An Insider’s View of Occupy Wall Street

To begin, I should point out that what is called “Wall Street” is not a monolith. Rather, it is like a giant global octopus with a central purpose (raising money for productive investment) and many different tentacles that have a broad reach, not all of which went awry in the last decades. Thus, people have to be careful not to oversimplify the subject and risk killing the entire octopus rather than targeting only those tainted tentacles.

I have spent most of my 80 years on or around Wall Street. I believe I know it pretty well and have enjoyed many of its benefits. I also still believe that the genius of “Wall Street” was and remains an essential ingredient in making possible American dreams. Now, however, I find myself agreeing with what appears to be the basic idea underlying the “Occupation.”

I hear the Occupiers’ message to be:

What happened in the economy of the country in recent years does not seem right or fair. Wall Street got us — the whole U.S. — into this mess by plying the country with excess unaffordable housing, creating too much easy credit for everything we wanted to buy, and at the same time reaping vast profits trading among themselves. The resulting bubble inevitably burst. Yet, its dire consequences linger and now we, the rest of America, are continuing to pay a stiff price for Wall Street’s selfish mistakes. At the same time Wall Street appears to have pretty much gotten off scot-free and has gone back to minting fortunes again, at our expense.

Broadly viewed, that message seems to be very close to the truth. And, it is hard and perhaps unwise to argue, or even quibble with, the relatively few points that may be overstated or exaggerated by some of the Occupiers.

Many people say correctly that they — the occupiers — have not sufficiently specified either their complaints or their wishes. Still, that does not diminish the powerful truths embedded in their overall basic message.

Frustration, a sense of helplessness and a feeling of abandonment are perfectly normal human reactions to the conditions which today embrace far too many Americans. While the Occupiers are still a relatively small number of people, they are clearly the leading edge of 15+ million Americans underemployed and unemployed, whose pains and foreclosures have been largely swept under the political rug.

Credit President Obama, Paul Volcker and the sponsors of the Dodd-Frank Wall Street Reform and Consumer Protection Act for setting out to rein in and correct much of the obvious Wall Street excesses, despite that they did it with kid gloves to avoid killing the whole octopus. But, remember also that Wall Street’s vastly well paid lobbyists quickly and powerfully thwarted too much of the original plan.

Now that the Occupiers have brought the issues front and center, what can and should be done, at least with respect to the Wall Street part of the overall larger economic problems?

  • Simply dissing the Occupiers as a rag tag lot of poor losers is not a productive idea. They are as real as rain.
  • Simply counting on bad weather to shut them down is wishful thinking because it is already clear they are striking a vibrantly resonant chord in many places.
  • Simply appearing to be broadly sympathetic, without seriously addressing basic issues, is likely to exacerbate their anguish, anger and behavior.

Wall Street needs to start by publicly presenting a credible group of leaders who loudly say, “We get it!” and pledge to start doing the things that they already know very well need to be changed. That list includes:

  1. Wall Street has to stop playing games with government about the reasons their special tax breaks (for example capital gains treatment on carried interests) enhance profits to allegedly raise more capital for America, when in all honesty they really are mainly to pay ever bigger bonuses from outsized profits in competition with everyone else in the business.
  2. People forget that Wall Street has poured ever larger amounts of money (simply as the economy grew) through the same pipes and made the relatively few people manning those pipes (traders and investment bankers) seem to themselves, at least, like geniuses who deserved ever more pay when really all that was happening was more money was passing the meters in their pipes. Their equivalent “unit” pay for most similar functions over the years increased by many multiples in relation to most other similar types of jobs, which deflected a lot of talent away from science, engineering and education. Modern computers made ordinary people seem much smarter (and apparently more valuable) than they really are.
  3. Rhetoric to the contrary, Wall Street was and is perfectly capable of creating sufficient investment capital for American industry at reasonable — in historical terms — levels of pay. It boggles imagination to believe that an investment banker will quit, if the pay for raising money goes down from $4 million to $2 million a year, if global ground rules uniformly change. It may be unpalatable, but is still a better deal than many alternatives, which (heaven forbid!) could lead them to being Occupiers too.
  4. Wall Street preached competition while it systematically undermined it. Elimination of the Glass-Steagall Act of 1933, which separated commercial banking from investment banking, was politically powered through in 1999 during the last big wave of prosperity. That led to eliminating many competing independent players on Wall Street, which in turn, enabled the remaining too few giant players to dominate, as well as obscure, many of their most profitable activities. This led directly to the bubble and other excesses, which ended in the collapse in 2008.
  5. Capital adequacy and proprietary trading have also become serious problems. Wall Street loves — lives on, in fact — leverage and therefore deplores being required to have more capital to protect its depositors, lenders and counterparties. They have turned somersaults to justify their capital adequacy and frequently have pulled blindfolds over regulators’ eyes. Proprietary trading became a very large part of their profits, even though that activity truly has little to do with their avowed purpose of providing capital to American business. They really should come clean on these issues and put into effect the sound and sensible rules that have been proposed by Volcker and others to put their houses in order.

