The Death of Wall Street

‘Starting a New Era at Goldman and Morgan.’ By Ben White. NY Times, September 22 2008.

Only two investment banks have survived this month’s financial collapse, and now they are no longer investment banks. Thus, there are no more independent investment firms on Wall Street. They’ve gone extinct, like the dinosaurs.

“By becoming bank holding companies, Morgan Stanley and Goldman are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.”

Wall Street, as we have known it in its modern/20th Century form, is officially dead. And consider why: it wanted to set the rules of the game itself to allow it to trade in investments freely, with all the risk that’s associated with it. For years these guys abhorred regulation, consistent with Milton Friedman’s free-market ideology. Now that the market has crashed, we go from zero regulation to calls for complete regulation, and the government is now actively nationalizing the American finance industry.

The lesson here is simple. Markets are not free. Markets are political-economic constructs of nation-states. Global capitalism cannot exist without a global system of nation-states, and when states let the market play by its own rules (instead of setting them in cooperative harmony), eventually markets bury themselves. It’s kind of like an undergraduate who is fresh out of high school and parties from September to November, only to wake up a week before finals and realize he (or she) is completely screwed. Better to tolerate some regulation consistently over time rather than long periods of deregulation which then lurch into wholesale nationalization of industries. In the future, it would be wise to read Polanyi rather than Hayek, and Keynes rather than Friedman.

But in the meantime, we can thank our First Comrade George for coming to his senses after seven long years! If he (and his fellow Bolsheviks) had evolved beyond their false consciousness long ago, their revolution would have never come. Remain hopeful though. Downtown Manhattan will be better served by the next decade rather than this one.

Update: Bloomberg wants to raise property tax in NYC, maybe to 7%.  Wall Street accounted for 10% of the city’s income.  It’s gone, and there’s a massive hole to fill.  Very soon the damage will filter up the Hudson, which doesn’t bode well if you work for a state agency.