The Financial Seminary
“What’s been lost is the idea that a banker has
some responsibility to protect the client’s interest.”
Nobel Laureate, 2000
The Wall Street Journal
August 21, 2008
During seminars, I use two simple graphs to describe the primary change I've witnessed since joining Wall Street during the late seventies. In my opinion, they go a very long way in explaining the Occupy Wall Street movement, and perhaps the Tea Party and concerns of American investors in general.
I've labeled the first graph "Early Wall Street." Imagine a piece of pipe lying on its side. On one end of the pipe are people with money but no good ideas for using it. On the other end are people with good ideas but no money. In the middle of the pipe, there is a pump that I have labeled "Wall Street." It's job is to keep money flowing thru the pipe. During the early eighties, Wall Street received less than 10% of our nation's GDP for doing so. It was a difficult but achievable job to keep those on both ends of the pipe happy, and earn a decent living in the process, with a modicum of ethics.
But due to human nature being created higher than the animals but lower than the angels, it's tempting to watch all that money flow by on its way elsewhere and not want ever more of it. So the second graph, labeled "Current Wall Street," shows several spigots on the pipeline. Of course, those spigots largely belong to the big Wall Street firms, of which I've not been a part in over twenty years.
One spigot might be the "proprietary trading desks" inside the big, publically-traded investment firms and banks. Essentially, they use money, usually raised from investors on Main Street, to literally trade in the markets, often against the very same people on Main Street who provided the money. Those people on Main Street usually have productive jobs that preoccupy their time, as well as have minimal experience and resources to judge the market. The traders have all day to do nothing but trade. And they have enormous capital, again supplied by those on Main Street, with which to buy the most advanced technologies, research and so on. Plus, they often earn bonuses of half their annual trading profits so they can be quite aggressive. Too often, one or more are so aggressive they threaten the life of the firm itself. And too often then, the same taxpayers on Main Street have to bail them out.
A second spigot might be "proprietary products." These are mutual funds and so on that are not only sold by Wall Street firms for commissions but are managed by the same firms selling them for management fees as well as commissions. The concern about those of course is that brokers and planners are sometimes encouraged through various means to give those products priority over a non-proprietary investment that might have a better track record of performance for investors.
A third spigot might be those hedge funds that are outside the big firms but are still partially owned by the big firms. Again, the capital made available by investors on Main Street can be used against them in the markets. The list goes on. So when the market peaked in early 2000, financial services companies were taking in almost 30% of our nation's income. And financial professionals were making more money than similarly educated professionals, often far, far more money.
That seems rather inequitable to an increasing number of Americans. It is a major reason both the Tea Party and the Occupy Wall Street movement, whether they understand the details or not, have grown quite upset. All that money being diverted off the nation's money supply from more productive purposes is also a major reason politicians from both parties have been so friendly toward Wall Street. But all that drained money, in my opinion anyway, is why your retirement plan has likely stagnated for years.
Nobel economist Milton Friedman, and therefore many CEO's today, liked to argue our publicly traded companies are in the "private sector," even though they are actually funded with money from the public. One might assume publicly traded Wall Street companies would hesitate to bite the hand that feeds them by increasingly trading against Main Street. But as the old saying goes: "It's hard to get people to see the truth when they're paid a small fortune not to see it." Still, those spigots are like the Spanish Moss that hangs in the trees outside my office window. When there are a small amount, they don't bother much. But when they get too thick, they kill the tree on which they depend.
It's the same way with Wall Street. Its younger members will never understand this due to the old saying about it being hard to reason with the overpaid. But more seasoned and less biased heads know Wall Street is in real danger of killing the money flow, as evidenced by the credit crisis that preceded the Great Recession. Or, consider the personal example of my sister. She stopped working as an attorney for the state of Kentucky more than a decade ago. Her retirement plan was frozen at that point. Though invested in some very high quality equity mutual funds chosen by the plan's trustees, she has made nothing during the years since she quit working. Obviously, that will greatly affect her future. And most Americans are in the same boat, even as Wall Street orders larger and larger yachts. Very simply, trading wealth around and draining it from the pipeline accomplishes very little wealth creation. Yes, it creates jobs and income; but so does prostitution and dealing black jack.
