November 04 , 2011
The Meaning of ‘Occupy Wall Street’
Since mid-September there has been a growing protest movement, popularly known as OWS ( Occupy Wall Street), which has led to tent cities of demonstrators in the centers of not just Wall Street but many American cities. These protests have been leaderless, rudderless, and apparently pointless. They have been attacked as a bunch of hippies and bums with nothing better to do, and even the Republican presidential candidate Herman Cain has told them to go get a job. So what to make of them? What do they represent, and what do they want?
This protest movement is one that I have a lot of sympathy for. There are some aging hippies and assorted radicals mixed in, but OWS is fundamentally a response to the gross unfairness of what happened, not just in 2008 and 2009, but in the last 30 years.
The harsh fact is that it was Wall Street, in the sense of the nation’s major financial institutions, that blew up the economy. They are supposed to represent financial expertise, good judgment, and the wise and patient allocation of capital through the credit sectors of the economy. In reality, all of the major financial institutions were involved in a giant game of musical chairs, in which the American people were left the ultimate losers.
What happened was rather complex, but can be easily understood. In the last 10 years, the housing market took off as prices started to rise and more and more people looked to buy. At the same time, there was a huge pool of investment capital all around the world looking to buy bonds that were AAA rated and returned high yields. Wall Street sought to satisfy this demand by magically turning home mortgages owed by individuals into large AAA rated bonds that could be sold to investors. These were called mortgage-backed securitites (MBS). They were given AAA rating (essentially certifying that they are risk-free) but in fact were doomed as the underlying mortgages should have never have been written to people who could not afford them on properties that were grossly overvalued. American institutions owned much of this, as did the Europeans, and when the housing bubble finally collapsed, it wiped out these MBS bonds, putting the entire financial system at risk of bankruptcy that would drag the country into another Great Depression. To save the banks, the government came up with a 700 billion dollar bailout fund called TARP in late 2008.
With the TARP money, the banking sector, and hence Wall Street, was saved. The stock market bottomed in March of 2009, and has risen 80% since then. The bankers are making record bonuses, and most of the financial firms are profitable again. So what’s wrong with this picture? Or as one journalist asked an OWS protestor, “Does it affect your thinking to know that the taxpayers ultimately got all the TARP money back?”
The TARP funds may have been returned, but the damage of the financial folly went far beyond TARP costs. This deep recession, really a mini-depression, is the result of the financial crisis. It has cost the US over 2 trillion dollars of lost output so far. The budget deficit is mostly due to the size of the economic collapse, if we still had full employment the deficit would be cut in half just like that. The 9% unemployment rate over 2 years after the crisis started is an unacceptable level of pain that is borne by main street, while Wall Street is back to party time. So the OWS crowd is right to be upset. What happened was that Wall Street made a huge blunder, but the price of it was paid by the nation, and not by the perpetrators.
There is also a broader point that needs to be made, and that this crisis has only highlighted. For 30 years now, economic growth has not been a tide lifting all boats in America. Since 1980, most of the benefit of economic growth has gone to the top 10% of Americans, while the rest have got little or nothing to show for it. The top 1% of earners takes 23% of total income in the US, up from 13% in 1979. This is not a healthy distribution. Certainly the talented, hardworking, entrepreneurial, and the lucky, are going to earn more than those who are not, but the disparity has become extreme, and undeserved. The tax code has been slanted too far, and the results are a country that does not allow its entire population to benefit from its prosperity. This needs to change. If this is what OWS is all about, then I support it.
