I would encourage you to read the recent interview of President Obama in the New York Times magazine. (Full interview, click here.) The first part of the interview is entitled “The Future of Finance.” The President has some encouraging things to say, but I can’t help feeling disappointed in the overall tone and substance of his responses… in which he says, in essence, “We’ll be fine with a bit more regulation.” He seems convinced that we should just duct-tape our financial/monetary system back together, and re-acquaint ourselves with a strong and powerful Wall Street (oligarchy?) as a foregone conclusion. Mr. Obama’s choices for key leadership positions in the administration reflect these views; in particular, Mary Schapiro as Chair of the Securities and Exchange Commission has functioned as a steadfast and loyal proponent of Wall Street – most recently as head of FINRA, the financial industry trade association. Schapiro is one example, but Obama has also put into place many others with direct ties to the big commercial and investment banks.
All this said, I urge you to draw your own conclusions. Certainly no one has a crystal ball, and no one can claim to know the best path to pursue at this point. For 15 years, I have read The Wall Street Journal (nearly every day) and The Economist in an effort to understand how the financial system works.
The biggest issue for me is scale, and its relationship to power. Mostly based on my study of American history, I’m a fan of small, entrepreneurial, decentralized marketplaces—in other words, networks of people and companies trading with relatively little financial intermediation.
In short, I don’t think a $2 trillion bank (e.g., JP Morgan Chase) is much good at innovation anyway. And personally, I think services like online bill pay and convenient ATM’s are insufficient reasons for not switching to a community bank or credit union if you really think it through. With a giant transnational bank, you have no idea what loans your money is being used for, or where your funds reside at any given time. Plus, how can you trust “collateralized debt obligations” or other “structured” financial vehicles that are designed only to help the bank become a larger and larger pile of money?
Public equity markets suffer from the same issues as the banks. There is absolutely no reason why the world needs over 8,000 different mutual funds, most charging fees well in excess of the value they create. Merrill Lynch and other brokers have been exposed as hopelessly riddled with conflicts-of-interest and incentive/compensation problems.
But, Wall Street will live on. Capital markets will exist, for good reason, for companies and industries that require large-scale R&D, manufacturing, and distribution, such as airplane engines, pharmaceuticals, semi-conductors, etc. Hopefully, investors will reward only the most transparent and honest of the remaining players.
Most important, I think we will also see the growth of diversified, regional capital markets – not dependent at all on Wall Street – designed to support small-and-medium-sized, triple-bottom-line companies in sectors like food, energy, clothing, building materials, and a whole range of household products (furniture, toys, etc). The goal here is that people save more, spend a higher percentage of their overall income on basic needs, keep their investment strategies simple, and their money closer to home.
To return to the issue of scale and power, these regional capital markets will ensure a healthy democracy in the U.S. Every business student of the post-World War II era has learned about “efficient” flows of capital and how a “fragmented” market will invariably consolidate. But, I don’t think this is true anymore. The 21st century will have many fragmented markets, because investors and consumers will demand authenticity and real innovation from the companies they support. This fragmentation or diversification will only be accelerated as a result of the current financial/economic crisis. This is how nature works, too. An ecosystem rich in biodiversity is the most resilient.
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