In news from a past age, a week and a half ago, Daniel Indiviglio of The Atlantic provided helpful prescient advice, “Five Reasons Why Occupy Wall Street Won’t Work”.
We have a straw man opening.
It’s easy to hate Wall Street. In movies, bankers are portrayed as heartless, greed-driven jerks. Some people blame the recent financial crisis and the recession that followed on Wall Street duping Americans into signing up for predatory mortgages. Others say that these rich bankers, traders, and investors don’t pay enough money in taxes. These and other anti-Wall Street attitudes have led to a protest in Lower Manhattan that continues to grow.
The assumption is that those who engage in these protests are a dumb animal herd, a crowd unable to assess or think, but possess dumb simple hates, because a character in a movie with slicked back hair and suspenders tried to corner the market in silver and held Jessica Biel hostage.
Let us take two simple, very legitimate reasons for why the protesters may be there.
That financial institutions have an outsize influence on the american political system, described acutely by Simon Johnson in Thirteen Bankers:
Between 1974 and 1990, the cost of a seat in the House of Representatives—the average expenses of an election winner—grew from $56,500 to $410,000; from 1990 to 2006, it tripled to $1,250,000 (more than doubling even after accounting for inflation).
The financial sector was a central player in this evolution. The sector was the leading contributor to political campaigns throughout the past two decades. But campaign contributions from the financial sector (including finance, insurance, and real estate) grew much faster than contributions overall, more than quadrupling, from $61 million in 1990 to $260 million in 2006. (After excluding insurance and real estate, the sector still contributed over $150 million in 2006; the second-ranking industry group, health care, contributed only $100 million in 2006.) Over the same time period, contributions from the securities and investment industry sextupled from $12 million to $72 million, and that $72 million omits the millions of dollars in contributions from the law firms that served the securities industry. (According to one analysis, from 1998 to 2008, the financial sector spent $1.7 billion on campaign contributions and $3.4 billion on lobbying expenses; the securities industry alone spent $500 million on campaign contributions and $600 million on lobbying.) The largest commercial and investment banks, which stood to gain the most from deregulation and consolidation, were also the largest sources of campaign cash. In 1990, the companies in the banking sector that contributed the most money were Goldman Sachs, Salomon Brothers, Barnett Banks (the largest bank in Florida, bought by NationsBank in 1997), Citibank, J.P. Morgan, and Morgan Stanley; in 2006, they were Goldman, Citigroup, Bank of America, UBS, JPMorgan Chase, and Morgan Stanley.
That the majority of revenues of these banks does not involve anything that would bring about jobs, capital investment, or anything else of public good. It is simple gambling, and when that gambling goes horribly awry, the public is asked to handle these losses, while the bettor, whatever his losses may be (and it is almost always a he), gets a multimillion compensation for his leave-taking, a sort of failure bonus.
This was best expressed by John Cassidy in “What Good is Wall Street?”
When the banking system behaves the way it is supposed to…it is akin to a power utility, distributing money (power) to where it is needed and keeping an account of how it is used. Just like power utilities, the big banks have a commanding position in the market, which they can use for the benefit of their customers and the economy at large. But when banks seek to exploit their position and make a quick killing, they can cause enormous damage.
The other important role of the banking industry, historically, has been to finance the growth of vital industries, including railroads, pharmaceuticals, automobiles, and entertainment.
Yet Wall Street’s role in financing new businesses is a small portion of what it does. The market for initial public offerings (I.P.O.s) of stock by U.S. companies never fully recovered from the tech bust. During the third quarter of 2010, just thirty-three U.S. companies went public, and they raised a paltry five billion dollars. Most people on Wall Street aren’t finding the next Apple or promoting a green rival to Exxon. They are buying and selling securities that are tied to existing firms and capital projects, or to something less concrete, such as the price of a stock or the level of an exchange rate. During the past two decades, trading volumes have risen exponentially across many markets: stocks, bonds, currencies, commodities, and all manner of derivative securities. In the first nine months of this year, sales and trading accounted for thirty-six per cent of Morgan Stanley’s revenues and a much higher proportion of profits. Traditional investment banking—the business of raising money for companies and advising them on deals—contributed less than fifteen per cent of the firm’s revenue. Goldman Sachs is even more reliant on trading. Between July and September of this year, trading accounted for sixty-three per cent of its revenue, and corporate finance just thirteen per cent.
