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Wall Street's Shame

Wall Street's Shame

By David Paul Kuhn - October 19, 2009

Something's amiss when Michael Moore and Larry Kudlow see the same problem.

Last Thursday, Kudlow headlined his CNBC show: "Capitalism in Peril?" He spoke of the disconnect between Wall Street and Main Street. It's "the tale of two Americas," Kudlow said. For a moment, Kudlow seemed to be channeling John Edwards. Hell had frozen over.

On the other end of the spectrum is Moore. "Capitalism, a love story," is a disjointed documentary about capitalism's casualties and corruptions. Moore confuses capitalism with its perversion. But when the devout anti-capitalist and the uber-capitalist are highlighting many of the same perversions, it's time we pay attention.

Kudlow's show began with the facts. Fifteen million unemployed. Two million homes in foreclosure. Meanwhile, as The Wall Street Journal reported, many banks and securities firms on course for larger profits and larger bonuses in 2009 than in 2007. Those bonuses will go to some of the "very same people who brought the system to its knees," as CNBC reported. "Has Wall Street learned nothing?"

Perhaps. Keep in mind that government intervention, supported by public tax dollars, prevented a run on institutions like Morgan Stanley. Here is John Mack, the CEO of Morgan Stanley, recently speaking on CNBC: "To be honest with you," he said dismissively, executive pay is "an easy target" and "enough's enough."

Is it enough? Wall Street became an easy, and justifiable, target when it fled the free market. And the pay structure has substantial faults. As Bloomberg's David Pauly wrote, "The bonus system--typically amounting to 60 percent of Wall Street's pay--is what led banks to take outsized risks in disastrous subprime mortgages that fueled the credit debacle."

Record bonuses capture the spirit of the issue. Main Street felt and still feels conned. And the reasons are manifold.

People see two economies today. Consider last week's news. The Dow Jones closes above 10,000. Yet the unemployment rate is near 10 percent. Some big banks announce record amounts of executive compensation. Yet one report finds a record amount of home foreclosures.

To economists, it's the difference between leading and lagging indicators. To Main Street, it's infuriating. Failure has proved profitable for large corners of the financial sector.

Welcome to the taxpayer funded stock rally. Wednesday, on the stock market floor, brokers donned the "Dow 10,000" hats. Cheers erupted. Some bulls now ask: when will we again surpass Dow 14,000?

On the path to 14,000, Americans relished record profits. We accepted that they went disproportionately to the rich. Two-thirds of the nation's total income gains from 2002 to 2007 went to the top 1 percent of U.S. households, according to economists Thomas Piketty and Emmanuel Saez. By 2007, the top 1 percent had a larger share of national income than at anytime since 1928.

Still, regular Americans saw their retirement accounts improve as well. The tide was not uniformly lifting all boats. But 401ks were lifting. Now, while Wall Street's yachts are sailing off, many others are struggling to stay afloat on their dingy.

This is America. It champions the self-made man (and woman). But there has always been a social contract. There are costs to gambling, even in high finance. Great risk carries great reward. And since the risk was real, the successful earned that reward.

Then Wall Street failed. Big banks needed a big loan from the US, as in "us." Adam Smith's "invisible hand" was limp. Americans were to pay for Wall Street's risks. It was easier to get money from Congress than to get a mortgage. Really, it was.

Looking back, financial institutions were leveraged 30 to 1 because they could be. It wasn't their money.

We now know what must be done. Far stronger capital requirements. Derivative regulation. A system to resolve "too big to fail." Walking back the exposure to risk and monitoring risk. A crack down on bad and exotic mortgages. The new Consumer Financial Protection Agency, with banks not exempted. Bank regulators conjoined into one agency, much as we learned to reorganize the intelligence community after 9/11.

But the bank lobby is mighty and is fighting reform. Thus far, Democrats have not gotten it done. To his credit, President Obama is trying. But talk is easy. Democrats must close. Or they are not worthy of their mandate.

People get the democracy they deserve. And they get the capitalism they accept. "Is capitalism flawed?" Kudlow asked. Of course it is, but only to the extent we allow it to be.

David Paul Kuhn is a writer who lives in New York City. His novel, “What Makes It Worthy,” will be published in February 2015.

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