Don't Cry for Wall Street

The Obama administration called them fat cats. The Occupiers branded them the root of all economic evil.

Strangely, the Wall Street bankers who have been vilified for the financial crisis wholeheartedly threw their support behind Barack Obama in 2008. Most of them are lifelong Democrats. They cheered the Democratic politicians who created the Dodd-Frank financial regulation bill, bill that is, as the old saying goes, eating their lunch.

Despite what you might be led to imagine, Dodd-Frank was not Tea Party policy.

Even if it is repealed, it seems unlikely that Wall Street will return to the bad old days. The bull market in financial services is over, for reasons that are structural as well as governmental.

This morning in New York Magazine Gabriel Sherman masterfully outlines the crash of Wall Street. As soon as Super Bowl euphoria passes, all New Yorkers will all be reading it.

On Wall Street the money is dying up. The shenanigans that produced outsized profits and gigantic bonuses are going the way of all market bubbles.

No one is crying for the traders who are missing out on their 8 figure bonuses. No one except those other New Yorkers whose livelihoods or whose welfare benefits depended on their largesse.

One would always prefer that the markets exact their own rough justice. This time it looks like  the government is reining in the excesses.

Doubtless the government will go too far. It always does.

But the old days are gone and very few people are going to lament their passing. Few people, that is, except for those who claim the superiority of blue state governance.

Walter Russell Mead and Joel Kotkin and others have pointed out that Wall Street has been funding some massively expensive government spending programs… from bloated bureaucracies to absurdly high pension benefits to welfare programs. In New York City, the mayor likes to point out, 40,000 people pay half the taxes.

Now that the happy 40,000 will be receiving less money New York City’s coffers will feel the pain.

No one knows exactly what effect the fall of Wall Street will have on New York City. A lot of people honestly don’t care. But, it worth looking at some of Sherman's preliminary speculations about New York’s coming lean years:

It’s certainly true that Wall Street’s money played an important part in New York’s comeback, helping to transform the city from a symbol of urban decay into a gleaming leisure theme park. Consciously or not, as a city, New York made a bargain: It would tolerate the one percent’s excessive pay as long as the rising tax base funded the schools, subways, and parks for the 99 percent. “Without Wall Street, New York becomes Philadelphia” is how a friend of mine in finance explains it.

In this view, deleveraging Wall Street means killing the goose. The next decade or so will answer the question of whether a Wall Street that’s built on a more stable foundation—and with smaller bonuses—can sustain the city the way the last one did. But as banks cast about for a new business model, the city’s economy will need to find new sources of growth (this is why the Bloomberg administration has aggressively courted the tech and science industries).