The task at hand is therefore to essentially save capitalism from the capitalists. That is why Paul Volcker has been strongly advocating what has become known as "the Volcker rule." Of course, Mr. Volcker is the greatly respected former chairman of the Federal Reserve. He killed inflation during the eighties when most Americans fear OPEC the way they now fear Wall Street and Washington. His rule would greatly limit the amount of such parasitic activity on the part of our investment firms, many of which were recently bailed out by the federal government, which means tax payers. Many are now apparently repeating the same mistakes that caused the credit crisis. And they still earning the same huge bonuses for doing so of course. So they are fighting Mr. Volcker and his rule, which this independent investment planner admires as much as Benedictine monks admire the Rule of Benedict. And that's actually a pretty good comparison.
One of the things rarely mentioned by the press about Mr. Volcker is that he is a devout Christian and serves on the board of a Christian college with which I am familiar. As such, he undoubtedly knows there is little, if anything, in Judeo-Christianity about easy money being a virtue. He was therefore willing to stop the easy money practices our nation engaged in after the Vietnam War. As the old saying used to go, it is the Federal Reserve's job to take away the punch bowl just when the party gets really rolling.
Unfortunately, Alan Greenspan apparently believed Ayn Rand's teaching that the moral purpose of our lives is to make money. So in the opinion of many, he further spiked the punch bowl when the party of the nineties had grown over-heated, eventually causing the economy to catch flames during the Great Recession. My clients used to wonder when he would eventually tighten credit. I replied that due to his moral reasoning, the odds of him stopping the printing of dollars was as likely as Billy Graham stopping the printing of Bibles. It turned out that a little knowledge of morality may have helped my clients.
The bad news is that Greenspan apparently passed his mantle on to Ben Bernanke. Mr. Bernanke was once asked what he would do if he printed money for the banks but Americans were reluctant to borrow it as they are over-burdened with debt or America needs so little more housing, cars and so on. Economists call that "pushing on a string" and the Japanese have experienced it for years. Anyway, Mr. Bernanke replied that if he had to, he'd print hundred dollar bills, rent a helicopter, fly across America and throw the money out. He's since been known as "Helicopter Ben." And he's essentially tried to provide free money by keeping interest rates near zero. As I write at the seeming height of the European debt crisis of 2011, the Fed is increasing the money supply at nearly a 30% annualized rate. That is even higher than it did during the credit crisis preceding the Great Recession.
My point for both the Tea Party and Occupy Wall Street is that it is not necessary to rid ourselves of the Federal Reserve. We've had times in the country when every local government printed its own money. That wasn't any more efficient for economic activities than carrying around sacks of gold. We simply need to understand the moral perspectives of all those in key positions of government, as well as industry, whether that puts more money in the pipeline for Wall Street to trade and siphon or not. Worse, we cannot expect investors to have confidence in the future when the fiscal policies of Congress promote austerity but the monetary policies of the Fed are stimulating. Perhaps that's why the August 10, 2010 edition of The Wall Street Journal contained these rather prophetic words:
“The False Fed Savior: As the Bible says, we know that our redeemer liveth. And on Wall Street and Washington these days, the economic redeemer of choice is the Federal Reserve…It’s a tempting religion, this faith in the magical powers of Ben Bernanke and monetary policy, but it’s also dangerous. It puts far too much hope in a single policy lever, ignores the significant risks of perpetually easy money, and above all lets the political class dodge responsibility.”
Gary Moore is a Sarasota-based investment counselor who has authored many publications and articles on the morality of political-economy and personal finance. He is a registered representative of, and offers securities through, National Planning Corp (NPC), member FINRA/SIPC, but opinions expressed here are his alone. The Financial Seminary and NPC are separate and unrelated. His comments are included in the More Good $ense newsletter in an effort to expand stewardship leaders’ understanding of broader economic issues.