The long-anticipated war of the world versus Wall Street has erupted, and we non–Wall Street New Yorkers are caught right in the line of fire. On the one hand, how can we not share the populist outrage over bankers’ squandering a decade’s worth of profits and still taking bonuses as they bag federal bailouts? Most Americans just read about these guys; we got shouldered aside at the bar by them, and watched their bonuses push real-estate prices beyond our reach. We have greater cause than anyone to loathe the bastards.
On the other hand, until recently, America’s losses were our gains. Those Wall Street bonuses, in part, went to cover taxes that kept our streets clean and safe. They underwrote charity and culture. They supported restaurants, shops, and galleries. They paid the wages of cabdrivers, maids, doormen, and hairdressers. All New Yorkers stand to lose a lot in the austerity plans being imposed upon Wall Street by Washington.
It’s hard to know just how badly a crippled Wall Street will affect life in the city. New York is a better place to live than it’s been in decades, and Harvard economist Edward Glaeser has noted that the city’s long-term vitality is assured by its concentration of bright, creative people. But what are all these smart people going to do while the financial world remains in intensive care? One of the Street’s leading obituary writers, Michael Lewis, contends that any industry that pays young, clueless college grads exorbitant salaries to do things they have no idea how to do—like it once did him—must be doomed.
But he’s wrong. Wall Street paid well to lure the callow hordes away from other career choices. It was, for the big firms, a relatively cheap way to ensure a deep talent pool from which to pluck the brightest and most ardent moneymakers. The vast majority of junior employees at Goldman Sachs don’t make partner, or ever come close. They end up seeking their fortunes elsewhere, like Lewis did. Wall Street has a warped incentive ecosystem, but it’s evolved that way because, over the years, it’s worked.
Whatever the next few years holds, there will be no meaningful recovery in this country, or in the world, without a functioning financial system. The world needs a healthy U.S. market to buy and sell into, with Wall Street as the indispensable intermediary. Eventually, somebody has to allocate capital besides the government. This is the core Wall Street function that got obscured while bankers set up a poker game among themselves with chips—call them CDOs, CMOS, CDSs, SIVs, whatever you like—that, in the end, couldn’t be cashed in. Now they have to return to serving the larger economy, restructuring the bad deals, recapitalizing firms, investing in the best new ideas. The rest of us are not obliged to cheer them on. We can even be excused for giving them a sharp elbow to the ribs at the bar. But we will all be better off when the profits come back to Wall Street, and the bonuses, too.