Although I endeavor to treat high dudgeon as an art form, it is difficult to find words adequate to convey the level of ridicule and opprobrium that Adam Davidson’s latest New York Times piece, “What Does Wall Street Do for You?” deserves. I had the vast misfortune to come across it late last week, and have gotten an unusually large volume of incredulous reader e-mails about it. Ms. G’s e-mail headline “NYT – Not a Parody” was typical:
This one is so bad, even for NYT, I’m wondering if the paper wasn’t secretly sold to Murdoch, Bloomberg & the Fed Reserve sometime in the past few days.
The problem with the piece isn’t that it’s propaganda. The majority of what you read in the mainstream media these days is propaganda. It’s that it’s shameless, blundering, obviously false propaganda. Eddie Bernays must be spinning in his grave.
Things have now gotten so bad that we now need official propaganda ratings, maybe on a crowd sourced or an Intrade model. I never thought the day would come when I would hold up Andrew Ross Sorkin or
Baghdad Bob Ezra Klein as models, but what they write has a tangential connection to reality and sounds plausible if you are not terribly well informed. By contrast, Davidson is all bumptious presumption, evidently hoping that if he sallies forth with enough vigor and enthusiasm, he will overcome any resistance.
You really need to read this train-wreck of a piece to understand how vomititiously bad it is. It argues we’d be living in mud huts were it not for Wall Street, which he defines as “The country’s largest investment banks, commercial banks and a few big insurance companies.” In other words, we don’t appreciate all the good the too big too fail firms are doing for all of us. Yet there is not a shred of evidence, not an iota of proof offered for any of Davidson’s assertions. And the overall thrust of his argument and many of its particulars are embarrassingly wrong (well, I am probably being charitable in assuming Davidson is capable of being embarrassed).
Davidson asserts that the big financial firms:
play the crucial role of intermediation — matching borrowers with lenders. Most of the time, the industry does this extremely well (though in the case of matching homeowners’ debt to the global financial system, too enthusiastically).
Lordie, lending money goes back to the Bronze Age. We don’t need massive financial firms to do that. And they don’t do it particularly well. FICO based credit lending has proven to be a poor proxy for creditworthiness. The banks blew themselves up, not out of “overenthusiasm,” but as we described in ECONNED, adoption of fatally flawed ways of measuring risk and management structures which make the senior managers both hostage to and in cahoots with “producers” led to widespread looting. This isn’t a benign and efficient financial system; it’s a rampant predator. And it does not do a particularly good job of allocating capital. Aside from the fact that the expansion of the financial sector is correlated with slower growth and more frequent financial crises, investors have also become more short term oriented. As Andrew Haldane of the Bank of England described, required investment returns show a marked short term bias, which leads to underfunding of projects with back-end weighted payoffs, such as infrastructure and new technologies.
And Davidson not only misleads, he says things that are completely false:
Most know that Ben Bernanke, Henry Paulson and Tim Geithner (like central bankers and treasury officials everywhere) were following the hallowed advice that Walter Bagehot, onetime editor of The Economist, set down in 1873: during a crisis, a country must do everything possible to preserve its banks.
This is what Bagehot actually said:
The cardinal maxim is, that any aid to a present bad Bank is the surest mode of preventing the establishment of a future good Bank.
As much as I’d enjoy thrashing the piece further, Amar Bhide, who is uniquely to do so, has graciously offered to help. Bhide is the author of a landmark book on entrepreneurship, The Origin and Evolution of New Businesses, and his most recent book is
A Call for Judgment: Sensible Finance for a Dynamic Economy. We were both members of the financial institutions group at McKinsey. Bhide became a proprietary trader before joining Harvard in its finance faculty, then switched to focusing on entreprenuership. He now teaches at Fletcher.
The author invites readers to imagine what life would be like without Wall Street. How awful: the poor would remain poor, there would be no middle class etc etc.
The reality is that all the good things that a financial system is supposed to do were in place more than half a century ago. There would certainly have been no mass market for automobiles and radios and vacuum cleaners without consumer finance. But that was invented in the 1920s.
The issue is of balance. We need a financial system that extends credit to those are likely to repay, not to reckless borrowers. A good diet must have protein but an all protein diet is dangerous.
What we have had in the last 30-40 years is excess piled upon excess.
I can very easily imagine life with finance as it used to be say in the 1960s, without a credit producing machine that enables reckless borrowing, without instruments that are supposed to reduce risks that have in fact gutted the real economy, and too big to fail banks like JP Morgan with more than 75 trillion dollars of derivatives on their books.
The piece reminds me of Blankfein claim in a London Times interview that Goldman “does God’s work” which he later said was a joke; but it did not amuse in at a time when unemployment was crossing 10 percent. In the same interview, Blankfein asserted that Goldman Sachs served a ”social purpose” by “help[ing] companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle.”
Blankfein’s claim, which was presumably not intentionally jocular, is hard to take seriously as an explanation for the tripling of the Goldman’s revenues from $13 billion in 1999 to $46 billion in 2007, and of employee compensation from $6 billion to over $20 billion. Equity underwriting – issuing stock for real companies – accounted for about 3 percent of Goldman’s 2007 revenues, and debt underwriting (which includes mortgage and other asset backed securities, not just corporate debt) accounted for another 4 percent on revenues.
Meanwhile, trading and principal investments amounted to 68 percent of revenues, and asset management and securities services (which also have little to do with raising money for real companies) 16 percent.
It is also difficult to imagine that trading and principal investment revenues were more than five times as great in 2007 as they had been in 1999 because Goldman’s traders had become five times better. Rather, Goldman multiplied its trading profits by multiplying its risk taking and leverage, borrowing vast sums from banks and shadow banks.
Davidson’s last two pieces for the Sunday New York Times magazine exemplifies the “do whatever you can get away with” attitude that now seems pervasive in big finance. But it is an open question why the Grey Lady is giving this sort of work such prominent placement.