FROM THE WALL STREET JOURNAL | MARCH 19, 2009
'Wall Street, as we knew it, is dead. The system that allowed the U.S. economy to be a dynamic innovator has been fundamentally broken and the implications of these structural changes have yet to be fully felt."
It's now commonly accepted that the economic meltdown has forever changed the nature of the financial industry. But the words above weren't written in the past weeks. They were penned by financial analyst Richard Wayman in 2003, after investigations by then New York Attorney General Eliot Spitzer led to a structural shift in the relationship between research and investment banking following the stock-market collapse of 2001-02.
Among the many remarkable aspects of our present crisis is the speed with which we have collectively forgotten past crises, even ones that happened recently. The current meltdown is substantial, dramatic, and systemically dangerous -- but it is hardly the first to merit that description. And each crisis, without fail, results in unequivocal pronouncements that such excesses will never again be allowed.
When President Barack Obama lambastes Wall Street bonuses as "shameful," he is keeping up with the American tradition of vilifying Wall Street. Almost since the founding of the country, the U.S. has oscillated between admiration and condemnation of money men. When the first Bank of the United States was established in Philadelphia in 1791, it was amid fears that it would allow merchants and speculators to subvert the new republic for their own gain. Decades later, Andrew Jackson's presidency was bolstered by his staunch opposition to the Second Bank of the United States. He positioned himself as the defender of the common man against supporters of the bank who used their money to obtain influence.
From the 19th century to the present day, denunciation of financiers has gone hand in hand with each recession, speculative bust and depression. Each time the economy falls, the chattering classes announce that the old ways have brought the country to the brink of ruin and that the riches of society will no longer remain in the hands of the greedy few.
Little recalled now is "The Long Depression" of the 1870s that began with the Panic of 1873. The Panic was triggered by the collapse of the Jay Cooke and Company Bank, which came on the heels of Jay Gould's infamous attempt to corner the national gold market in 1869 and the speculative boom in railroad building. During the 1870s, as much as 50% of the U.S. labor force was out of work at one time or another, making it by far the worst economic collapse in the country's history. In the agrarian heartland of the country, early stirrings of populism led to attacks on eastern barons for robbing Americans of their birthright.
From then on, busts followed almost like clockwork every 20 years, with the panics of 1873 and 1877 followed by the panic of 1893 and then the "Bankers' Panic" of 1907, when J.P. Morgan orchestrated the recapitalization of the financial system from his mansion in Manhattan. It was the TARP, the "bad bank," and the stimulus of its day, and it earned Morgan the gratitude of a nation and the applause of President Theodore Roosevelt.
Having lionized Morgan, a few years later the country turned on him and his ilk with a vengeance. In 1913, a populist congressman from Louisiana, Arsène Pujo, launched an investigation of the so-called "Money Trust" that he claimed was exerting undue and deleterious influence on the body politic. Exhibit No. 1 was none other than one-time savior Morgan, who was interrogated by the committee as if he had committed a heinous crime. One member of the committee said Morgan represented "a moneyed oligarchy more despotic and dangerous to industrial freedom than anything civilization has ever known." Strict regulations followed -- as they always have on the heels of such crises.
Yet 20 years later, the market imploded with the crash of 1929. The ranks of the unemployed swelled to at least 25%, and the country was plunged into the Great Depression. Franklin Delano Roosevelt famously indicted the "money changers" in his 1933 inaugural address, but he was even more caustic in private, vowing to end forever "speculation with other people's money." The raft of modern regulatory institutions, from the Securities and Exchange Commission to the Federal Deposit Insurance Corporation, was one result. Wall Street was tamed and quiet for a while.
Later on, the "Go-Go" years of Wall Street in the late 1960s quickly gave way to the bust of the so-called "Nifty-Fifty," the 50 largest blue-chip companies. Then came inflation, severe unemployment, and the stock market collapse of 1973-74. Between 1964 and 1982, the major stock indices went nowhere fast -- the Dow began that period at about 800 and ended at the same. Wall Street in those years was more of a cottage industry, one that few suspected would again return to its prominent and controversial position at the apex of American society.
The booming 1980s -- mergers and acquisitions and arbitrage -- were capped by the highly publicized trials of Ivan Boesky and Michael Milken, who were pursued by the Eliot Spitzer of his day, Rudy Giuliani. Combined with the market crash of 1987, the subsequent Savings and Loan debacle (which had little to do with Wall Street per se, but was wrapped up with the same crowd in public imagining), and the recession of 1991-92, Wall Street was once again pronounced immoral and in need of tight reins. Yet within a few years, the Nasdaq was soaring, animal spirits were in control, and the Internet bubble was in full bloom.
Wall Street's obituary has been written many times. Yet what is striking today is that cycles that used to take a few decades now take a few years. And our cultural amnesia has gotten worse. The rapid sequence of the dot-com bubble of the 1990s, the recession of 2001, and the 2002 collapse of Enron combined with major fines levied against investment banks, all became a distant echo in a surprisingly short amount of time. At the rate we've been going, we're due for a new boom with obscene profits for the financial industry -- albeit with different names and different companies -- before Mr. Obama runs for re-election.
The fact that we have been in similar places in the past doesn't make the specific problems we face any less pressing. New regulations may prevent an exact recurrence of yesterday's crises, but our relentless capacity for reinvention means that we will produce innovations that will in turn create new problems.
Recognizing that our present is not quite so breathlessly unprecedented doesn't make the challenges less critical, but it could lead to a more level approach. That can begin with steady leadership from President Obama. Wall Street has been humbled and will change, but capital will continue to flow. That much, at least, is certain.