The Wall Street Waste

So, I just finished reading Michael Lewis’ Flash Boys about how high frequency traders have been gaming Wall Street to basically place a tax on the entire American economy while delivering no benefits to society whatsoever (they’ve got various claims to the contrary, but suffice it to say that the economy does not benefit because one company figures out how to send stock information 3 microseconds faster than another company).  Like any Lewis book it was a great read, but it was so frustrating to read.  Sure, I know Wall Street is a venal, greedy, corrupt place, but to just read how deeply ingrained that is down to the DNA of the place is quite depressing.

Sure, there’s some decent people there, like the book’s hero, Brad Katsuyama, there’s an entire culture of conflict of interest and ripping off the customers one is supposed to be helping (i.e., pretty much ordinary investor who owns stock, which is a huge portion of Americans in retirement funds, etc.).  The book gives a sense of hope, but really, the entire tale is sordid and disgusting and it’s hard to be optimistic about a place where greed is the ultimate value.  I loved the anecdote about how when Katsuyama wanted to build a new, more fair stock exchange because he was horrified at the corruption of all the existing ones, nobody really believed him.  When he told investors he wanted to make a new exchange so he could earn lots of money, then the investors came pouring in.

There’s a nice piece from earlier this year featuring Michael Lewis in 60 Minutes.

One of the great frustrations of the situation is just how many smart, ambitious Americans get sucked into an industry that is essentially doing nothing to better America’s productivity.  Sure, the stock market as a whole does, but as it turns out it’s super inefficient and has way more people involved that need to be and it would be much better off for our society if very many of those smart people were working as engineers and innovators, not just trying to be one more person getting rich on Wall Street.  There was a great Post article on this a couple weeks back:

The financial industry has doubled in size as a share of the economy in the past 50 years, but it hasn’t gotten any better at its core job: getting money from investors who have it to companies that will use it to generate growth, profit and jobs. There are many ways to quantify how that financial growth-without-improvement hurts the economy.

In 2012, economists at the International Monetary Fund analyzed data across years and countries and concluded that in some countries, including America, the financial sector had grown so large that it was slowing economic growth. Using a different methodology, the most prominent researcher on the size and economic value of Wall Street, a New York University economist named Thomas Philippon, estimates that the United States is sinking nearly $300 billion too much annually into finance.

In perhaps the starkest illustration, economists from Harvard University and the University of Chicago wrote in a recent paper that every dollar a worker earns in a research field spills over to make the economy $5 better off. Every dollar a similar worker earns in finance comes with a drain, making the economy 60 cents worse off.

It’s not that finance is inherently bad — on the contrary, a well-functioning financial system is critical to a market economy. The problem is, America’s financial system has grown much larger than it should have, based on how well the industry performs.  [emphases mine]

Yowza.  Can’t say I’m all that surprised, but this is disturbing information.  And information that strongly suggests we should do something as a society, i.e., change the laws, that have allowed this sector to become such a drag on America’s productivity.  The article continues with a great analogy on all this unproductivity (you really should read the whole thing.  Really) and gets to the problem with the waste of our intellectual capital:

What that means is that the growth of complex financial products has served primarily to boost income for the firms themselves, Philippon said. A new paper from researchers in the United Kingdom supports his findings. It analyzes decades of data on individual workers and finds no connection between financial professionals’ specific skill sets and why they make so much more money than similarly skilled workers in other industries.

Those finance pros could have been doctors or researchers or product engineers. They could have gone into the business of solving human problems, commercializing big ideas and creating jobs. Almost anything they could have done, by Philippon’s calculations, would have added more value — more growth and job creation — to the economy.

So, damn it, it is really important to the good of the country that this change.  Alas, greed tends to win.  All that extra money buys a lot of politicians.  And, we’ve reached a point where both parties are pretty much dependent upon these absurd Wall Street profits to help fund them.  Hmmm, maybe it all circles back to campaign finance reform.  Whatever it is, the whole matter leaves me bitter, depressed, and pessimistic.  Bah humbug.

About Steve Greene
Professor of Political Science at NC State http://faculty.chass.ncsu.edu/shgreene

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