Yes, it worked with $1 trillion from the gov. That’s no consolation. And it was brought on by too much WS. Too big a financial system could be worse than non existent system. Nonexistent financial system may not help the economy but doesn’t rob from the economy. Oversized financial system can and did and will if allowed. It’s the nature of the beast. They have to feed themselves and the bigger you are, the greater your need. I don’t call that functioning.
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Yes, I understand that perfectly well.
However, having a functioning finance industry providing the essential service of functioning capital markets does not mean that it is desirable for it to use the power it gets from being essential to privatize an outsize share of the economy’s gains to itself (from 10-20% of corporate profits decades go to around 30% more recently, according to http://www.theatlantic.com/business/archive/2013/03/how-wall-street-devoured-corporate-america/273732/ ) while socializing its losses onto everyone else (as in 2008-2009).
An analogous situation is that, as long as there are criminals, police is an essential service in society. But many people would prefer better oversight so that low quality officers (corrupt, racist, etc.) cannot abuse their power and destroy the trust between the community and the police that is necessary for police to do a better job.
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Interesting, working on Wall Street for many years I can talk to a somewhat intelligent level about why someone would head there, and also work with several people who went to MIT who have worked in Wall Street on the financial side.
One of the head tech people in my area went to MIT, and he said that at MIT what usually happened was that the top tier students, the top X at a place like MIT, stay on the heavy duty tech/Stem track, while those in the bottom tier often end up majoring in other things (some kids obviously go to MIT with the intent of studying business as Sloan, leaving them out of this for the time being) when they realize where they are in the scope of things, so some of that will be at play. Keep in mind that the bottom tier at a place like MIT is likely among the top at a lot of other schools…
As far as why heading to Wall Street, it can be about the money or feeling like ‘this is the place to be’ (even though Wall Street is not necessarily about NYC any more or London or Hong Kong), if you are talking investment banking you can make a lot of money pretty young if you are a fit for it (and a lot burn out pretty quickly, it isn’t an easy life or one suited for everyone). On the tech side, Wall Street trading systems , algo systems and the like are pretty interesting to work on, and financial firms tend to pay better than non financial ones in tech, especially if you consider bonuses and stock grants and the like.
As far as why Goldman would hire kids out of MIT (or consulting firms and so forth), the answer is they often are looking for those who don’t necessarily fit the “Goldman mode” (which is true of other investment banks), they don’t necessarily want too many of the kids who focused on being an investment banker and making $$$$, who go the traditional route of going to an Ivy or other elite school, major in finance or economics, so they often hire non traditional students. More importantly, most Wall Street trading and strategies are driven by complex alogorithmic systems that monitor data feeds and such from all over the financial universe and make trading moves based on it, and these are designed by people who need the math background and the ability to handle some pretty complex math and business knowledge to do this.
As far as Wall Street suddenly being this evil beast when it was in the past this beneficial force, some things don’t change, and this view is one of them, Wall Street is neither saint nor sinner, it is a combination of both, you get the best with the worst. In the 1920’s Henry Ford took Ford Motor private, because he said that Wall Street was only interested in the next quarter, and having those ‘leeches’ hanging off of him meant he couldn’t make needed decisions; these days hedge funds buy significant positions in companies, and they ‘encourage’ ie browbeat firms into aggressively ramping up profits, because hedge funds whole mantra is rapid return in double digit range (the infamous Carrier plant of the last election and Mylen Pharmeceuticals were both driven by hedge funds). The same stock price that can cause people to be laid off or cause companies to make short decisions with harmful long term consequences also can allow a company to buy a start up with a brilliant idea and truly bring it to market (big companies for the most part don’t innovate, they swallow up small companies that did). Junk bonds that were the big evil in the 1980’s takeover mania also were responsible for innovative companies to be founded (MCI was one of those), or allow towns and cities to finance things they otherwise might not have, Michael Miliken and Boesky took down the financial markets yet Milliken did a lot of good with junk bonds…
