Etay Zwick: Predatory Habits -- How Wall Street Transformed Work in America

Predatory Habits: How Wall Street Transformed Work in America
By Etay Zwick
The Point

More than a century ago, Thorstein Veblen—American economist, sociologist and social critic—warned that the United States had developed a bizarre and debilitating network of social habits and economic institutions. Ascendant financial practices benefited a limited group at the expense of the greater society; yet paradoxically Americans deemed these practices necessary, even commendable. Far from lambasting the financiers plundering the nation’s resources, we lauded them as the finest members of society. Their instincts, wisdom and savoir faire were idealized, their avarice and chicanery promoted under the banners of patriotism and virtue.

Veblen, an inveterate reader of ethnographies, noticed a historical pattern that could illuminate America’s peculiar relationship with its economic institutions. Societies everywhere fall between two extremes. First, there are societies in which every person works, and no one is demeaned by his or her toil. In these societies, individuals pride themselves on their workmanship, and they exhibit a natural concern for the welfare of their entire community. As examples of such “productive” societies, Veblen mentions Native Americans, the Ainus of Japan, the Todas of the Nilgiri hills and the bushmen of Australia. Second, there are “barbarian” societies, in which a single dominant class (usually of warriors) seizes the wealth and produce of others through force or fraud—think ancient Vikings, Japanese shoguns and Polynesian tribesmen. Farmers labor for their livelihood and warriors expropriate the fruits of that labor. Exploitative elites take no part in the actual production of wealth; they live off the toil of others. Yet far from being judged criminal or indolent, they are revered by the rest of the community. In barbarian societies, nothing is as manly, as venerated, as envied, as the lives of warriors. Their every trait—their predatory practices, their dress, their sport, their gait, their speech—is held in high esteem by all.

Our world falls into the latter form. There remains a class that pillages, seizes and exploits in broad daylight—and with our envious approval. Who are the barbarian warriors today? According to Veblen, the modern barbarians live on Wall Street. They are the financiers summarily praised for their versatility, intelligence and courage in the face of an increasingly mysterious economy. Today a growing number of Americans feel at risk of economic despair; in a world of unsatisfying professional options and constant financial insecurity, the image of Wall Street life offers a sort of relief. It symbolizes the success possible in the modern world.

But in order to capitalize mortgage securities, expected future earnings and corporate debts, Wall Street elites must first capitalize on our personal insecurities. They make their exploits appear necessary, natural, even laudable. This is quite a feat, since in those moments when we suspend our faith in the financial sector and candidly examine its performance, we generally judge Wall Street’s behavior to be avaricious and destabilizing, immoral and imprudent. At the best of times, Wall Street provides white noise amidst entrepreneurs’ and workers’ attempts to actualize their ambitions and projects. We are still learning what happens at the worst of times.
The Myth of Finance

The myth of the financial sector goes something like this: only men and women equipped with the highest intelligence, the will to work death-defying hours and the most advanced technology can be entrusted with the sacred and mysterious task of ensuring the growth of the economy. Using complicated financial instruments, these elites (a) spread the risks involved in different ventures and (b) discipline firms to minimize costs—thus guaranteeing the best investments are extended sufficient credit. According to this myth, Wall Street is the economy’s private nutritionist, advising and assisting only the most motivated firms—and these fitter firms will provide jobs and pave the path to national prosperity. If the rest of us do not understand exactly why trading credit derivatives and commodity futures would achieve all this, this is because we are not as smart as the people working on Wall Street. Even Wall Street elites are happy to admit that they do not really know how the system works; such admissions only testify to the immensity of their noble task.

Many economists have tried to disabuse us of this myth. Twenty-five years before the recent financial crisis, Nobel Laureate James Tobin demonstrated that a very limited percent of the capital flow originating on Wall Street goes toward financing “real investments”—that is, investments in improving a firm’s production process. When large American corporations invest in new technology, they rely primarily on internal funds, not outside credit. The torrents of capital we see on Wall Street are devoted to a different purpose—speculation, gambling for capital gains. Finance’s second founding myth, that the stock market in particular is an “efficient” source for funding business ventures, simply doesn’t cohere with the history of American industrial development. When firms have needed to raise outside capital, they have generally issued debt—not stock. The stock market’s chief virtue has always been that it allows business elites to cash out of any enterprise by transferring ownership to other elites. Old owners then enjoy their new wealth, while new owners manage the same old corporation. The reality is that business elites promote the stock market far more than the stock market promotes economic growth.

Rather than foster growth, contemporary financial practices have primarily succeeded in exacerbating income inequality and creating singular forms of economic calamity. In the recent crisis, new instruments for expanding financial activity—justified at the time by reckless promises of universal homeownership—prompted a remarkable spiral of poverty, debt and downward mobility in America. The path from homeownership to homelessness, from apparent wealth and security to lack of basic shelter, is completely novel—as is the now steadily growing social group of “middle-class paupers.” (Ten percent of homeless people assisted by social service agencies last year lost their homes through bank foreclosures, according to the study “Foreclosure to Homelessness 2009.”) The homeless-through-foreclosure, having been persuaded by cheap credit to aspire to homeownership, were punished for unbefitting ambitions; any future pathway out of debt will be accompanied by new insecurities about the appropriateness of their life aspirations. Also novel in recent years is the extent to which economic “booms” no longer benefit average Americans. During the last economic “expansion” (between 2002 and 2007), fully two-thirds of all income gains flowed to the wealthiest one percent of the population. In 2007, the top 50 hedge and private equity managers averaged $588 million in annual compensation. On the other hand, the median income of ordinary Americans has dropped an average of $2,197 per year since 2000.

We habitually excuse Wall Street’s disproportionate earnings out of a sense that it helps American businesses thrive—but even corporations don’t quite benefit from Wall Street’s “services.” Consider the infamous merger between Daimler-Benz and Chrysler. In 1998, Goldman Sachs claimed that this merger would result in a $3 billion revenue gain. Stock prices responded extremely positively to the merger, which won the coveted Institutional Dealers’ Digest “Deal of the Year” Award. Only two years later, because of incongruities between the European and American parties, Chrysler lost $512 million in annual income, $1 billion in shareholder value in a single quarter, and was forced to lay off 26,000 workers. With the merger acknowledged as a failure, Chrysler was sold off from Daimler-Benz in 2007. Goldman Sachs, which had already made millions in windfall fees from the original merger, then walked away with millions more for advising the equity firm which now swooped in to pillage an ailing Chrysler. Bad advice seems to do little to tarnish Goldman’s golden reputation; after all, the firm can always point to its extraordinary profits as proof of talent and success. (Goldman Sachs ought to love the “bad publicity” it attracts nowadays; the headlines that reveal the billions made shorting housing and securities markets only solidify its status as Wall Street’s elite firm—capable of turning a profit even in times of economic crisis.)

The evidence suggests that Wall Street has assumed a negative relation to the economic interests of society at large. Many investment bankers are doubtless nice, hard-working people who give a lot of money to charity; nevertheless, they constitute a distinct class with interests diverging from society’s as a whole. This past year, unemployment skyrocketed from 6.2 to 10 percent. Meanwhile, Wall Street announced stock market gains of $4.6 trillion between March and October.

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