Donald Trump has been telling us for weeks that he will repeal (or revise or whatever) the Dodd-Frank regulatory regime put in place after the financial crisis and Great Recession. Who knows how that will work out.
But related to the current debate over changes to Dodd-Frank regulations is the kind of piece we don’t often see these days—one that praises Wall Street. In a Los Angeles Times op-ed, Your way of life would not be remotely possible without Wall Street, William Cohan starts out:
At $500 million in box office revenue and counting, we sure love Disney’s new movie “Beauty and the Beast.” With more than 1 billion sold, we sure love Apple’s iPhone. The same goes for Netflix, Chevy pickups, wide-screen televisions and grocery store aisles stocked high with fresh fruit and vegetables.
But for some reason, we hate the one entity that brought all these things within reach of most Americans: Wall Street.
Our way of life would not be remotely possible without the interstitial role played by Wall Street. It’s the left ventricle of capitalism. Yet Wall Street has become shorthand for everything that is wrong with the American economic system.
Cohan doesn’t give Wall Street a complete pass. Nor should he. He believes that Wall Street “exacerbated the 2008 financial crisis and was not held accountable.” Hence, politicians from Elizabeth Warren to Donald Trump have villainized Wall Street, “[O]ne politician after another,” Cohan observes, “has lambasted Wall Street for every imaginable evil.”
But he then returns to his main point:
With so much sanctimony on the national stage, it’s easy to hate bankers. But if we want to actually fix what’s wrong with Wall Street, we will need to stop mindlessly villainizing it.
In the most basic terms: Wall Street provides capital at a fair price to people who want it, by borrowing it from people who have it and want to invest it. It’s a simple service, and without it, we might as well go back to the Middle Ages, when people never ventured far from their tiny villages and spent their days worrying about their next meal.
Wall Street put the Internet at our collective fingertips. It’s the reason more than 160 million Americans have credit cards and access to an unsecured line of credit anytime they may want to use it. It democratized jet travel, which now allows average people to get halfway around the world in the time it used to take a fisherman to get his cod to market. Few people who have these things would be willing to give them up.
It’s refreshing to see some honesty and objectivity brought into the debate over financial regulations. But it’s not enough. Cohan is right that some on Wall Street were a contributing cause of the financial crisis. But was Wall Street the primary cause? I think Cohan falls short in not emphasizing the government's primary role in fomenting the housing bubble and bust and its role in spreading the contagion of bad mortgages throughout the investment community and ultimately the “main street” economy. Aside from pointing to the government’s “too-big-to-fail” policy, he ignores the Washington politicians’ “affordable housing crusade” and the related perfect storm of regulatory interference in the mortgage and housing markets to back up their crusade.
Through Fannie Mae and Freddie Mac, to the Federal Reserve, to the FDIC, to the Community Reinvestment Act, to mark-to-market accounting rules, and on and on, the government pushed and prodded and coerced and incentivized borrowers into homeownership-at-any-cost and lenders into destroyed lending standards, all amid inflationary monetary policies. The results were as basic economics has always taught. The 2008 financial crisis was a long time in the making—well over a decade. The truth, though pretty much ignored by the Washington Establishment, has been deeply documented in books by experts like Thomas Sowell, John A. Allison, and Peter J. Wallison. A good encapsulation of the government’s primary role in causing the economic catastrophe is presented by Don Watkins in his essay FREE MARKETS DIDN’T CREATE THE GREAT RECESSION.
Cohan believes that “The problem with Wall Street is its incentive and compensation system, which encourages bankers, traders and executives to take big risks with other people’s money. It rewards greed and recklessness without imposing accountability.”
What he doesn’t emphasize is that government regulation and interference is what skews the incentives (though, as noted earlier, he does name the “too-big-to-fail” policies, which he rightly argues should be thrown “into the dustbin of history, where it belongs.”) But he opposes proposals to “gut the financial regulations implemented after the financial crisis.” Instead, he proposes taking “a scalpel, not a sledgehammer,” to Dodd-Frank—and proposes a few significant changes.
Cohan is on the right track. But I think he misses the big picture.
We need a new incentive system on Wall Street, one that encourages risk-taking, innovation and creativity, while also holding the people who work there accountable where it hurts — in their wallets — when things go wrong, as they inevitably will again.
He’s right. And what he doesn’t acknowledge is that these are exactly the kinds of incentives that are seamlessly built into a free, unregulated financial market. (By “unregulated,” I do not mean government has no role. Laws against fraud, laws that protect the sanctity of contracts, and the like are proper government roles.) It was precisely the government’s regulatory interference that destroyed those natural free market incentives, rigging the system toward a “heads I profit, tails the taxpayer loses” mentality.
These caveats aside, I love that Cohan unabashedly defends the massively vital practical contributions made by profit seeking Wall Street to our well-being and standard of living. I would add that the work of Wall Street is extraordinarily humanitarian and richly moral—no pun intended. Isn’t making the world a better place for humans to flourish the essence of humanitarianism? Isn't that integral to the morality of self-interest that lies at the heart of free market capitalism? Yes and yes. Cohan’s is a good start in making the case for deregulation.
The Nature and the Origin of the Subprime Mortgage Crisis—San José State University
Department of Economics
The subprime mortgage crisis had its origin in the program the directors of Fannie Mae initiated in the late 1990's to pursue social welfare goals rather than maintain financial viability.
Altruism: The Moral Root of the Financial Crisis—Richard M. Salsman for The Objective Standard, Vol. 4. No. 1.
The Morality of Moneylending: A Short History—Yaron Brook for The Objective Standard, Vol. 2, No. 3.