of left-wing icon through endless bashing of "Wall Street."  Hillary Clinton, while perhaps stopping short of the rhetorical extremes of Sanders and Warren, has joined enthusiastically in calls for more and yet more regulation of the financial sector.  (Wasn't the 2000+ page 2010 Dodd-Frank law supposed to include every possible idea for financial regulation that any progressive politician could even think of?)  

And actually, it gets even worse.  Here in New York, the financial business is our main home-town industry, the activity that far more than anything else makes us one of the richest cities in the world, if not the richest.  And yet somehow bashing Wall Street is an even surer route to political success here than elsewhere in the country.  Eliot Spitzer, when he was New York's AG, showed how a prosecutor could easily shake down any financial institution of his choosing for a few hundred mil, and quickly rode that horse to the governorship.  His current successor as AG, Schneiderman, continues in Spitzer's ignoble footsteps.  Same for the politician-wannabe U.S. Attorney (Bharara), who also follows the Spitzer playbook except that he has upped the customary hit of protection money per settlement by an order of magnitude, from a few hundred mil to a few bil.  Bashing Wall Street is also a sine qua non of most every successful campaign for the City Council.  Even in my own precinct of Greenwich Village -- home to loads of people in the financial business and where all local businesses, from real estate to retail to restaurants to theater to museums, depend on the success of the financial business for their livelihoods -- you are hard-pressed to find anyone with a good word to say about Wall Street.  They know that their own company consists of hard-working and ethical people, but somehow at the same time they buy into the narrative that everyone else in the financial sector is some kind of a crook.

Well, somebody needs to stand up for Wall Street.  And what's the point of being the Contrarian if you're not willing to do it?

First of all, what is "Wall Street"?  It once referred to a neighborhood near the Southern tip of Manhattan where the financial business was heavily concentrated.  The stock exchanges actually used to have a rule requiring stock brokers to keep their offices in the neighborhood in order to facilitate the physical transfer of share certificates from one firm to another when stocks were bought and sold.  Obviously, that rule became obsolete with the disappearance of paper share certificates.  Today I have my office in the Financial District area, a couple of blocks from Wall Street itself, and I can say from observation that the financial business is a much reduced presence in this area.  In the time since I previously worked around here in the 70s, close to half the buildings have been converted to residential.  In the 70s the residential population of the Financial District area was only a few hundred hardy souls; today estimates put the population around 50,000.  The biggest remaining office space users seem to be City and State government agencies.  Big new private office space users include the likes of Revlon, A.C. Nielsen, Conde Nast and Time, Inc.  Of the big banks, Citi and Chase have some operations here, but their headquarters and main operations are elsewhere; only Goldman Sachs maintains a headquarters in this area.  There are many small to mid-size stockbrokers and investment firms, but far and away most of that business is in midtown, if not Westchester or Greenwich, Connecticut (or Florida).

So "Wall Street" today is much more an abstraction than a place.  Indeed, Wall Street is an abstraction about the business of dealing in abstractions.  People rarely give a definition of what they are talking about when they use the term "Wall Street," but a good working definition is that part of the economy that deals in buying and selling abstractions.  In the traditional economy, you bought and sold physical things that could be touched and seen.  Even the other big wealth-generating sector of today's new economy, tech, has output that can mostly be touched, or at least seen.  Think computers, smart phones, or, in the case of programming, the output that you can see on your screen.  But what does the financial services sector produce and sell?  Things like rights to future repayment with interest, or rights to pieces of the future revenue stream of a business, or rights to future payment depending on the fluctuation of prices of something like gold or pork bellies or interest rates.  