The above five categories of issues obviously involve many detailed and complex matters that go way beyond the basic purpose of this note. However, by seriously addressing those topics in the context of a genuine “we get it” attitude, Wall Street could legitimately put itself on a path of reform which could become an important part of the larger goal of restoring confidence in the American economy.

That might lead the Occupiers to getting behind the other crucial issues like overall tax reform (including more taxes from the super rich) and getting broader consensus behind sufficient economic stimulation and putting more Americans back to work and back into the malls of America.

Frank A. Weil is the Chairman of Abacus & Associates, Inc., Investments; formerly Vice Chair and Chief Financial Officer of Paine Webber and General Partner, Loeb Rhoades & Co.

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Answers to Questions Rarely Asked

One of President Obama’s (POTUS) clear frustrations today, as Drew Westen pointed out in his August 6th prominent¬†New York Times¬†article, is the difficulty in telling “stories” necessary to support his current and strategic goals, as FDR used radio fireside chats. There are even better media today that can lend themselves to powerful dissemination of the President’s message. YouTube and Facebook can be powerful vehicles for communicating his narrative.

People have many questions which they are reluctant to ask in town meetings for fear of looking foolish – questions that need to be raised and answered by POTUS himself to help everyone in the country better understand what he needs and wants to accomplish.

Currently, for example, extension of unemployment benefits – to help friends, neighbors, cousins and millions of others, who through no fault of their own got caught in the unemployment trap sprung on them by the near collapse of the banking system in 2007-8. “When we find folks swimming in a sea of trouble, it is the American way to throw them a life preserver. I am sure you agree it simply is not the American way to force them to just fend for themselves!”

Following is a scenario which is intended to illustrate several questions and answers, and there are, of course, many others, that could help the national dialogue.

There is merit in looking for the kind of metaphors that can be the funny bones to unlocking public understanding and acceptance. They could magnify and improve how POTUS reaches out and better connects to more Americans.

It was late Tuesday afternoon, one week after President Obama signed the legislation lifting the limit on US indebtedness, five days after S&P downgraded the rating of US bonds from AAA to AA+, four days after the stock market fell about 600 points on the Dow Jones Average and not long after the close of the New York Stock Exchange, when the Dow average had risen about 500 points.

Three old friends living in a small town on the outskirts of Cleveland gathered in a local joint for a beer, and to catch up on what was going in their lives. Andy sells ads for the local newspaper whose circulation is sinking like a stone; Barbara is a currently unemployed forewoman in a small manufacturing plant making parts for GM cars; Charley is an emergency room doctor in the local hospital working on an hourly basis. They got together occasionally for a drink, some conversation, and the town gossip.

Beers and pretzels in hand, they headed to an empty table. Andy said, “For Pete’s sake, has the world gone crazy?” Charley shot back, “It hasn’t just gone crazy; it has been crazy.” Barbara asked, “What is so crazy? It seems to me business as usual — only a little faster and more exaggerated. I just wish someone could explain this mess, without pointing fingers or covering their own . . . .” she trailed off.

At that point, a man sitting alone at the next table piped up, “You seem to be asking the right questions, but wouldn’t you rather have some decent answers?”

Andy said to their new friend, “Who the heck are you? And can you really shed some light on what we’re talking about?”

The new guy said, “My name is Dave. I’m a field reporter for CNN. At the moment I am on special assignment to find out what people are thinking about, what they are talking about, what they understand and what they do not understand, and what they would do about things.

“You’re just the sort of folks I’m looking for,” Dave added. “Would you guys be willing to talk to help me get at those questions? I also have a surprise participant available to respond to you via YouTube if you’re interested?”

“Whoa, that’s a mouthful of stuff!” said Charley the doc. “What in the world do you want our views for? You already heard us say that we don’t get it.”

Dave came right back with, “That’s just it – if people like you don’t get it, how can the political system ‘get it’? You’re the ones sending people to Washington and paying the bills. Without sensible input from citizens like you, elected officials can’t possibly do their jobs well. But it almost seems that some politicians are quite happy to keep their constituents in the dark and confused – you guys can really help yourselves and everyone by asking questions people rarely dare ask, for risk of sounding stupid.”

