Lynn Stout, a Cornell law professor, refutes Wall Street’s claims to add value to the world.
Wall Street’s claims and Stout’s Rebuttals are as follows.
1.Wall Street helps raise capital. Stout refutes this point by pointing out that trading profits and commissions are the main sources of the banks’ revenues.
This is a valid point. Wall Street makes more money from trading than raising capital. But Stout forgets that investment banks also help with other activities such as mergers and acquisitions (M&A) and research. Of course, M&A and research both have their problems (Global Settlement in case of research) yet I want to point out that the street does provide other values as well besides trading.
2. Wall Street’s claim to provide liquidity so markets function well. Stout refutes that there is way too much turnover, only making brokers and bankers richer with commissions.
This is another valid point. But I think Stout downplays the importance of liquidity. A liquidity crisis can really screw the economy. During the financial crisis, many firms went into a liquidity shock rather than distress, which could have easily destroyed the company and hurt the economy. Liquidity is absolutely important for well functioning markets. It is better to have over liquidity than less liquidity because once the liquidity stops the market halts as well.
3. Wall Street’s claim to help price discovery. Stout refutes that the Street does not do much in discovering price.
I disagree on this one. Yes, analysts have conflicts of interest and some are probably just corporate cheerleaders or incompetent. Yet the labor market does work for analysts as well. Best analysts (Institutional Investors nominated) tend to perform well through time (not forever because markets are efficient and people become less humble). M&A bankers pitch potential targets to corporations. IPO bankers flirt potential of going public with private firms. These activities no matter its quality still provides some information to the market.
Overall, the Street adds value to society. Now the question of overcompensation of Wall Street is a different one and most people agree that they are overpaid. However, the market is already working on this inefficiency.
Creative and energetic entrepreneurs are taking on Wall Street. Lending Club and Prosper are providing loans to borrowers. Kick Starter and Indiegogo are providing alternative routes of peer-to-peer financing for startups. Betterment and Wealthfront are providing wealth management at a low fee. RealCrowd and FundRise are revolutionizing real estate through crowd funding. Even money transfer is being disturbed by Transferwise and CurrencyFair. Hence, although Stout has valid points, she needs to have more faith in the markets. Inefficiency may last longer than expected but eventually efficiency reigns through competition.
So what can we do as average people? Here is an action list.
- If you really do not agree with Wall Street, stop using their products. Do not open a bank account with the major banks. Use online banks or local banks/ credit unions. For a financial advisor, either use a roboadvisor or a local financial planner/ advisor.
- If you own investment bank stock either sell out or vote with your shares. You can even demand pension funds or other endowments to boycott certain management proposals. Of course, this takes some work but you can write emails and call.
- Help fund other industries or startups that compete with the Street. Use Lending Club, Prosper, Kick Starter, Indiegogo, and other financial startups for your financial purposes.
- If you are talented and smart and disagree with Wall Street, take a different job that provides more value to society.
- If you are in Wall Street already then see what things you can change. There are people on the Street who try their best to have a good influence.
One individual’s action does not make a difference but together we will change and go far. And it all starts with us. You can be unhappy and complain about Wall Street or you can take action.