Sunday, March 27, 2011

What Does Wall Street Really Do?

Money & Society

A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily.
Ben Bernanke, Current Chairman of the Federal Reserve in the United States

I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms: greed for life, for money, for love, knowledge, has marked the upward surge of mankind.
Gordon Gecko, Wall Street, a 1987 film by Oliver Stone

The 400 of us pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you're in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.
Warren Buffet, speaking at a $4,600-a-seat political fundraiser in New York,
as quoted in "Buffett blasts system that lets him pay less tax than secretary",
Times Online, June 28, 2007.

The Stock Exchange, the Gambling Pit:  As Vince Cable, British cabinet minister, said: "Investment banking has, in recent years, resembled a casino, and the massive scale of gambling losses has dragged down traditional business and retail lending activities as banks try to rebuild their balance sheets. This was one aspect of modern financial liberalization that had dire consequences."
Source: Reuters

In yesterday's post, I played the song by Paul McCartney, Live and Let Die. Although the song was made for a James Bond film of the same name, I have been thinking about the expression itself.

Live and let die essentially means that you take a self-centred approach to life, taking everything for yourself and not caring about the welfare of others. It could also mean having a callous disregard for others, ignoring their plight, sticking to bureaucratic rules and forms, policies and procedures, but in the end really doing nothing for others. Or pointing to expediency, to inhumane rules and to policy so as to, in the end, deny aid.

Such are the conditions that many of us live with ... daily. Although they would not likely admit to it, this might be the theme song for all those greedy self-important people, who casually and easily take such sentiments to heart, and whose policies of self-aggrandizement  and self-enrichment have made the world a much poorer place for the vast majority of persons.

Instead of  using their power and position to help humanity, which is central to the essays and music contained in this blog, such insensitive, avaricious and voracious individuals have contributed contemptible acts of inhumanity to humanity. In their calculations and homage to self and self-interest, such men and women rarely if ever consider the merit of working or thinking for humanity's sake. 

Live and let die, a horrible expression if there ever was one, is the opposite of the saying, "Live and let live," which means you want to live in peace and to allow others the same right. Economic terrorism, a tough word no doubt, but that is essentially what the policies of the financial world of bankers, Wall Street traders and high financiers has resulted in. Most of the world reaps the (dis)benefits of their decisions. (see Dante's Inferno: A Modern Reading & The Rich Shall Always Be With Us.)

The Less Fortunate: Children sleeping in Mulberry Street, 1890. As bad as things were, things would get worse a few years later with the Panic of 1893, an economic depression that hit the United States, chiefly a result of speculation in railroads and bank failures.  In its comment on its effects, Vassar College said:  "In its impact on industry and employment, the depression of the 1890s was on a par with the Great Depression of the 1930s."
Photo Credit: Jacob Riis [1849-1914]
Source: Wikipedia
Gambling With the Future

I have always wondered what such people on Wall Street really do. The images of the trading floor seems pure bedlam, screaming, gesticulating and scurrying about like mice with pieces of paper in their hands. Today, it might be in digital form, but you get the idea. In short, what value do they contribute to society?

It seems to me that their job is a form of gambling and betting on certain outcomes, albeit financial ones. They might use fancier more sophisticated computer-generated algorithms than the casino gambler, but isn't betting still betting? I am not sure how gambling and betting does good for the average Jill or Joe.

Etay Zwick made this point in an article, "Predatory Habits: How Wall Street Transformed Work in America," in
Twenty-five years before the recent financial crisis, Nobel Laureate James Tobin demonstrated that a very limited percent of the capital flow originating on Wall Street goes toward financing “real investments”—that is, investments in improving a firm’s production process. When large American corporations invest in new technology, they rely primarily on internal funds, not outside credit. The torrents of capital we see on Wall Street are devoted to a different purpose—speculation, gambling for capital gains.
It would be better economically if this wasn't so, if Wall Street invested money in companies that produced something tangible. Such policies and actions would undoubtedly create jobs, bolster newer technologies, say, alternative energies, and generally increase confidence among the citizenry. It would place America once again among the forefront of nations dedicated to scientific, medical and technological advancement.

Yet, like gamblers who have an addiction or an affliction (or a genetic disorder as some might say), these men (and it's mostly men) find it exciting to bet with other people's money for personal gain. It's an adrenaline rush of the junkie.