“Who is your mystery genius?” asked Barbara. Dave then said, “Well, you may not believe me, but it’s the President.” The group looked suspiciously at one another. “It’s true. President Obama is prepared to answer your questions directly on You Tube. He suggests that you start by listing several questions you don’t quite ‘get.’ He will then take a crack at answers which will be on YouTube and you all and others can put on Facebook so more people can hear the same answers. I suggest taking them one a time. That will help us avoid scrambling everything all together and creating more confusion.

Andy said, “Let’s start a list; here goes:

  1. What is trade protectionism and what can we do about it?
    2. What is the difference between fiscal and monetary policy?
    3. Isn’t the plea for time to restart the economy simply a lame excuse?
    4. How it is that stock and bond markets predict the future without a crystal ball?”

Then Barbara added,

5. “Why do deficits matter?
6. Why do taxes, up or down, make a difference to economic growth?”

Charley suggested,

  1. “Why does the size of government really matter?
    8. How does liquidity, or more money in the banking system, restore growth?”

“That’s a great list!” Dave said. “Now, Mr. President, would you take a crack at answers simple enough to be understandable and complete enough to be credible and useful?”

The President said, “That is a tall order but I will try. Let me whack at each question first and then perhaps we can talk about issues you may have.

  1. TRADE – I have long believed that the best solution to a trade problem is MORE trade not LESS trade – we tried less in the 1930s by keeping things out and it was a disaster – watch out. That may have been the biggest cause of the depression.
  2. FISCAL/MONETARY – Fiscal policy is taxes and government spending and monetary policy is the Fed’s domain of interest rates and availability of loans. They are very different and distinct and that must be remembered.
  3. TAKES TIME – have you ever tried to push a wet noodle? At best it is a slow delicate process. The economy has been swamped everywhere with unemployment and lack of confidence, so the noodle is wet and very hard to move around. If you do not believe me, play with a noodle.
  4. MARKET PREDICTIONS – There is an old saying that ‘markets never lie’ – all that means is that a market is an accurate measure of what A LOT of people are thinking at a given moment. BUT markets, like the people who make them work, are emotional and fickle and are susceptible to stampeding often in the wrong direction. HOWEVER, when you average the views of a lot of people over some reasonable period of time, you do usually get some idea of what may be coming because people are definitely trying to anticipate the future so they can buy low and sell higher.
  5. DEFICTS – There is an old wisdom that says if a person wants a fish you can choose whether to sell them a fish or teach them to fish. BUT if they borrow money to buy a lot of fish, sooner or later they will owe more than they can afford to pay. If you teach them to fish, they quickly become self-sufficient in fish. Deficits matter more to individuals than to whole economies of people. If you are simply lending to one person you worry about whether she will break a leg. If you are lending to a million people, not that many people will break their legs, so that loan, as a whole to the larger group, is a much less risky proposition. Deficits do not have to be a problem for nations that are rich and diverse like the US. We have to be careful not to be too simplistic about this particular question.
  6. TAXES – A simple answer is that less taxes for a lot of people can mean more consumption:-cars, clothes, houses, and so forth, that makes the economy grow. More taxes, of course, means less money to spend and/or invest therefore less growth. But it is not just up or down; it is fairness in distributing the overall burden of taxes. We have too many special arrangements that tend to favor the powerful and rich and which sap away public confidence in many ideas about changing, raising or lowering taxes.
  7. SIZE OF GOVERNMENT – This is not an easy question. One way to think about it is to imagine what it would feel like having an elephant in your living room instead of a cow – clearly the elephant takes up more room. BUT if you need to lift a grand piano it would be more help. But if all you needed was more to drink, the cow, of course, would be more help. So the question really is, ‘what do people really need?’ I think the needs today are more like trying to lift a piano –think of trying to lift 15 million people up and help them find work – milk alone probably will not do the trick.
  8. LIQUIDITY – Basically liquidity by itself can NOT do the job – it is a necessary but not sufficient condition. Think of it like swimming with or against the current – against the current (or less liquidity) is real tough – but when the current is pushing you along too it helps. Liquidity lubricates the economic system.”

Then the President said, “Ok folks, let’s hear your complaints and questions.”

Dave said, “Thanks Mr. President, your comments are now being posted on You Tube and we have no doubt that this will start a lot more useful, helpful discussion among a lot of people who are honestly interested in knowing enough to really contribute to the national conversation.”

Andy, Barbara and Charley said more or less in unison, “That is a great start on understanding more and better. We hope you will find a way to keep it up. The country needs it, whether people agree or not.”

Let’s hope that something along these lines happens to help get the country out of its present state of mind.