The Unsophisticated and Shameful Demonization of Wall Street

The Unsophisticated and Shameful Demonization of Wall Street
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“I needed cash…I spent most of every day thinking about liquidity, talking about liquidity, looking to the heavens and pleading for liquidity.  My kingdom for liquidity.” Those are the words of Phil Knight, the brilliant, visionary, billionaire founder of Nike, from his endlessly interesting 2016 memoir, Shoe Dog.

Knight was recalling a frequent yearning that defined 1970 for him.   At the time this importer of Tiger shoes meant to fulfill the needs of an eccentric and small U.S. market interested in “jogging” wasn’t viewed as brilliant or visionary, and if he had a net worth, it was likely negative depending on the time of the month.  Knight woke up every day facing the possibility of his entrepreneurial dream being rendered insolvent, which explains why he was so desirous of liquidity nearly 47 years ago.

Knight’s situation is a reminder of just how crucial the symbol of finance that we call “Wall Street” is to the health of the U.S.’s dynamic, entrepreneurial economy.  Wall Street is liquidity personified.  More to the point, the high pay enjoyed by Wall Street’s leading lights is a function of those same talented people discovering the Knights of the world, and relieving them of their daily worries about liquidity. 

Of course, that’s what’s so offensive about the demonization of Wall Street by media and members of the political class.  A U.S. financial industry that moves proverbial mountains in order to find finance for today’s and tomorrow’s great companies has few modern peers when it comes to negative reputation.  “Wall Street” is increasingly a pejorative to elite and non-elite thinkers, and that’s shameful.

While Wall Street’s leading figures have been populating Republican and Democratic presidential administrations for decades and centuries, so low is its reputation nowadays that President Trump’s inclusion of various financial types at the top of his own administration has the emotional up in arms.  To believe the political and media elite is to believe that Wall Street is “bad.”

But as Knight’s story reminds us yet again, life would be a small fraction of its abundant self absent the source of finance that we describe as “Wall Street.” Contrary to the political/media characterization of it as this corrupt and compromised industry full of the dishonest and slick, the real truth is that Wall Street is populated by wildly talented people doing the intensely difficult work without which Nike and other great brands likely wouldn’t exist.  Knight needed liquidity in order to survive.  Wealth on Wall Street is a function of meeting the needs of individuals like Knight. 

Indeed, it’s one thing for a genius like Knight to come up with a business idea, but it’s quite another for great thinkers like him to be matched with the finance necessary to turn a vision into a commercial reality.  Investment bankers on Wall Street are the liquidity finders for business, without which the most dynamic economy in the world would sputter.  Investment bankers are paid very well not because finding finance for companies is easy, but precisely because it’s incredibly hard.

As Knight’s story hopefully reminds readers, he was overseeing a business running on fumes as it were.  It was his “kingdom” for liquidity, but the going rate among investment bankers is 7% of the funds raised.  Investment bankers are paid well, though not as well as Knight would have paid one in 1970 for precious cash. Investment bankers are frequently among the 1 percent because they’re doing work that few are capable of.  And it doesn’t stop there.   

Wall Street and its incorrectly demonized investment bankers raise money for businesses through the issuance of shares.  When those shares are publicly traded, “traders” on Wall Street make a market for the shares through the purchase and sale of same.  Those who should know better say “traders,” like their investment banker peers, are paid well despite not creating anything.  What a naïve view of the world.  Absent the work of both, the ability of entrepreneurs to create actual goods and services would be rather limited. 

Figure that the trading of equities and bonds is no easy feat.  As any successful trader will explain, the best ones are wrong nearly half the time.  It’s incredibly difficult to know which direction markets are heading, so when traders “buy and sell” they’re taking enormous risks.  And absent the risks taken by traders, capitalism wouldn’t function.

Lest we forget, entrepreneurs and businesses can’t operate without capital that reaches them in the form of cash.  Knight’s story is a reminder of what is true.  Businesses exchange shares in their companies for cash provided by investors matched with the company by investment bankers, but there are only investors insofar as there are sources of liquidity for those same investors.  Absent the highly risky “buying and selling” performed by Wall Street traders, investment for the Knights of the world would be very scarce.  Few are going to invest in anything without access to a path outside of that same investment.  The traders so many have been so eager to vilify take the daily risks that make it possible for investment sources to back people like Knight.

When the hysterics from media, academia, and politics demean Wall Street, they reveal an impressive lack of sophistication and knowledge of how the world works.  Phil Knight’s wondrous story is yet another reminder that there would be few entrepreneurs like him without Wall Street.  When the confused disparage it, they’re talking down the very finance that turns ideas into life-enhancing reality.  The demonization of Wall Street is offensive, and it’s something serious thinkers should contemptuously dismiss. 

John Tamny is editor of RealClearMarkets, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics(Regnery, 2015). 

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