Are Wall Streeters Worth The Money? Just Ask Counterparts Elsewhere

The New York Stock Exchange in Manhattan. Only the U.K., with its famous “City” equivalent, functions on a comparable level when it comes to allocating capital. (AP)

The New York Stock Exchange in Manhattan. Only the U.K., with its famous “City” equivalent, functions on a comparable level when it comes to allocating capital. (AP)

Pity Wall Street.

The Democratic Party’s presidential candidates have painted a bull’s-eye on its back. Bernie Sanders wants to nationalize it. Hillary Clinton joins in the feeding frenzy, lest she and her husband’s ties to Goldman Sachs and other institutions become a bigger issue.

Wall Street bankers are widely portrayed as evil parasites, feeding their greed through speculation that serves no good other than to line unsavory pockets and buying off politicians with campaign contributions and lucrative speaking fees. “One percent’” Wall Streeters are said to be getting mega-rich while everyone else suffers.

Republican candidates fear coming to Wall Street’s defense. Any positive words about it will end up as a negative sound-bite come election time. During the Occupy Wall Street riots, I do not recall one political voice speaking up for Wall Street against the tirades of hooligan protesters.

Those trained in basic economics should counter this pillorying of Wall Street. Yes, there are abuses. Yes, there are some bad apples. Yes, there are some undeserved bonuses.

But we must ask why markets lavish riches on do-nothings who inflict damage rather than do good? Why should those who are producing no value be rewarded so handsomely?

No one is forced to use the service of Wall Streeters. Financial exchange is voluntary.

“Wall Street,” broadly defined to include investment banks, Silicon Valley venture capital, private equity funds and other types of participants in capital markets, create value by matching investors and savers and helping companies to obtain needed capital in the most efficient way.

They do a good job and are paid well if they succeed in directing savings to their highest and best use. They subtract from potential value and are paid poorly if they direct savings to low and poor uses.

Warren Buffett counts among the world’s richest because of his acute ability to match his shareholders’ capital with investment opportunities. It is strange that no one criticizes Buffett when he is doing what Wall Street does, while polishing his anti-greed image by currying political favor from Omaha, Neb.

Wall Street (including Buffett) intermediates between saving and investment because savers, such as contributors to retirement accounts or buyers of insurance policies, have little expertise in matching their savings to investments.


Business investors create new business and expand established ones, but they are not specialized in seeking out savers to fund their plans.

The striking feature of the U.S. capital market, as opposed to banks, is its reliance on stock markets and open competition. In the United States, market capitalization far exceeds the value of GDP, whereas in Europe and Japan it averages a little over half.

In Europe and Japan, banks play the role of Wall Street. They decide who gets investment finance and who does not. In many cases, these banks are closely tied to related businesses or to state and national governments.

Like their Chinese counterparts, they are inclined to allocate capital to lower-return but politically attractive uses. After all, an important regional politician might need a faltering local company propped up. Or the bank may loan to a company of which it owns 20%.

And which bank with any sense will back a startup operating from the young founder’s garage?

The chart above offers a simple measure of Wall Street performance, relative to the European and Japanese alternative. It divides the average GDP growth rate by the average gross saving rate to calculate how much growth various countries get from one percentage point of savings.

The figures are averages for 1980 to 2015 to capture long-run performance. They show that for every one percentage point of the savings rate, the U.S. gets 0.15 of one percentage point of GDP growth. Europe and Japan get half as much. Only the United Kingdom, with its famous “City” equivalent to Wall Street, functions on a comparable level.

If anti-Wall Street politicians and Occupy Wall Street rioters had their way, U.S. capital markets would at best revert to allocating capital like the rest of the world. A 20% saving rate would generate a GDP growth rate of 1.5% rather than 3%. Slow growth would be our new normal.

Maybe we should stick with what we have, and let the Wall Streeters get rich. If they fail, we savers will lose along with them.

Gregory is Cullen Distinguished Professor of Economics at the University of Houston and research fellow at the Hoover Institution at Stanford.