In terms of the financial system, one of the problems we have seen is that the worlds of the overall financial system and Wall Street were allowed to merge starting in the late 90’s, commercial banks lending to hedge funds, for example, of the infamous CDO debacle tied to home mortgages that was probably the single biggest cause of 2008 (that and unregulated trading and clearing of both CDO’s and CDS’s that insured them), it actually highlights what the real source of the stability of our system has been for the most part, and that is the balance between regulation and business. 2008 happened in large part because a check and balance was lost, with the repeal of Glass Steagal that seperated commercial and investment banking and services, and commercial banks were killed because they lent money against risky investments and ended up with a portolio of near junk, prior to the late 90’s wouldn’t have happened. Wall Street was the largest cause of the mortgage crisis, Wall Street investment firms told the banks to write as many mortgages as they wanted, they would buy them and turn them into CDOs, and banks didn’t care, once they sold them (they thought) their risk was done; in the end when CDO’s collapsed they ended up with mortgages they couldn’t see and on the other end, ended up with a lot of CDO’s they collected as collateral when firms went under on loans that were worthless. The reason our system works is because there are all kinds of regulations, despite what some thing, public companies have to file 10k filings and have their books audited (and yes, there were lapses in oversight that basically allowed accounting firms to have consulting arms, and as a result they had incentive to cook the books), in financial trading most of the so called ‘bilateral’ trading happening without a clearinghouse involved has been regulated out of existence (AIG is the classic example of bilateral trades as dangerous). The reason people can get mortgages and the like is there are a system of rules in terms of lending that stop banks from practices done overseas, and you won’t get what happens in countries that are lightly regulated, you find public companies disappearing when it is shocking to find that the company’s filing were bogus and the like (I am waiting for the first big Chinese company to go under like that, Chinese regulatory agencies basically are there to get the people working in them rich from bribes and such).
For better or worse most of us benefit from it in terms of things like the 401k program, and for people with traditional pensions that money is invested in Wall Street and allows them to pay out benefits (well, okay, if they were funded properly, but that is another story for another dayh)…like most things around human beings, some parts of Wall Street do great things, others are necessary to make the economy work, other parts actually work against the interests of many people in the search for more profits, and the big enemy, greed, is there, too.
incredibly cogent and well written post @musicprnt !!
This was another disappointing article from Paul Krugman, who was once clearly brilliant, but who now lets his ideology drive what he writes.
High-frequency trading is often misunderstood. The reality is that for long-term investors (like me–I am a partner in an asset management firm), high-frequency trading has a negligible effect in terms of trading costs, and actually provides liquidity that might not otherwise exist.
And @barrons, while you might put me in the “worthless Wall Street” camp, the millions of union workers who rely in part on my firm for their pensions, and colleges that depend upon returns to their endowment, will disagree with you.
It isn’t just the Sloan students or non-STEM students heading into finance/ibanking/business organizational consulting.
Columbia SEAS after the early '00s became notorious among some hardcore engineering/tech employers and majors for a sizable chunk of its engineering/tech graduates go into finance/ibanking/business organizational consulting over the engineering/tech careers their majors were supposed to lead towards.
Another case in point is a cousin-in-law who turned down admission to a top 10 Genetics PhD program to go into organizational business consulting with a well-known firm and later, getting her MBA from a top 3 program.
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The thread (and article) title is so misleading. Talking about a small area. Most smart people are engaged in so many other fields- one could argue that the smartest ones do not even consider anything business/finance related… The posts are focusing on a small world. Such a wider world for the smartest to enjoy.
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Working in finance is mind-numbingly boring, especially in investment banking, so no surprise there.
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When the financial market failed in 2008, what happened to the real economy? The employment rate went from about 5% to 10%. The reality is simply that a heathy real economy (main street) requires a healthy wall street.
I had been a wall street practitioner for 6 years, and have been teaching finance for almost 20 years. I enjoy every minute of it.