It all seems so ephemeral.  Why should people get rich dealing in things you can't even touch?  Which is what gives the opening to the likes of a Sanders to say that Wall Street "produces nothing."  Well, that's because he's not smart enough or observant enough to perceive the benefits that buying and selling abstractions can bring to human existence.  Here are just a few examples:

  • Availability of credit to the masses.  When I was a kid, credit cards were a new thing, and the large majority of people did not have them.  Most purchases required you to earn the cash first.
  • Venture capital.  It's not just Microsoft and Apple and Google and Facebook.  Hundreds of companies in new and untried fields have gotten started in the U.S. through speculative venture capital investments, and a few of them have become the backbone of the economy in a remarkably short period of time.  Other countries don't have those companies because they don't have our venture capital investors.  Yes, some of the venture capitalists have become billionaires.
  • Private equity.  Closely related to venture capital, but private equity often deals with existing businesses that could benefit from a good shake-up, or new businesses in more traditional fields.  In the old days to execute your business idea you needed wealthy friends or family to back you.  Today, there are Wall Street players who specialize in separating the promising ideas from the lemons.  If they actually have a good eye for the ideas that will work, they will make a lot of money.  And the economy will have many new and successful businesses to provide jobs and income to the masses. 
  • Liquidity of investments.  Today you can buy or sell thousands of different stocks or bonds or funds in seconds, with minimal losses to commissions and bid/ask spreads (which today are a fraction of what they were when I was younger).  Much of the added liquidity comes from the increased presence of speculators in the markets, one species of which, the "high speed trader," is a favorite villain of Wall Street bashers.
  • Risk shifting.  Before derivatives markets, farmers got wiped out when the value of their crop dropped between planting and harvest.  Miners got wiped out when the value of the output dropped while the mine was being developed.  Companies selling internationally got wiped out when currency prices fluctuated.  Today farmers and miners and international traders lock in their prices before they produce the output.  Who takes the risk?  Speculators.
  • Efficiency of business.  Back in the 70s and 80s, a constant lament of business writers was that American business had gone soft, with entrenched management leading the easy life without accountability.  That meant less innovation and higher priced products for the consumer.  Today another aspect of "Wall Street" consists of activist investors and a market for whole companies ("corporate takeovers"), with aggressive investors constantly on the lookout for lazy management to challenge or oust.  Lazy entrenched management has been largely eliminated, except for that handful of companies with two-tiered stock structures that allow a family or other inside group to keep control (New York Times, anyone?).
  • Someplace to earn at least something on your retirement savings even as the government runs a decade-and-counting-long war against savers and retirees by keeping interest rates at or near zero. 

And really, I'm just getting started.  To say that "Wall Street" produces nothing of value is to show that you do not know what you are talking about.  

As is obvious from the above list, despite the rhetoric of Sanders, Warren, Clinton, et al., the so-called "big banks" are only a small part of the businesses referred to as "Wall Street."  The biggest banks (the likes of Chase, Citi, BofA, Wells Fargo and Goldman Sachs) may have big shares of certain aspects of "Wall Street," like bank "assets," bank accounts, credit cards, and home mortgages; but they are far from dominant in the overall financial services sector of the economy.  Wikipedia here, citing a Citibank source, puts Citi's share of the overall financial services market at about 3%.  That would put the market share of the five biggest banks in the range of 10 - 15%, which seems about right to me.  And you won't find many of the "Wall Street billionaires" working for the big banks.  Outside of their investment banking operations, the big banks employ thousands of people who administer things like bank accounts and home mortgages, and do not make outsize salaries.  Some investment bankers do make outsize salaries, but they also have about the highest pressure jobs in the world, often concluding enormously complex transactions on breathtakingly short time schedules.  Meanwhile, the large majority of the "Wall Street billionaires" will be found not in the big banks, but rather in the venture capital funds, the private equity funds and the so-called hedge funds. 

And finally, what exactly is wrong with buying and selling abstractions?  With all the upsides identified above (and plenty more that I have not had space to mention), what is the downside?  Sanders says that Wall Street "brought the economy to its knees."  How?  Sure, every market fluctuates, and prices of anything can (and, from time to time, will) crash.  Is that a reason to prohibit the existence of the market?  It's just complete ignorance, but with literally nobody pushing back.