Is Wall Street Doing God's Work?

If you are looking for some good reading over the Thanksgiving weekend, and you're skeptical that Wall Street is doing "God's work" as Goldman Sachs CEO Lloyd Blankfein so beautifully put it, I recommend you read John Cassidy's What Good Is Wall Street? Cassidy, who writes for the New Yorker, has been an abject apologist for Wall Street and government bailouts, but now he's learned a thing or two. Critical thinking is so rare among purveyors of the status quo that we must praise it whenever we find it.

The subtitle of the article is much of what investment bankers do is socially worthless. This is the great truth Cassidy has discovered, but it is only a partial truth. In fact, much of what investment bankers do is economically and socially destructive. I laid out the only reasonable position one might take toward Wall Street in Goldman Sachs Should Not Exist. Unfortunately, DOTE was only a few months old at the time, which means that only a handful of people have read it.

Cassidy still does not quite understand what he's talking about, which is easily forgivable in a person in the early stages of trying to figure out how the world works. For example, here Cassidy is talking about financial houses as rent-seekers—

Other regulators have gone further. Lord Adair Turner, the chairman of Britain’s top financial watchdog, the Financial Services Authority, has described much of what happens on Wall Street and in other financial centers as “socially useless activity”—a comment that suggests it could be eliminated without doing any damage to the economy. In a recent article titled “What Do Banks Do?,” which appeared in a collection of essays devoted to the future of finance,

Turner pointed out that although certain financial activities were genuinely valuable, others generated revenues and profits without delivering anything of real worth—payments that economists refer to as rents. “It is possible for financial activity to extract rents from the real economy rather than to deliver economic value,” Turner wrote. “Financial innovation . . . may in some ways and under some circumstances foster economic value creation, but that needs to be illustrated at the level of specific effects: it cannot be asserted a priori.”

Turner’s viewpoint caused consternation in the City of London, the world’s largest financial market. A clear implication of his argument is that many people in the City and on Wall Street are the financial equivalent of slumlords or toll collectors in pin-striped suits. If they retired to their beach houses en masse, the rest of the economy would be fine, or perhaps even healthier.

While I'm sure Turner's remarks caused much consternation among London bankers, the point that has been missed here is that rent-seeking on Wall Street necessarily requires government policies that allow banks to engage in socially parasitic activities. This quote is from my Goldman Sachs Should Not Exist—

Rent seeking is one of the most important insights in the last fifty years of economics and, unfortunately, one of the most inappropriately labeled... The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors.

Cassidy's article is long and contains much valuable material, even if he himself does not quite yet grasp the full implications of what he's talking about. Still, he has quoted Lord Turner, and as Diogenes' lantern implies, an honest man is hard to find. These quotes from near the end of Cassidy's piece give you a sense of his still-evolving point of view—

Despite all the criticism that President Obama has received lately from Wall Street, the Administration has largely left the great money-making machine intact. A couple of years ago, firms such as Citigroup, JPMorgan Chase, and Goldman Sachs faced the danger that the government would break them up, drive them out of some of their most lucrative business lines—such as dealing in derivatives—or force them to maintain so much capital that their profits would be greatly diminished. “None of these things materialized,” Altman noted. “Reforms and changes came in, but they did not have a transformative effect"...

Since the early nineteen-eighties, by contrast, financial blowups have proliferated and living standards have stagnated. Is this coincidence? For a long time, economists and policymakers have accepted the financial industry’s appraisal of its own worth, ignoring the market failures and other pathologies that plague it.

Even after all that has happened, there is a tendency in Congress and the White House to defer to Wall Street because what happens there, befuddling as it may be to outsiders, is essential to the country’s prosperity. Finally, dissidents like Paul Woolley are questioning this narrative. “There was a presumption that financial innovation is socially valuable,” Woolley said to me. “The first thing I discovered was that it wasn’t backed by any empirical evidence. There’s almost none.”

I would say that there is considerably more than a "tendency" in Congress and the White House to "defer" to Wall Street. The next step in Cassidy's evolution will be his discovery that the cozy arrangement between Washington and Wall Street is not quite on the up and up.

Captain Renaud:  "I'm shocked, shocked to find out that gambling is going on in here!"
Waiter:  "Your winnings, sir."
Captain Renaud:  "Oh, thank you very much. Everybody out at once!"

Needless to say, it can not be said of social parasites like Goldman Sachs—the financial equivalent of slumlords or toll collectors in pin-striped suits—that they are doing God's work

Comments

[Tony Weddle]

This is a bit off topic but did you notice that the 3rd quarter growth figure was revised UP, to 2.5%. The GDP calculation is obviously flawed but is there some specific aspect that could cause this kind of clear diversion from reality?