What Does Wall Street Do?

[xoxoxoBruce]

The government scrambled to save some of the big players on Wall Street. Why? What do we need them for?

In 1940, a former Wall Street trader named Fred Schwed, Jr., wrote a charming little book titled “Where Are the Customers’ Yachts?,” in which he noted that many members of the public believed that Wall Street was inhabited primarily by “crooks and scoundrels, and very clever ones at that; that they sell for millions what they know is worthless; in short, that they are villains.” It was an extreme view, but public antagonism toward bankers and other financiers kept them in check for forty years. Economic historians refer to a period of “financial repression,” during which regulators and policymakers, reflecting public suspicion of Wall Street, restrained the growth of the banking sector. They placed limits on interest rates, prohibited deposit-taking institutions from issuing securities, and, by preventing financial institutions from merging with one another, kept most of them relatively small. During this period, major financial crises were conspicuously absent, while capital investment, productivity, and wages grew at rates that lifted tens of millions of working Americans into the middle class.

Since the early nineteen-eighties, by contrast, financial blowups have proliferated and living standards have stagnated. Is this coincidence? For a long time, economists and policymakers have accepted the financial industry’s appraisal of its own worth, ignoring the market failures and other pathologies that plague it. Even after all that has happened, there is a tendency in Congress and the White House to defer to Wall Street because what happens there, befuddling as it may be to outsiders, is essential to the country’s prosperity. Finally, dissidents like Paul Woolley are questioning this narrative. “There was a presumption that financial innovation is socially valuable,” Woolley said to me. “The first thing I discovered was that it wasn’t backed by any empirical evidence. There’s almost none.”

I don't have the background to analyse the doings of Wall Street, but this guy makes a very good case.

Link

[tw]

Originally Posted by xoxoxoBruce

The government scrambled to save some of the big players on Wall Street. Why? What do we need them for?

Necessary is to first establish a few principles. Fundamental in business - the company's survival. Why? The existence and structure of a company - that makes possible products and the resulting jobs - takes years and decades to create. To do the number one purpose of a company - its products - a company must survive. So, how do we fix defective companies? Fix the reasons for the defect. That means always going after a #1 reason for the problem - top management. No destroying the symptoms of our economic enemy - the resulting corporation.

A company that makes buggy whips does not make automobile turn signals for only one reason. Top management was stifling the innovators who were promoting new products and markets.

HP made the sine wave oscillators that, for example, make the weird sounds in Disney's Fantasia. So why did HP make so many electronic test equipment and critical hospital medial equipment? Why did HP make wrist watches and calculators? Why did HP eventually replace IBM (and the seven dwarfs) as a world leader in computer? See Clayton Christensen's Innovator's Dilemma.

Innovation makes companies. But existing companies that replace business school rhetoric with innovation morph into the greatest advocates of the only thing that made America great.

Bankruptcy is another American innovation. Had GM been in bankruptcy in 1991, then GM would not had destroyed so many American jobs and required government bridge loans 20 years later. Because bankruptcy loomed, then 1979 Chrysler, 1981 Ford and 2007 Toyota all started to fix themselves. Yes, 2007 Toyota. When Toyoda took over his great grandfather's legacy, he said there are five stages to a company's destruction. And Toyota was already at level 3.

You saw Toyota fixing itself when the legacy of those problems appeared in stuck accelerators some years later.

A company must survive. That means its number 1) reason for failures - top management - must be fixed. If not, then 2) a company must fire employees. If still not done, then 3) bankruptcy forces necessary (see Wagoner as the classic reasons why this would not happen - denial) changes. To either force restructuring. Or to sell assets to others who are more American patriotic. Who do not fear innovation.

A company that meets its survival requirements never need get past above point 1 - as Toyoda has done. A company that was one of the most anti-American companies was doing everything wrong because they did not do point 1) 30 years ago. GM has been that that destructive to the American economy for that long.

Because Ford only started fixing its problems in 2000, then we are only just beginning to see Ford advancing the American economy. The company was saved. Therefore innovation (the most important thing that every company does) could be made available to the economy.

