Henwood's Wall Street, After 30 Years

For some time now, there has been a lot of talk about “financialization,” meaning the growing share of U.S. economic output from the “FIRE” sector (finance, insurance, real estate), and its related, malign implications. My old friend Doug Henwood was onto this in the latter 1990s. For some time I had meant to go back to my copy of his book “Wall Street: How It Works and For Whom” but it had gotten lost in the clutter of my house, where there are piles of books lying around everywhere. (Shelves are full.) The other day I found it (while looking for another book I had lost, and still haven’t found) so I have begun to reread it. By the way, he is now giving away a PDF without charge. One of my preferred finance writers, Justin Fox, did a retrospective on the book in 2012.

Somebody ought to do a similar overview of FIRE today. Maybe somebody has. Henwood notes trends and problems that have blossomed to a great extent, some 30 years later.

A key finding confirmed by Fox and perhaps the heart of Henwood’s story is the limited extent to which “Wall Street” stock transactions finance new investment. Most such investment — literal purchase of plant and equipment — is, or was, financed internally from profits. That means all the money sloshing around the stock market is not allocating capital, one of its celebrated purposes. Market allocation of capital is one of the sacred justifications for unregulated capitalism.

You could argue that a firm that uses its own money and makes good investment decisions will be favored by stock traders, though such decisions usually take time to pay off and traders are substantially interested in flipping share purchases for quick returns. It’s still a crap shoot.

The ineffectiveness of capital allocation via decentralized investment decisions is plausible enough, but the question looms, compared to what? As I wrote a while back, similar concerns surrounded the furor over the so-called “money trust” at the dawn of the 20th Century, as recounted by Steve Fraser in his lovely book, “Every Man A Speculator.” Even so, for all the arguable inefficiency of investment decisions steered by J.P. Morgan and cronies, the U.S. economy still grew enormously. However malignant financialization has become, the U.S. economy grows still.

Back then, the prominent reform bandied back and forth was breaking up the “trusts.” These days there has been a renaissance of anti-trust ferment, reflected in the energetic policies of Joe Biden’s Federal Trade Commission honcho, Lina Khan. Matt Stoller is a busy evangelist. It became a minor scandal a week or two ago when a major Democratic donor was caught lobbying, out of personal financial interest, for Khan’s removal.

My attitude towards anti-trust is strictly limited to two cheers, rather than three, since the enthusiasm tends to gloss over the potential of public takeover of predatory monopolies. You don’t hear much about that these days, notwithstanding the fevers around Democratic Socialists of America and “The Squad.” There has been chatter about postal savings banks. I tried to goose it up here.

The start of Henwood’s book is a kind of boilerplate description of the financial industry and data pertaining to, but told from a jaundiced left standpoint. You’d have to look hard to find anything like it. Unlike some other lefty accounts, the book is extensively documented and festooned with citations. It could be a dissertation, though Henwood’s academic background (like mine, originally) was English lit.

Of course I have some quibbles. I’d be happy to be corrected, and it is quite possible DH has since changed his views. I would hate to be held responsible for everything I’ve said over the past three decades. Poor Josh Shapiro is being trashed for something he wrote as a college student. Fortunately for me, all of my literary atrocities predate the Internet, not to mention the personal computer. At any rate:

One is his assertion that public finance redistributes wealth regressively, since taxpayers finance lending from the rich. I’ve heard this since the 90s, and I have not changed my objections to the claim. I don’t think it follows. If the rich did not buy government bonds, they would buy other financial assets and still be just as rich, more or less. Of course their choice of government bonds rather than riskier assets means it leaves them better off, but that in my view is a second order factor. On the other side of the transaction, taxpayers in general are better off if the government can use debt finance, so on the whole I would say public indebtedness in the U.S., of course not carried to extremes, is a good thing.

Another thing that comes up concerns consumer finance. Households borrow to prop up their standard of living, since work doesn’t pay, but a detail is missing therein. Household debt must be repaid. If it is not, if one is able to pass away owing money to the rich, besides receiving my congratulations that person has gotten away with something. Insofar as household debt is repaid there is redistribution away from the masses since we pay exorbitant interest rates for the privilege of altering the timing of our expenditure, but the inability to borrow at all would leave us worse off. The cures are better pay and public banking, but the availability of consumer credit is better than no such availability.

I’m only two chapters in, but I’d prefer to post today rather than keep this on ice for another week. The key to blogging used to be volume. So too with Substacking. Going forward I will probably have more to say.