In effect, many of the big banks have turned themselves from businesses whose profits rose and fell with the capital-raising needs of their clients into immense trading houses whose fortunes depend on their ability to exploit day-to-day movements in the markets. Because trading has become so central to their business, the big banks are forever trying to invent new financial products that they can sell but that their competitors, at least for the moment, cannot. Some recent innovations, such as tradable pollution rights and catastrophe bonds, have provided a public benefit. But it’s easy to point to other innovations that serve little purpose or that blew up and caused a lot of collateral damage, such as auction-rate securities and collateralized debt obligations.
Then Mr. Indiviglio gives his reasons for the looming failure.
Its Goals Are Unclear
Any protest that hopes to accomplish some goal needs, well, a goal. If a demonstration like this lacks concrete objectives, then its purpose will be limited at best and nonexistent at worst. At this time, all the protest really appears to stand for is a general dislike of Wall Street. But what does that mean?
#OWS has two possible sound, specific objectives that I’ve already mentioned. That many #OWS complaints can be grouped under these two does not make them vague.
Wall Street Doesn’t Care
There’s a key difference between the Occupy Wall Street movement and the Tea Party movement. The Tea Partiers’ anger is directed squarely at the U.S. government. It began due to dismay at the bailouts and the massive Obama stimulus package. The Tea Party wanted less government interference in the economy.
But the Occupy Wall Street movement’s anger is directed at bankers. Here’s the problem: they really don’t care. These protesters are not Wall Street’s customers. In many cases they aren’t even their customers’ customers.
I do think there is an interesting contradiction here. The #OWS is somehow, cursed by vagueness. It cannot work because it is aimed vaguely at “Wall Street”, and one of its goals, less influence in government by financial institutions, is too vague. On the other hand, the Tea Party was effective, because its protest was aimed “squarely” at the vast behemoth of government, and they wanted the precise, not vague at all goal, of less government.
Mr. Indiviglio then makes the error that somehow the institution protested against is the one that must “care”. When the embassy of a particularly despicable regime is protested, there’s no expectation that the regime of Burma, Libya, South Africa, Syria, Yemen will “care”. The purpose is to force attention on the infamies of that regime and to pressure their own government to either cut ties with those regimes or force them to reform. In the past, money from Libya or South Africa to a congressman would be considered tainted, and he would be shamed into returning it. Given the absense of any attempt at financial reform in the political or media class, perhaps this will be the first step by which financial institutions will lose the influence which dwarfs that of any citizen: their election funds will now be a scarlet letter.
The Protesters Can’t Sway Congress
The Tea Party accomplished something very key: it helped to significantly alter the makeup of Congress through the 2010 election. It had a goal — to put out of power the big government candidates — and it accomplished that goal. The Occupy Wall Street cannot hope for any result as significant.
As mentioned, it doesn’t have a clear set of objectives. But let’s say, for argument’s sake, that it has some general fringe-left goals. Some that have been suggested include new taxes on Wall Street and much stronger financial regulation. The problem is that these views aren’t likely to catch on in Congress: even when the mix was much further to the left in 2009 through 2010, a relatively mild financial regulation bill was passed and even the Bush tax cuts remained intact.
The reality is that the U.S. is a center-right nation, and Congress reflects that. While some cities are farther to the left than others, they already have very progressive representatives. Meanwhile, the message of Occupy Wall Street isn’t likely to catch on and affect any change in more center-right regions like the Tea Party did.
Mr. Indiviglio, a past enemy of vagueness, writes rather vaguely here. The american people are “center right”, the Congress reflects this center rightness, and therefore, this revolt is quixotic. He writes, naively, that financial reform was mild because of the country’s “center rightness”, as if the collective will of the people were a magnetic field that bent legislation one way or another.
Congresspeople are now almost always constantly fund-raising. They require vast amounts of campaign cash. Again, using Mr. Johnson’s figures, the financial industry spent over five billion dollars in lobbying from 1998 to 2008. Does Mr. Indiviglio believe that such funds had no influence whatsoever on the political process, that it was entirely the people’s will that guided legislation?