And even if they bet wrongly, there are no real repercussions. There's always the government to bail them out with tax dollars, as the TARP program did for Wall Street in 2008. And these fine men from fine colleges get richly rewarded. Is there something wrong with this picture?

Perhaps someone from Wall Street would do me the courtesy of explaining in simple terms what exactly they do. At least athletes, actors, musicians and performers do something positive: entertain and make people forget their misery. Even the court jester had a purpose.
Homeless Shelter in Los Angeles: A cardboard box serves as a home for some people in Los Angeles, California, not far from the luxurious and more sturdy homes of the privileged and super-wealthy classes. This photo was taken a few years before the housing bubble and the financial crisis of 2008. Homelessness has increased since then by a large degree. (see Tent Cities.)
Photo Credit: Chris Sansenbach, 2005.
Source: Wikipedia

The Results Are Poor

But for this class of super-elites, the bottom line is a bottom line of personal enrichment and self-aggrandizement. Consider the following sobering news. The effects of the recent housing bubble and economic recession, which started in December 2007 in large if not all due to Wall Street's reckless ways,  is still being felt by millions of Americans and inestimable number of millions around the world. Eight million jobs lost, likely never to return. The result? 6.6 million Americans have lost their homes since 2007, and 12 million more expected nationally within the next five years.

It gets worse. No job. No home. What you get is homelessness. Recent estimates say that up to one-quarter of American children are essentially homeless or living in squalid poverty, reaching the levels of the Great Depression of the 1930s. Such, however, is little concern for such individuals, who blithely carry on as if nothing has changed.

That in rich industrialized America many millions of people fall through the cracks, and die as a result of such harsh monetary and fiscal policies, seems to not bother such individuals at all. They drink their champagne and eat their caviar with insouciance.

But it doesn't stop there. Many not only carry on, business as usual, but take money that rightfully does not belong to them. Stealing money in any form is a crime. Billionaires Warren Buffet and Charles Munger, both considered astute investors, have observed how the pen is mightier than the sword, but not in the sense of writing for a noble cause:
Over the years, Charlie [Munger] and I have observed many accounting-based frauds of staggering size. Few of the perpetrators have been punished; many have not even been censured. It has been far safer to steal large sums with pen than small sums with a gun.
The Essays of Warren Buffett: Lessons for Corporate America (2001)
Did Warren Buffet turn in these fraudsters? Or did he keep silent, afraid to offend his wealthy associates, his conscience cleared by writing about it in general non-concrete terms? As for Charlie Munger, he is no friend of the middle-class homeowner, as is evident in a Bloomberg Business article in 2010, entitled "Munger Says `Thank God' U.S. Opted for Bailouts Over Handouts:
There’s danger in just shoveling out money to people who say, ‘My life is a little harder than it used to be,’” Munger said at the event, which was moderated by CNBC’s Becky Quick. “At a certain place you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.’” 
Of course, good old Charlie Munger is coping nicely. It's not surprising that such people respond in such an insensitive manner. Wealth has hardened their hearts and clouded their thinking, making them less than human. Perhaps one day such people will awaken from their self-induced narcotic slumber and come to the realization that there is much more to life than enlarging the bottom line of a bank by another billion dollars per quarter, or pouring money into another hedge fund, or issuing derivatives or more junk bonds through some computerized trading scheme.

The American Nightmare

Neither does  the average citizen on Main Street really care or understand the abstract importance of increasing a nation's GDP, its productivity numbers, bettering balance of payments, or reducing the deficit— if they are scrambling to make ends meet—living from paycheque to paycheque.  Millions are not living the American Dream. It's more like the American Nightmare.

To use the language of accounting, let's see what Wall Street has accomplished so far in America alone: Eight million job losses. Almost seven million foreclosures. One-quarter of children living in a non-permanent residence.

For Wall Street, whose companies lost thirty-five billion dollars in 2008, such results translated to more than eighteen billion dollars in bonuses, the New York Times reported. Some bankers gave themselves bonuses of millions of dollars. The average bonus was $112,000. Nice work, if you can get it.

No, not really.  Not if you have a working conscience. There's much more to life. There's much more to living. There's a world of humanity out there. We can only hope for a change to a better order of things. People deserve better. The Jews call it teshuvah. The Christians call it repentance.

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