What is Wall Street doing for you?
Hating Wall Street is an American tradition that dates back even to the days when Thomas Jefferson cursed money lover Alexander Hamilton. And for centuries the complaints about it have largely remained the same: it doesn’t matter! It creates chaos! It’s a parasite that sucks hard-working Americans dry! (Or something to that effect.) But these are distortions of a fundamentally beneficial business. The country’s largest investment banks, commercial banks, and a few large insurance companies (what we generally call Wall Street) play the crucial role of intermediation – connecting borrowers with lenders. Most of the time, the industry does it extremely well (albeit in the case of matching owner debt to the global financial system, with too much enthusiasm). Perhaps the best way to really appreciate what Wall Street is doing is to imagine life without it.
THE POOR WILL BE POOR
In the United States, we use credit cards, mortgages, credit scores, securitized loans, and other Wall Street innovations to work the miracle: persuade an institution with a lot of money to hand it over to someone. one that doesn’t have a lot. This happens even though we have laws that allow borrowers to declare that they cannot repay loans.
Of course, we have too much household debt, but it’s a better problem than most countries face. Most people in the world do not have access to a modern financial system, and there is almost no way, other than through greedy loan sharks, for the excess money of the very rich to end up between the hands of the poor.
THERE WILL BE NO MIDDLE CLASS
Or at least it would look very different from what it is today. One of the most striking facts about life in countries without a modern financial system is the almost total absence of upward mobility. The financial services industry, however, is taking a sort of fiscal time travel by pooling the nation’s collective savings and turning them into all kinds of loans. It allows people to spend money now that they won’t earn until later. When spent wisely, this borrowed money in the future makes the future a little brighter.
There is a lot of appropriate anger about excessive student debt these days, but student loans have largely changed America for the better. Countless working class children have been able to get an education that they could not otherwise afford. Many have been able to start businesses because of easier access to credit. They were also able to sell their wares to other people who had risen into the middle class.
A LOT OF AWESOME THINGS WOULD NEVER HAPPEN
Just about anything that makes you happy – whether it’s life-saving medicine or just homemade goat cheese from the corner store – was at one point a risky project. As you read this, your money is pooled with that of millions of other people and institutions to fund risky projects (farmers, traders, tech developers) that would scare you if you were asked to lend them. . Your 401 (k) takes your available money and links it to thousands of businesses, many of which are making bets that you might find ridiculous. But by pooling so much capital and spreading the risk, Wall Street creates a safe space for failure, which is an essential part of capitalism.
HOW DOES WALL STREET DO?
The main function of Wall Street is to perform some kind of financial alchemy, an incredibly complicated method of giving a lot of people what they want. Investors with additional liquidity want constant access to their money with little chance of losing it. Borrowers want to keep loans for a long time and sometimes take big risks. Stocks, bonds, savings accounts, and money market funds are all ways to please both nervous and conservative lenders and dreamy, semi-reckless borrowers from the same pile of dough.
In the meantime, check out the chart to see how Wall Street is making money to pay for these trades.
IS IT ALWAYS CORRECT TO HAVE WALL STREET?
Absoutely. Wall Street companies apply the cold rules of capitalism: hostile takeovers, foreclosures, fee increases, defaults. But these rules clearly do not apply to the biggest banks themselves. Various economists (including, notably, several from the Stern School of Business at New York University) have accumulated strong evidence that over the past decade or so, a significant portion of Wall Street activity has shifted from being satisfied. from the nation’s financial needs to valuing “regulatory arbitrage”: making money by playing with the rules of the game. Reports from my colleagues at NPR’s “Planet Money” show that a dollar spent on lobbying in Washington can have a return on investment of thousands of dollars.
Another reason: Wall Street’s central function is to make our financial system more robust and less susceptible to unexpected risks, but it has done the exact opposite while maddeningly avoiding paying the price. On the flip side, many of Wall Street’s harshest economist critics do not condemn the bailouts and generous policies of the Fed and the Treasury Department. Most know that Ben Bernanke, Henry Paulson, and Tim Geithner (like central bankers and treasuries all over the world) followed the sacred advice that Walter Bagehot, former editor of The Economist, gave in 1873: during a crisis, a country must do everything possible to preserve its shores. And while it made the rich even richer, our economy would be much worse if it hadn’t happened.
One lesson from this crisis is that regulation – no matter how well-intentioned it is – cannot be trusted to hold Wall Street back. In fact, the biggest financial firms have repeatedly shown their ability to take even the strictest regulations and turn them into profit centers. So maybe the main reason for hating Wall Street is that it has made so many Americans hate such a much needed system.