We often hear some smart folks on Wall Street saying that it’s their job to “raise capital and put it to good use.” But it appears – according to a recent editorial in USA Today – that some on Wall Street have found it hard to get the job done. The failure is most evident in the huge fortunes that Wall Street — defined broadly in the editorial as New York’s major banks, plus hedge funds and private equity houses — poured into high-risk mortgage products, triggering a financial crisis and ruinous recession.
We have seen the attempt in the form of bailouts to correct the stupid mistakes and deliberate acts of fraud by many on Wall Street. While the bailouts have been highly unpopular, overlooked is the fact that they did serve to avert a deep depression in this country. The protests mentioned above are motivated by deep-seeded feelings against what is perceived as “corporate greed.” While I’m not sure where the protests are actually headed, nor what the final outcome will be, it certainly appears the protestors are on to something. Financial institutions that should be the enablers of economic growth have become, at least in part, destructive to the U.S. economy. According to USA Today, there are five legitimate reasons why folks – left, right and center – should all be angry at Wall Street. These are the reasons listed in the editorial:
• Economic distress. The Great Recession was a direct consequence of Wall Street’s insatiable demand for mortgages to package into securities and sell. This demand spurred reckless lending, abetted by the government, and inflated a huge housing bubble, the bursting of which continues to inflict pain on millions of people more than three years later with no end in sight.
• Bonus excess. The bonus system has gone beyond a means of rewarding talent and is now Wall Street’s primary business. Institutions take huge gambles because the short-term returns are a rationale for their rich payouts. But even when the consequences of their risky behavior come back to haunt them, they still pay huge bonuses. Last year, bonuses paid to New York City-based securities industry employees totaled $20.8 billion, up from $17.6 billion in 2008 — this at a time when unemployment nationally is above 9% and household incomes are stagnating.
• Brain drain. Because of this outsized compensation, banks and hedge funds lure some of the country’s smartest people away from more productive endeavors, such as creating and building companies. That’s not easily fixed. People have every right to make their own choices. But the nation suffers if its best brains are busy manufacturing risk through schemes such as high-frequency computerized trading rather than creating jobs.
• Too big to fail. The largest institutions have grown so large that the failure of any one of them is a cataclysmic event. While last year’s bank reform law creates a system for a rapid, supposedly bailout-free dissolution of failing institutions, it is highly questionable whether future leaders would let them go under. Bank CEOs know this, and it gives them confidence to pile on risk.
• The Washington racket. Through lobbyists and campaign contributions, the banking industry has long had its way in Washington. This was evident in the Clinton-era legislation that repealed a post-Depression safeguard and allowed banking behemoths to combine banking and brokerages under one roof. It was even more apparent during the Bush Administration when Washington closed its eyes to reckless subprime lending. Now, after a brief period of contrition, the bank lobby is back in full force. Demands that megabanks maintain more conservative balance sheets, so bailouts won’t be needed, are cast in Alice-in-Wonderland fashion as Big Government intrusion, not taxpayer protection. And hedge fund managers continue to enjoy an indefensible tax break that allows them to pay just 15% on earnings that sometimes exceed $1 billion a year.
Wall Street’s misbehavior, as bad as it has been, wasn’t the only thing that contributed to almost destroying the economy. USA Today says folks around the country increasingly see “Wall Street’s shortcomings as a form of modern thievery,” and that’s a pretty good assessment of what happened. If things don’t change soon, Wall Street will have a lot more to worry about than the protesters. Investors have to be greatly alarmed over what they are now learning about how Wall Street operates and their future involvement in the market will be more guarded.
The American people, as a whole, also have good reason to be fed up with the extremely poor regulation by the federal government and also with Congress being controlled by the big banks on issues directly affecting the banks. The cries by some on the right that we have too much regulation – and that it hurts business – rings sort of hollow when one considers how truly bad Wall Street has been. It’s past time to clamp down and make the big banks do right. Putting the Glass-Steagall Act back on the books by Congress would be a good start and certainly a step in the right direction.
When it comes to the relationship between Congress and ordinary folks, I am reminded of something Harry Truman was purported to have said while he was in office. The plain-spoken 33rd president, perhaps out of his frustration in dealing with Congress, observed: “If you want a friend in Washington, get a dog.” Ordinary folks might consider trading in a few key members of Congress for a good dog!
Source: USA Today
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