[xoxoxoBruce]

You're off topic as usual.

[bluecuracao]

I think Billy Ray Valentine summed up Wall Street the best.

"Sounds to me like you guys a couple of bookies."

[lookout123]

Originally Posted by tw

Necessary is to first establish a few principles. Fundamental in business - the company's survival. Why? The existence and structure of a company - that makes possible products and the resulting jobs - takes years and decades to create. To do the number one purpose of a company - its products - a company must survive. So, how do we fix defective companies? Fix the reasons for the defect. That means always going after a #1 reason for the problem - top management. No destroying the symptoms of our economic enemy - the resulting corporation.

A company that makes buggy whips does not make automobile turn signals for only one reason. Top management was stifling the innovators who were promoting new products and markets.

HP made the sine wave oscillators that, for example, make the weird sounds in Disney's Fantasia. So why did HP make so many electronic test equipment and critical hospital medial equipment? Why did HP make wrist watches and calculators? Why did HP eventually replace IBM (and the seven dwarfs) as a world leader in computer? See Clayton Christensen's Innovator's Dilemma.

Innovation makes companies. But existing companies that replace business school rhetoric with innovation morph into the greatest advocates of the only thing that made America great.

Bankruptcy is another American innovation. Had GM been in bankruptcy in 1991, then GM would not had destroyed so many American jobs and required government bridge loans 20 years later. Because bankruptcy loomed, then 1979 Chrysler, 1981 Ford and 2007 Toyota all started to fix themselves. Yes, 2007 Toyota. When Toyoda took over his great grandfather's legacy, he said there are five stages to a company's destruction. And Toyota was already at level 3.

You saw Toyota fixing itself when the legacy of those problems appeared in stuck accelerators some years later.

A company must survive. That means its number 1) reason for failures - top management - must be fixed. If not, then 2) a company must fire employees. If still not done, then 3) bankruptcy forces necessary (see Wagoner as the classic reasons why this would not happen - denial) changes. To either force restructuring. Or to sell assets to others who are more American patriotic. Who do not fear innovation.

A company that meets its survival requirements never need get past above point 1 - as Toyoda has done. A company that was one of the most anti-American companies was doing everything wrong because they did not do point 1) 30 years ago. GM has been that that destructive to the American economy for that long.

Because Ford only started fixing its problems in 2000, then we are only just beginning to see Ford advancing the American economy. The company was saved. Therefore innovation (the most important thing that every company does) could be made available to the economy.

it would honestly be easier if you'd just stick to your typical cut and paste so your fans wouldn't fall asleep before they posted their smilies.

[Griff]

I gotta run this morning, but the article does open a needed conversation. Maybe tw will read the piece and respond to it. That would be refreshing...

[ZenGum]

Financial markets * can * serve a socially useful purpose - as a way to raise capital to fund genuine economic development: building a new factory or port facility or something.

A lot of what goes on there is just clever ways of acquiring possession of existing resources.

Quite a lot is somewhere in between.

The first kind of activity is the great redeeming feature of capitalism, that it is the best means of creating wealth.
The worst kind is mere legalised theft, the Big Lie, the kind of transfer of wealth to a tiny few which leads to social demoralisation, and ultimately revolution and/or collapse.

It is a judgement call as to how much and what kind of regulation we can apply to restrict the bad activity without choking off the good.

[xoxoxoBruce]

A friend was telling me yesterday, he has two nieces, sisters. One is a surgeon who was "drafted" by Harvard Medical, and the other was a securities broker for for Goldman or Lehman. The difference is monetary reward caused considerable family friction.

[Lamplighter]

Zen, I think you're spot-on...

Certainly there are benefits from corporations as legal entities
to raise money via stock and bonds to do work.
And some do go into various forms of bankruptcy.

But viable corporations don't die !
They only replace their elder minions, who do die and
their estates do get re-distributed back into society.
So corporations grow year after year acquiring capital assets.

Follow this to it's ad nauseum end and corporations will eventually
essentially own all such assets: business, financial, real estate., etc.,
unless there is some form of governmental balancing their capital growth.
Currently I don't see any such a balancing mechanism.