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Tuesday, January 24, 2012

My Award Goes to, Gulp, New York Times and NPR for Explaining Wall Street


Adam Davidson of NPR’s “Planet Money” gets my award for a clear, fair, and balanced explanation of how Wall Street and financial intermediation contribute to economic prosperity and growth in his  What Does Wall Street Do for You? published in the New York Times Sunday Magazine.

Davidson’s piece is a rare exception to the shrill cacophony of accusations and vitriol leveled against Wall Street, big banks, and big finance, some of which, as Davidson notes, is deserved.

I recommend that Republican candidates read this piece so that they can explain how the financial community contributes to economic well being.

Here is my abridged version that quotes directly from Davidson:


Perhaps the best way to really appreciate what Wall Street does is to imagine life without it.

THE POOR WOULD STAY POOR

Most people in the world don’t have access to a modern financial system, and there is almost no way, other than through greedy loan sharks, for the surplus cash of the very rich to get in the hands of the poor.

THERE WOULD BE NO MIDDLE CLASS

One of the most striking facts of life in countries without a modern financial system is the near total absence of upward mobility. The financial-services industry, however, performs a kind of fiscal time travel by pooling the nation’s collective savings and transforming it into all sorts of loans…. Student loans have largely changed America for the better. Many were able to start businesses because of easier access to credit.

LOTS OF AWESOME THINGS WOULD NEVER HAPPEN

Just about anything that makes you happy …was at one point a risky project. Your money is being pooled with that of millions of other people and institutions to finance risky projects…that would freak you out if you were asked to lend to them. But by pooling so much capital and spreading out the risk, Wall Street creates a safe space for failure, which is an essential part of capitalism.

HOW DOES WALL STREET DO THIS?

Wall Street’s core function is to perform a sort of financial alchemy…. giving a lot of people what they want. Investors with extra cash want constant access to their money with little chance of losing any. Borrowers want to hold on to the loans for a long time and, sometimes, take big risks. Stocks, bonds, savings accounts and money-market funds are all ways of making twitchy, conservative lenders and dreamy, semi-reckless borrowers happy at the same time about the same pile of dough.

IS IT STILL O.K. TO HATE WALL STREET?

Wall Street firms enforce the cold rules of capitalism: hostile takeovers, foreclosures, fee increases, defaults. But those rules clearly do not apply to the largest banks themselves. A variety of economists … (have found) that… a significant part of Wall Street’s business has shifted from serving the financial needs of the nation to profiting from “regulatory arbitrage.” A dollar spent lobbying in Washington can have a return on investment of thousands of dollars. Another reason: Wall Street’s central function is to make our financial system more robust and less susceptible to unexpected risk, but it did precisely the opposite while, maddeningly, avoiding paying the price. (Our financial leaders) were following the hallowed advice that Walter Bagehot… set down in 1873: during a crisis, a country must do everything possible to preserve its banks.

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