Going easy on the Street

Despite the storm of scandals in recent years and the stock market crash of 2000 that dashed retirement dreams for many, the public outcry against Wall Street was short-lived. To the contrary, although the Dow Jones industrials still trade below the levels of five years ago and the high-tech Nasdaq average is down 60%, President Bush ran for reelection as the advocate of a new “ownership society.” Now his first major piece of domestic business is to sell the privatization of Social Security to the nation. Privatization will allow you and me to invest part of our payroll taxes in the market rather than depend on the federal government to provide a minimum guaranteed monthly income once we retire. Who wouldn’t rather depend on stockbrokers than the government for retirement security? Yeah, right.

Of course Wall Street has served an important role in American economic history, raising capital and providing an avenue for individuals to invest, but Social Security can be made solvent through moderate tax increases and benefit reductions. Meantime, the use of stock options, which have made many chief executives unjustifiably and unimaginably rich over the last couple of decades, has yet to be widely placed as an expense on the company profit-and-loss statements, an urgent requirement according to many reformists.

What has been enacted -- namely, the clumsy Sarbanes-Oxley corporate governance requirements and rules for independent auditors -- will almost surely be watered down under pressure from business. William Donaldson, former chairman of the New York Stock Exchange, is now backing off his initial reform proposals in his role as the chairman of the Securities and Exchange Commission. All we have is the relentless Eliot Spitzer, New York’s attorney general, who has vigorously gone after brokers, investment banks, mutual funds and insurance companies. Now the U.S. Chamber of Commerce has gone after him, calling his measures, with absurd hyperbole, “the most egregious and unacceptable form of intimidation that we have seen in this country in modern times.”

Was it always this way in America? The answer is no. Steve Fraser’s comprehensive cultural history of Wall Street recounts just what the nation, through its authors, preachers, journalists and politicians, thought of financial speculators and the Street through the years. Fraser’s detailed book would have benefited from tighter organization, but its accumulation of information is fascinating. Criticism of speculators and Wall Street has in fact often been severe, moralistic, passionate and politically influential -- at least, with the notable exception of Spitzer, until recent decades.

Daniel Defoe, generally a defender of business, wrote in 1700s Britain that stock brokerage was “founded in Fraud, born of Deceit, and nourished in Trick, Cheat, Wheedle.” Americans deepened the tradition. “Rapacious wolves” is what one Jeffersonian called the speculators in the early 1800s, reflecting the public’s intense fear not merely of the speculators but also of the powerful bankers and rising manufacturers of an increasingly commercial nation. Anger toward business and in particular the Street were in evidence since soon after the New York Stock Exchange’s founding in 1792. This was unsurprising in a nation of frequent financial panics and nationwide depressions. “Honor, honesty, self-esteem -- all the higher qualities that should attach to mankind,” wrote New York merchant Abram Dayton in 1871, “were thrown aside in this wild chase after gain.”

The literature of anger was reinforced by exceptionally talented and diligent authors around the turn of the 20th century. They included Thorstein Veblen, who wrote “The Theory of the Leisure Class”; Louis Brandeis, who wrote a definitive work on the power of the nation’s large business trusts; 19th century political economist Henry George, who advocated a tax on land; and Edward Bellamy, whose novel “Looking Backward” may have been most influential. Ultimately, Teddy Roosevelt and Woodrow Wilson supported the common man against the Street and the trusts and made reforms that stood strong until the early 1980s, when a gradual dissolution of those protections began to take hold.

Fraser writes that Americans have historically given an ear to Wall Street critics, especially during the late 1800s, but that some of the best known talked out of both sides of their mouths. Towering preacher Henry Ward Beecher warned against the unjust accumulation of wealth because it was “a canker, a rust, a fire, a curse,” but also approved of the Social Darwinists’ survival of the fittest as justification for fierce business competition and high levels of layoffs. Mark Twain labeled the period the Gilded Age and criticized speculation. A mine, he supposedly said, was “a hole in the ground with a liar standing next to it.” As for the government, he noted, “I think I can say, and say with pride, that we have some legislatures that bring higher prices than any in the world.” But he could not keep from speculating himself in mines, timber and a range of inventions. He apparently lost $200,000 on an alluring new compositor.

Fraser does not fully sort out the consequences of this ambivalence. Government intrusion in finances and business in general was more restrained than in the Old World throughout American history. Abuses rose to new heights in the Roaring ‘20s, but the crash and the Depression led to strong securities and banking regulations under FDR. Social Security and unemployment insurance were created. In the 1930s, the New York Stock Exchange’s president, the dignified Richard Whitney, was sent to Sing Sing for embezzlement.

