(this is an excerpt from a longer piece available here)
There are several dimensions to Wall Street’s rise to pre-eminence over the last few decades. One can simply be measured in money. For example, in almost every year since the U.S. national income accounts begin in 1929, securities and commodities brokers have been the highest-paid of almost the almost 90 industries reported by the Bureau of Economic Analysis. And the securities industry’s premium has grown enormously over time. From 1929 through 1939, it was 237% of average pay. It fell during World War II and the immediate postwar decades, at just under 180% of average pay. But with the takeoff of the bull market in 1982, the premium began to swell, crossing 300% in 1992 and 400% in 2006. It fell back some in 2008, to a mere 409%. It fell back some more in 2009 to 366%, which, though below the massive heights of a few years ago, is still higher than anything before 2004.
Or take profits. As the bull market was about to take off in 1982, the financial sector claimed 12% of pretax profits in 1982; that nearly tripled to 34% at the 2008 peak. It fell by more than half in the heat of the crisis, to 15% at the end of 2008—but it back to nearly 30%. That’s a remarkable share for a sector that employs less than 6% of the workforce.
Or take the proliferation of assets. Financial assets of all kinds—not just debt, but equities and everything else the Federal Reserve counts in its flow of funds accounts—were equal to 462% of GDP in 1982. That measure rose steadily for the next 25 years, more than doubling to a peak of 1,058% of GDP in 2007. The ratio came down a bit with the early stages of the financial crisis, but bottomed in the first quarter of 2009 and has been more or less flat ever since.
So here’s the story the numbers tell us: after a long period, mainly the Golden Age of the post-World War II decades through the 1970s, Wall Street was something of a torpid backwater. Its denizens lived well, but not large. But since then, they’ve accumulated an enormous amount of wealth.
Then there’s the issue of power. The financial sector has surprisingly little to do with raising money to finance real corporate investment. It rarely has. That’s especially true of the stock market. Even in the boomiest moments of the late 1990s dot.com bubble, IPOs—first offerings of stock to public investors—financed only a small fraction of corporate investment, about 5–6%.
Or, looked at another way, if you combine net equity offerings—which, given the heavy schedule of buybacks over the last quarter century, have been negative most of the time since 1982—takeovers (which involve the distribution of corporate cash to shareholders of the target firm), and traditional dividends into a concept I call transfers to shareholders, you see that corporations have been shoveling cash into Wall Street’s pockets at a furious pace. Back in the 1950s and 1960s, nonfinancial corporations distributed about 20% of their profits to shareholders. In the 1970s, that fell to 15%, which helped create the sour mood on Wall Street in that decade. After 1982, though, the shareholders’ share rose steadily. It came close to 100% in 1998, fell back to a mere 25% in 2002, and then soared to 126% in 2007. That means that corporations were actually borrowing to fund these transfers. It fell during the crisis, bottoming at 21% in mid-2009, but as of late last year, it was almost 70%.
Businesses do get outside financing, yes, but the most important source of that is old-style banks. So what exactly does Wall Street do? Let’s be generous and concede that it does provide some financing for investment. But an enormous apparatus of trading has grown up around it—not m
erely trading in certificates, but in control over entire corporations. I think it’s less fruitful to think of Wall Street as a financial intermediary than it is to think of it as an instrument for the establishment and exercise of class power. It’s the means by which an owning class forms itself, particularly the stock market. It allows the rich to own pieces of the productive assets of an entire economy. So, while at first glance, the tangential relation of Wall Street, especially the stock market, to financing real investment might make the sector seem ripe for tight regulation and heavy taxation, its centrality to the formation of ruling class power makes it a very difficult target.
the shareholder revolution
For a long while, shareholder ownership was more notional than active. After the 1929 crash, Wall Street sort of receded into the background, giving us the Golden Age of Galbraith’s managerial capitalism—when managers and technocrats ran corporations and shareholders were at most silent partners. But when economic performance faltered in the 1970s, when the Golden Age was replaced by Bronze Age of rising inflation and falling profits, Wall Street, meaning shareholders, finally asserted themselves. They unleashed what has been dubbed the shareholder revolution, demanding not only higher profits but a larger share of them. The first means by which they exercised this control was through the takeover and leveraged buyout movements of the 1980s. By loading up companies with debt, they forced managers to cut costs radically, and ship larger shares of the corporate surplus to outside investors rather than investing in the business or hiring workers. This cost-cutting mania helped drive the outsourcing movement.
The 1980s debt mania came to a bad end, as highly leveraged companies found themselves unable to cope with the early 1990s recession. So the shareholder revolution recast itself as a movement of activist pension funds, led by the California Public Employees Retirement System (CalPERS). The funds lobbied management, drew up hit lists of badly run companies, and generally pushed the idea that firms should be run for their shareholders. It had some successes. Compensation structures were rejiggered to emphasize stock over direct salaries; the idea was to get managers to think and act like shareholders, since they were materially that under the new regime.
But pension fund activism sort of petered out as the decade wore on. Managers still ran companies with the stock price in mind, but the limits to shareholder influence have come very clear since the financial crisis began. Managers have been paying themselves enormously while stock prices languished. If the stock price wasn’t cooperating, well, options could always be back-dated. The problem was especially acute in the financial sector: Bank of America, for example, bought Merrill Lynch because its former CEO, Ken Lewis, coveted the firm, and if the shareholders had any objections, he could just lie to them about how sick the brokerage firm was. It was as if the shareholder revolution hardly happened, at least in this sense. But all that money flowing from corporate treasuries into money managers’ pockets has quieted any discontent.
political coda
Wall Street demonstrated its immense political power during the financial crisis and its aftermath. Financiers may bellyache about increased regulation over the last couple of years, but the actual changes have been very minor. The major bill that changed the regulatory architecture, nicknamed Dodd–Frank, was weak tea to start with and is being watered down further as the detailed regulations required in the legislation are written.
So in return for hundreds of billions of dollars in public funds used to keep the financial system from going under, the banks will emerge from this crisis largely unscathed. One reason for this is Wall Street’s skill at lobbying, and its ability to spread huge amounts of cash around Washington. As Public Citizen documented, between 1998 and 2008, Wall Street spent $5 billion in campaign contributions and deployed 3,000 lobbyists across Capitol Hill to get its way. While $5 billion sounds like a lot, it was less than a third of the Goldman Sachs bonus pool for 2009, and spread out over a decade. Wall Street has a lot of money, and Congress can be bought on the cheap.
But, as I argued earlier, Wall Street also represents the commanding heights of the economy, the central mechanism by which ruling class economic power is formed and exercised. It’s only surprising to people who don’t understand this that Washington dances so faithfully to the bankers’ tunes.
via lbo-news.com
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