No Sympathy For Wall Street
“Shanna, they bought their tickets, they knew what they were getting into. I say, let ‘em crash.”-Airplane! (American comedy film. 1980)
I have this strange feeling that Washington Post columnist Steven Pearlstein is not Wall Street’s biggest fan. Maybe it has something to do with his piece from this morning entitled “Time for Wall Street to Pay,” in which he wrote:
I’d be lying if I didn’t admit there’s part of me that takes some perverse satisfaction from the ever-widening crisis that has engulfed Wall Street, humbling its most powerful institutions and exposing its hypocrisy and corruption.
Pearlstein was just getting started:
Over the ensuing two decades, Wall Street has been brilliant at dreaming up other financial innovations that picked up where junk bonds left off. These included complex futures and derivatives contracts; loan syndication; securitization; credit default swaps; off-balance-sheet vehicles; collateralized debt obligations, or CDOs; and blank-check initial public offerings.
As the industry and its cheerleaders constantly remind us, these innovations have helped to lower the cost of capital and make the business sector more efficient and globally competitive. But what we are now discovering — or perhaps rediscovering — are all the ways in which all this glorious financial innovation has weakened the economy and the society it serves.
Pearlstein listed how Wall Street’s “innovations” have taken their toll on America and its economy:
For starters, these innovations have helped to create a cycle of financial booms and busts that have a tendency to spill over into the real economy, contributing to a heightened sense of insecurity.
They have shortened the time horizons of investors and corporate executives, who have responded by under-investing in research and the development of human capital.
They have contributed significantly to massive misallocation of capital to real estate, unproven technologies and unproductive financial manipulation.
They have made it easy and seemingly painless for businesses, households and even countries to take on dangerous levels of debt.
They have given traders a greater ability to secretly manipulate markets.
They have given corporations clever new tools to hide risks, liabilities and losses from investors.
And by giving banks the tools to circumvent reserve requirements and make more loans with less capital, they have enormously increased the leverage in the financial system and with it the risk of a financial meltdown.
But far and away the greatest damage from all this financial wizardry is the obscene levels of compensation it has generated for a select group of Wall Street executives and money managers.
Regarding this last point, Pearlstein warned that because “huge bonuses paid in the good years are never required to be paid back in the bad years,” this creates an “asymmetric compensation system that encourages excessive leverage and risk-taking.” Furthermore, he lamented at the fact that the prospect of earning untold wealth on Wall Street has attracted “an enormous amount of young talent that could have been more productively used in science, engineering, medicine, teaching, public service and businesses that generate genuine long-term value.” He asked:
Is it not fair to ask whether the United States can remain the world’s most prosperous and innovative economy when half of the seniors at the most prestigious colleges and universities now aspire to become “i-bankers” at Goldman Sachs?
At which point, Pearlstein went nuclear:
So I hope you’ll forgive me, dear readers, when I say that the best thing that could happen to our economy is for a dozen high-profile hedge funds to collapse; for investment banking to enter a long, deep freeze; for a major bank to fail; and for the price of a typical Park Avenue duplex to fall by 30 percent. For only then might we finally stop genuflecting before the altar of unregulated financial markets and insist that Wall Street serve the interest of Main Street, rather than the other way around.
Yes, I know it’s harsh and vengeful solution, and there will be lots of collateral damage. But as I look out over the destruction sweeping across the financial sector, I just can’t silence the small voice in my head that keeps repeating that old ‘60s expression, “Burn, baby, burn.”
February 21st, 2008 at 6:56 am
I wish I said that!
February 22nd, 2008 at 1:10 pm
The article made me recall an artice I read recent past that China graduates 40,000 geological engieers and we graduate 400. I would assume the same applies to chemical engineers and lawyers. How long can this go on.
February 22nd, 2008 at 6:28 pm
Thanks for the comments John T and Harleydog. Funny you mention China, Harleydog. When I was at the University of Illinois at Urbana-Champaign in the early nineties, there used to be a LARGE number of Chinese nationals enrolled in the different graduate schools, particularly engineering. I have a feeling a good portion went back to China after acquiring their advanced degrees. The point is, even back then, China was already looking to the long-term by preparing its youth for employment in fields “that generate genuine long-term value,” as Mr. Pearlstein would say.