But by the mid-20th century, Fraser argues, acquiescence to Wall Street and its occasionally wayward ways marked a new docility that can be traced to the very success of the New Deal in taming capitalism’s excesses. When business complained that the new regulations were again bringing on depression in the late 1930s, the chairman of the new Securities and Exchange Commission, the redoubtable William O. Douglas, threatened to take over the exchange. Imagine William Donaldson threatening that today. “By shaming Wall Street and subjecting the Street along with the rest of the corporate world to some form of public regulation, however rickety and ad hoc, the New Deal made a convincing case that the ogre had effectively been defanged,” concludes Fraser. “ ‘Two nations’ might again become one.”

Arguably, the ogre came back as stock prices soared. Along the way, as business gained public approbation, it also gained more political power. So did rich Americans. And the media, itself increasingly consolidated, often fell into line. Who today would contest the claim that Wall Street plays a major role as a conduit for fresh capital? In fact, for much of American history, business profit itself was the greater source of needed funds.

Even a Democratic administration under Bill Clinton convinced Congress to reduce financial regulations and overturn key legislation from the New Deal, principally the Glass-Steagall Act. The act had been designed to restrict natural conflicts of interest between commercial bankers, who served corporations, and brokers, who served investors. It took only a couple of years to demonstrate why such regulations had been necessary, as companies began to overstate their earnings -- not by millions but by billions of dollars. Brokers from the “best” firms looked the other way and twisted their financial analyses to encourage unsuspecting investors to buy shares in companies their investment-banking arms were selling. Individual investors, especially employees of the most notorious of the scoundrels, lost hundreds of millions. Lawyers and accountants abetted the process, earning millions themselves.

The average CEO of a large firm made 500 times the pay of his or her average worker in 2003, compared with a still-stunning 140 times in 1991. Many lived robber-baron lifestyles of ostentation at the expense of shareholders -- and taxpayers, because they deducted on their returns the costs of their yachts and $15,000 umbrella stands.

Their stock options were supposed to motivate them to manage better, but the reward is grossly out of proportion. Lucian A. Bebchuk, professor at Harvard Law School, and Yaniv Grinstein of Cornell Business School, find that the pay of the top five executives at a number of large firms rose much faster than did company profit or stock market value since the early 1990s. That pay now accounts for nearly 10% of total corporate profit compared with 5.7% in the early 1990s.

All of this might have been tolerable if the economy had continued to thrive. Although it boomed in the late 1990s, and wages for all levels of workers at last began to rise handsomely again, in the last few years job creation has been the poorest of any economic expansion in the last 50 years. Wages after inflation actually fell last year. And income inequality is growing. The record of economic growth has, over three decades in fact, been well below historical par. As Fraser notes, during the robber-baron period the economy at least grew by leaps and bounds. Not so during the ascendancy of Wall Street that began in the early 1980s.

Yet the rapprochement between workers and the Street still seems to be in force. Why? There has been no dearth of critical bestselling books: “Den of Thieves,” “Barbarians at the Gate” and “The Bonfire of the Vanities.” Kevin Phillips, in “The Politics of the Rich and Poor” and “Wealth and Democracy,” has documented the politics of wealth amid the widening of income distribution. Gretchen Morgenson at the New York Times is a one-person watchdog agency of ongoing financial abuse. Barbara Ehrenreich has graphically described life at the bottom in her book “Nickel and Dimed.” Harvard Law School professor Elizabeth Warren has shown how hurt the middle class is. New York Times columnist Paul Krugman, once a moderate mainstream economist, has become a remarkably popular economic muckraker.

Fraser’s useful book helps us understand these contradictions. He persuasively makes the case that the government is less effective at taming Wall Street’s excesses today because the New Deal so effectively dissipated Americans’ traditional distrust of Wall Street.

But it is not the whole story. We need more histories and a better understanding of this transformed America of the last few decades, an era so different from the progressive period of reforms of the early 20th century. America’s historic antagonism toward Wall Street was not always justified. But Fraser’s history shows that it was an important balancing force against the all-too-frequent eruptions of greed and destructive speculation.

Economic frustration has hardly disappeared among poor and middle-income Americans today, and it may take economic catastrophe to revive America’s will to put Wall Street back in its place. The privatization of Social Security could well be such a tragedy in the making. But it will take years to be found out. It’s worth remembering that the poverty rate of the elderly was 35% as late as 1959. Now it’s about 10%, because of Social Security.

Fraser notes that Thomas Lamont, an executive of Morgan Bank, assured his friend Herbert Hoover in 1929 that “the wide distribution of ownership of our greater industries by tens or hundreds of thousands of stockholders, should go a long way to solve the problems of social unrest.”

Alas, the Great Crash and the Great Depression rudely interfered with those self-serving dreams. Reforms are what restored balance to the nation, not an ownership society. Wall Street was not undermined by the New Deal. But these days, the nation does not seem up to reining in its excesses. We will pay a high price for that. *