We're all for a good peaceful protest. As long-time
readers know, I've been an adamant critic of the bailouts of mismanaged
financial institutions, as well as various illegal policy actions that
have been pursued by the Fed since the financial crisis began in 2008.
Undoubtedly, there is good and bad on Wall Street, and we know a lot of
smart, well-meaning financial advisors who go to work every day with the
goal of improving the financial security of their clients, who do
careful research, avoid speculation, and provide a service to others
through their profession. A functioning economy needs to allocate
capital effectively, and there Wall Street can be essential.
Unfortunately, over the past 15 years or so, the
basic function of the financial markets has been corrupted into what
I've grown to view as a self-serving carnival of speculation, where many
participants are interested in nothing except getting the next rally
going at public expense, regardless of how badly market signals are
distorted, how recklessly capital is misallocated, or even whether what
they do has any positive effect on the economy or the country (some of
the sleazier ones even have their own shows on basic cable).
There is no single source of this transformation.
Part of it is a remnant of the dot-com and technology bubbles, when
market valuations moved to nearly triple the historical norm, and
investors began to view perpetual market advances and high returns as a
birthright. The subsequent decade of zero overall returns for the stock
market largely reflects a reversion to more normal (but still cyclically
elevated) valuations.
Another part of this transformation is due to the
activist policies of Federal Reserve, which has continually attempted to
short-circuit every instance of short-term economic discomfort by
distorting the menu of investment returns (e.g. zero interest rate
policies) in an effort to provoke investors to accept fresh speculative
risk. Ironically, the long-term effect of distorting market signals has
been to drive good, potentially productive capital into wholly
unproductive uses - the housing bubble being a prime example. As a
result, real U.S. gross domestic investment has not grown at all since
1998, and the portion financed by domestic U.S. savings has collapsed,
so much of the new capital we've accumulated is owned by foreigners.
Undoubtedly, one of the greatest rhetorical
victories of Wall Street has been to successfully plant in the minds of
the public the idea that some financial institutions are simply "too big
to fail," and that the "failure" of "systemically important"
institutions will result in global financial meltdown and Depression.
The reality is much different.
