The growing fraud that is Wall Street

Wednesday, December 17, 2008

In the 1990’s many people said that Wall Street would be democratized by the internet. Cheap internet-based trading would allow people to become day traders in bathrobes, moving stock trading out of the hands of brokers and off the trading floor to our PC. Yet, if we have learned anything since the financial markets collapsed in the fall, it is clear that much of the world of finance and Wall Street is still done in the shadows.

We have now learned about bizarre new financial instruments, and a complete lack of governmental regulation. We learned about Bear Stearns, AIG, collusion between insurance companies and banks and, most recently, about a guy named Madoff, who made off with a bunch of people’s money.

As it comes to light that a greater and greater amount of Wall Street business is built upon fraud and lies, how can we continue to believe the economic theories that have been born of Wall Street?

Economists have claimed for decades that the new world order meant the so called financial, insurance, and real estate (FIRE) industries would be the best generator of jobs in America. We were told that globalization was inevitable and that the FIRE industry could replace the jobs that produced real goods. We were told that certain jobs were expendable, but cheaper imported goods would allow us to afford our children’s college education.

The economists of Wall Street have made protectionism a bad word, hushing all those who would disagree. Instead of expecting the free trade economists to prove their theories, we gave them a free pass and ran headlong into a system that has weakened our country. We were promised that free, unregulated trade would raise the standards of living in other countries, creating markets for American goods. We were told that the new world order would create better jobs for Americans in new, better industries. We were told that the FIRE industries would be the main protected and export industry of the nation.

The proof of economic failure is all around us. We see declining standards of living, a growing gap between the wealthy and the lower-middles class, and losses of employer-provided health care. We have seen a diminished tax base, higher pollution in newly industrialized third-world countries, and an inability to keep lead out of our children’s toys. These growing inequalities and problems demonstrate the real impact of our trade policies. Instead of increased global prosperity, we have witnessed a race to the bottom on wages and benefits.

I am not proposing we erect high walls and turn all the boats away at our shores, but shouldn’t we be asking ourselves if, along with greater regulation of the financial services sector, we should regulate trade? It seems to me free market fundamentalism has failed on both fronts.

Many other countries regulate trade, some of them erecting high barriers to protect their industries and create export economies. Others, like China, have been bringing down barriers, but have continued to regulate trade, to make sure jobs and a domestic market is created.

For too long we have taken economists at their word, and have been admonished whenever regulated trade is mentioned. It seems to me their track record isn’t so good. Isn’t it time to listen to the unconventional wisdom and hear from a much broader array of economists, including those advocating economic theories often considered taboo?


Smitty 2:53 PM  

Someomne should do some research as to why Teddy Roosevelt thought that some form of business regulation was a good thing. I would, were it not for...tomorrow.

Good piece, Bob. We followed their advice for a while now, and where exactly has it got us?

Sopor 4:11 PM  

A year or two ago I would've preached the word of free-market capitalism, claiming that if we let the market run it's course, all will be righted in the long run!

However, I can't honestly say I have the same blind faith in our economic system in The USA anymore... Like Smitty said "where exactly has it got us?"

Mr Furious 1:26 AM  

I'm too frazzled and sleep-deprived to fully comprehend what I just read, Bob. But it seems to have resonated with me.

I'll be back.

Bob 8:27 AM  

"But it seems to have resonated with me."

Resonated? Wow. That's cool.

steves 7:29 PM  

Excellent points. Unfortunately, econ is not an area that I am all that skilled in, but I'll throw in my two cents.

The economic views of most hardcore Libertarians prevents me from taking them seriously. I don't see a completely free market as something that is workable or desirable. While regulation may be more common now than in the past, there has never been a time in this country where there wasn't some level of regulation.

I don't know if it is possible to say that lack of regulation is the cause of the current woes. There are just too many other factors. I think a strong case can be made that had some effect.

I also believe that some regulation can be harmful. I linked to an article a while back that suggested that some New Deal policies may have made the Depression worse and made it last longer than it should have.

I don't think the question should be should we regulate the market or not, but what kinds of regulation is going to be the most beneficial. The only way to discuss this is to stop arguing whether we need regulation and to discuss specific regulations and monitor their effect. I can think of many good regulations and laws, including ones on usury and disclosure. I can thinks of examples where de-regulation was mostly beneficial, such as with the airline industry and the phone companies.

Rickey Henderson 9:23 AM  

Rickey's two cents: regulation is just a dirty word for putting someone with an actual amount of authority in charge of monitoring these demented fucks.

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