Their Timing Is Off
Even if the U.S. were to embrace the message of these protests, Congress would not act. The bailouts were hugely unpopular with voters, but they occurred anyway. That’s because there are times when Washington just needs to be practical. When unemployment is stuck above 9% is such a time. (my emphasis)
I believe this part gives the game away. Earlier in this piece, it has been stressed that the protests cannot work because they are too vague, unlike the vague messages of the Tea Party. They cannot work, because they go against the immutable “center right” will of the american people. Whatever the american people feel is irrelevant. There are times when Congress must act practically, when unemployment is at 9%, but also when unemployment is below 9%, banks have grievously wounded themselves, and need help. A question a feeble minded man like myself asks is: practical for whom?
Mr. Indiviglio has straight up admitted it. The will of the american people is irrelevant in the face of what banks and their client politicos want and will do.
Enacting new financial transaction taxes or even more burdensome regulation will not be good for the economy in the short-run. Even many Democrats are worried that such aggressive actions threaten the recovery. That’s the main reason why the Bush tax cuts were extended.
A small note: these would be the same Bush tax cuts which were cited in S&P’s report downgrading US securities. The Bush tax cuts must be preserved because aggressive actions would threaten the economy, even through aggressive actions that threaten the economy.
Banking is a Vital Institution — Especially to the U.S.
Hating banks is counterproductive. You simply can’t live without banks in a modern, sophisticated economy. Wall Street investment firms are equally essential. Capital markets and debt markets allow businesses to function smoothly. Without them, growth and progress would be much slower.
But the U.S., in particular, needs to maintain its healthy, vibrant banking system. During the financial regulation battle least year, a lawyer I know who works with banks and investors lamented the effort. He worried that Congress would go to far. Banking is one of the few industries the U.S. has left where we’re a global leader, he said. He is absolutely right.
It seems we are in all or nothing land. I may either have financial institutions that engage in large-scale dangerous financial gambling, or I may buy my food with shiny beads.
A small short effective counterpoint to Mr. Indiviglio’s rosy vision is found here (“How Lobbyists Are Undermining Dodd-Frank: A Case Study”), which describes the ways in which Dodd-Frank is being altered by lobbyists to allow for oil speculation.
On October 18 the Commodity Futures Trading Commission (CFTC) will vote on a proposed rule to limit the percentage of contracts in a given commodity that any individual trader can own.
Proponents of tight position limits argue that excessive speculation in a market means prices will generally be both higher and more volatile. The consequences of higher prices are easy to understand—for example, a Goldman Sachs report in April estimated that the speculative premium on a barrel of oil was then between $21.40 and $26.75 a barrel, roughly a sixth of the total price at that time.As Marcus Stanley of Americans for Financial Reform told me, all sorts of people rely on predictable commodity markets for their business: gas stations, businesses that supply heating oil, enterprises that order food in bulk such as confectioners, and so on. Higher volatility often ends up being passed on to businesses as a higher cost on their balance sheet, with predictable consequences.
Moreover, even if the rule passes, it faces serious questions about whether a very active lobbying process will have rendered it effectively meaningless. The position-limits rule, in particular, has been subjected to a fierce lobbying effort, especially by big financial institutions. The Sunlight Foundation, a nonprofit organization that advocates for transparency in government, counted over 13,000 comment letters to the CFTC concerning the rule, with groups from airlines to investors pressing their case. Gary Gensler, the chair of the CFTC, has stated that “large institutions” have an “outsized interest” in the rules and that there’s a “little imbalance” in how much access they’ve gotten to the commission. Gensler has estimated the CFTC has held 1,000 meetings to hear comments relating to the rule, and that the “vast majority are from large financial institutions.”
My simple brain is curious how an economy is made more modern, more sophisticated, more smoothly functioning through more expensive oil.
For all of these reasons, we aren’t likely to see the Occupy Wall Street effort accomplish much. It doesn’t have a clear focus, and practical realities will prevent it from achieving any vague objectives it might have. Those angry with Wall Street should seek more effective means of affecting change than this.
Whatever takes place next, the passions shown so far will not simply dissipate.
Again, this was written a week and a half ago, an age in our modern times. I am not familiar with all of Mr. Indiviglio’s work. Perhaps two weeks ago he wrote that Libya would be ruled by Muammar Qaddafi forever.