If one has any problem with the profitability of wall street, he/she ought to look into the profitability of healthcare business, say pharmaceutical firms. If my memory serves me correct, their average return on equity has been consistently around 20-25% for many decades. During the same time period, financial firms’s returns are no where near that level or at that level of consistency. Does this automatically imply that healthcare practitioners are more greedy or evil than finance practitioners? I would surely not put it in that way.
Wall street has been able to attract 20-30% of Ivy graduates not just for 1 or 2 years, but quite consistently for many decades. If wall street cannot add value to the society, how can it be so sustainable in attracting talents? If wall street cannot add value to the society, why would its customers keep on paying fees for wall street’s services. People are not that stupid, particularly when money are involved.
Because, as you well know, there are lots of activities that may be personally profitable, but socially useless. Wall Street can’t be Lake Wobegon, where the average investor beats the market return.
" During the same time period, financial firms’s returns are no where near that level or at that level of consistency"
gee, I wonder why?
maybe it was because of the enactment of the Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), which was passed by Congress in 1933 and prohibits commercial banks from engaging in the investment business. It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression.
That regulation was put into place after the GREAT DEPRESSION to PREVENT another financial crisis caused by FINANCIAL INSTITUTIONS TAKING RISK WITH ORDINARY DEPOSITORS $$ .
If memory serves me…
I dont see many pharmaceutical companies having the same ability of risking the life savings of ordinary people as banks do, or did, until Glass- Stegall was enacted.
but it was repealed in 1999 and guess what happened??
The super smart people on Wall street once again figured out a way to make billions of $$ at the expense of ordinary people.
sheesh… 
8-|
“there are lots of activities that may be personally profitable, but socially useless.”
Do you mean building bridges to no where? Are we then going to make a conclusion that studying political science is useless? At least I would not. Political science is an important subject because it has significant consequences on the society. Its value will not be diminished in any way simply because some unethical ones abuse their power. By the same token, not all financial activities are noble. But these unfortunate incidents do not diminish the importance of financial studies because if we screw some of them up, the society will pay a big price for it.
Just imagine what kind of life that we are doing to live without a modern financial system: your salary cannot be automatically deposited into your bank account; McDonald could not get money from Bank of America to open a new store or replace a new coffee machine; you cannot afford to buy a house because there is no such thing called fixed rate mortgage; you cannot get private student loans because these loans companies cannot sell their loans (the list goes on and on). Just do not tell me that these activities are not socially useful.
“Working in finance is mind-numbingly boring, especially in investment banking, so no surprise there.”
Not true. Do you work in finance? If so, perhaps it is time to find work you are more suited for.
Why do people keep trusting WS? People are stupid and think economic laws wont apply to them.
Why are WS returns lower–maybe look at pay.They grab all the cash and leave just enough to appease investors.
And nowhere did I call for eliminating the capital market. Let’s just keep it that and not a casino for noxious speculation and greed
If you want good steady overall returns just buy an index fund for your 401K or endowment… Costs next to nothing and will outperform most active managed funds over long term.
Who do you think runs index funds?
“If you want good steady overall returns just buy an index fund for your 401K or endowment.”
I give the same advice to my friends, as most of them do not have the time or expertise to outperform. But if you think about it, you can see that there is still a need for active management. If active management doesn’t exist, there is no price setting for the securities in the index.
Endowments are a completely different story. Passive investments have a role there, but so do many other types of investments.
No one is saying that there should not be a modern financial system. Indeed, a modern finance industry is essential for well running economy.
However, the finance industry does not do itself any favors in public opinion when it gets itself into trouble, drags everyone else down with it, and needs to be bailed out by the government at everyone else’s expense. Nor does it look good to everyone else when it is seen as taking the biggest share of the economic gains of the recovery, while the 99+% of people whose income is mostly from labor (as opposed to capital) see only small gains.
There is a problem here. Consider the huge tax benefit Ivies get on their endowments. We have to question if it is worth to the society to give them big tax breaks if as many as a third of them go into WS? Is WS as productive as the rest of the economy to deserve that? Aren’t we effectively funding them to create CDS and drive the country to bankruptcy?
Do Ivies alone get them or all non-profits, including charities and churches?