Why You Should Love These Greedy &%$#@*s
Too many Americans have the wrong idea about Wall Street.
They view the industry as a bunch of greedy, reckless, money-grubbing bastards. And, OK, I’ve known a few who met that description.
But Wall Street is also home to the world’s premier financial innovators, people who - in addition to getting rich - are making your life simpler, easier and wealthier.
If you’re drawing a blank right now - or wondering what the heck I’m talking about - it may be because you’ve fallen under the spell of the populists.
Last October, for instance, President Obama scolded investment banks for gobbling up the brightest college graduates:
“Too many potential physicists and engineers spend their careers shifting money around in the financial sector,” he said, “instead of applying their talents to innovating in the real economy.”
Hmm. Turns out the financial sector - which accounts for nearly a fifth of our national GDP - is not even the real economy. Who knew?
But, yes, Wall Street snaps up the lion’s share of Harvard and Yale graduates because the compensation there is the highest.
(I’d argue that is a good thing, and the kids majoring in gender studies, nautical archaeology or Egyptology - instead of learning a financially valuable skill - are making a mistake. But that’s a conversation for another day.)
There are detractors on the other side of the aisle, too. During his campaign, Donald Trump railed against Wall Street bigwigs and hedge funds mangers, calling them “guys that shift paper around and get lucky.”
Isn’t it good to know that - even if we live in a divided country - we are still united in our hatred of Wall Street.
Here’s a different perspective...
The history of human enterprise is also one of financial breakthroughs. The invention of money, the advent of credit and the creation of stock exchanges were hugely innovative responses to fundamental, real-world problems.
Finance fosters trade, reduces risks and creates new enterprises. Without finance, the modern world wouldn’t exist. Indeed, it could never have come into being.
Money itself was the original financial breakthrough.
I’ve often tried to imagine the first man to accept a note in a transaction. I picture a grizzled farmer with a skeptical look on his face saying, “Let me get this straight. You want to take my cow and” - snaps paper a couple times - “give me this?”
It had to happen. We can’t live in a barter society.
Finance gives consumers and business owners the ability to make things happen now. It enables capital to flow from savers to investors to entrepreneurs.
Markets have incredible potential for implementing positive change. They harness human ingenuity. They connect those with money to those with moneymaking ideas.
Yes, the history of Wall Street is full of fear and greed, manias and crashes, fraud and deceit, get-rich-quick schemes and get-poor-quicker speculations.
There are titanic sums washing around the financial markets. So Wall Street would tend toward excess even if it were populated by saints. (And this is an industry notoriously short of halos.)
Moreover, the recent financial crisis was a classic example of how Wall Street’s complex dealings can sometimes undermine the public interest.
Yet financial innovation is indispensable. It’s what makes the economy - and ultimately everything else - run. It bridges the gap between the present and the future. It provides a store of wealth.
And in today’s world, it helps us share and manage risk.
Some people say they don’t see any financial innovation. But they don’t recognize it for the same reason fish don’t notice water. It’s all around us, permeating our existence.
Off the top of my head, here are just a few things that didn’t exist when I was born a little over a half-century ago:
- Automated teller machines
- Discount brokers
- Adjustable-rate mortgages
- College savings plans (529 plans)
- Debit cards
- IRAs and 401(k)s
- Home equity credit lines
- Bar codes and scanners
- Online banks and brokerages
- The Vanguard Group (It’s not just the biggest mutual fund family, but the one with dramatically lower fees since Vanguard fund shareholders actually own the company.)
- Electronic bill pay
- Tax preparation software
- Exchange-traded funds (ETFs)
- Index funds
- Target-date funds
- Venture capital and private equity funds
- Inflation-adjusted Treasurys
- Health savings accounts
- Super-catastrophe insurance (My 13-year-old thinks “super-cat insurance” is a policy on the family pet. Don’t tell him otherwise.)
- High-frequency trading
- Dark pools
- Uber, Craigslist, eBay, Amazon, Priceline, Expedia, Airbnb and PayPal (Yes, these are all financial innovators too.)
Not all financial innovation is good, of course. (Any cheers for negative amortization mortgages?) Nor have all advances been used effectively.
And many financial innovations are not well appreciated. Much derided high-frequency traders, for instance, actually improve market liquidity and reduce bid-ask spreads.
Consider how all this has affected you as an investor. Your investment choices today have never been greater. Spreads have never been thinner. Fees have never been lower. Trade executions have never been faster. Monitoring your portfolio has never been easier.
There’s a reason Wall Street executives brag about hiring “the smartest people in the world.”
Finance is one of the most competitive industries on the planet. We don’t often see it - or realize it - but these creative minds are grappling with huge and complex problems.
The end result is that ideas get funded, projects get started, infrastructure gets built, and deals get done as money flows to where it earns the highest and best returns.
The ultimate beneficiary of all this activity? Take a look in the mirror.
Have thoughts on this article? Leave a comment below.
Editor’s Note: Perhaps you skimmed right past it, but among the financial innovations listed above, Alex specifically noted dark pools. They’re worth calling out... because these massive pools of liquidity can have a serious impact on the stock market. And according to our research, you can actually use them to predict - several days in advance - which companies are about to soar. To see how Alex has leveraged this information to help his premium subscribers earn gains of “$79,400 and $88,700,” click here.