Date: Fri, 03 Oct 1997 10:19:43 -0400
From: Louis Proyect <lnp3-AT-columbia.edu>
Subject: M-TH: In These Times review of Doug Henwood's "Wall Street"


NO STOCK ANSWERS

A review of Doug Henwood's "Wall Street"

James North

In These Times, October 19, 1997

Every few months, the Wall Street Journal pits a small group of highly paid
financial experts against a dartboard. The Journal tosses its darts at a
stock table and then asks the professional investors for their more
considered stock recommendations. After the  financial quarter passes, the
random darts often have beaten the pros.

More substantively, money managers are regularly rated against the Standard
& Poor's 500 index, which is a giant market average. Over the past three
years, the S&P index has outperformed the experts. The Journal's usually
dyspeptic editorial page does not go on to answer the obvious question: How
can these smug, highly paid financial planners, stockbrokers and gurus
advocating this or that investing method justify their prestige and wealth,
when most of them cannot produce results that even tie the average? To use
one of the sports metaphors they are so fond of, .199 hitters should get
sent down to the minor leagues, not be rewarded with huge contracts.

Doug Henwood asks this kind of pointed question in his superb new book.
Henwood, a New Yorker and student of high finance for more than two
decades, has appeared regularly in the left press over the years and puts
out a superior, indispensable newsletter, Left Business Observer. "It's
rare," he writes, "that someone should develop an obsession with Wall
Street without sharing its driving passion, the accumulation of money."

"Wall Street" is not an easy book. Henwood is a gifted writer, good at
explaining, pungent where necessary, and he includes the same kind of
useful charts that grace his newsletter. But high finance has grown
extraordinarily complex as Wall Streeters have developed new financial
instruments to gamble with along with complex rationales to justify their
use. So Henwood's work is inevitably dense. Even so, the book is so good
that the difficult parts are worth rereading. The volume will serve as a
classic reference for years to come.

"Wall Street" appears at the right time. High finance has probably not been
this arrogant since the spring and summer of 1929. What makes the Wall
Street gamblers so annoying is that not only are they--for now--multiplying
their money overnight, but they also insist that their lucrative activities
are in the best interests of the rest of us. They maintain that they are
thoughtful investors whose purchases of stocks and bonds provide promising
businesses the funds to expand. Carefully monitored by a vigorous financial
press, companies function efficiently because they are subject to the
quasi-democratic control of the marketplace.

Henwood sets out his rebuttal: "The U.S. financial system performs dismally
at its advertised task, that of efficiently directing society's savings
towards their optimal investment pursuits. The system is stupefyingly
expensive, gives terrible signals for the allocation of capital, and has
surprisingly little to do with real investment." He goes on: "Behind the
abstraction known as 'the markets' lurks a set of institutions designed to
maximize the wealth and power of the most privileged group of people in the
world, the creditor-rentier of the First World and their junior partners in
the Third."

Over the next 300 pages, Henwood proves his contention. He starts with a
readable field guide to financial instruments; stocks and bonds have been
joined by a vast new array of futures, options and derivatives. Then he
turns to the "players," dissecting the traders and bankers. He explains the
Federal Reserve Bank and hedge funds, and he shows the markets in action
with a lively snapshot of a week in trading in May 1994.

Along the way, he makes one telling point after another:

--Stock Markets are NOT important sources of new investment; corporations
finance 90 percent of their growth with their own internal funds.

--The number of people who have money in the stock market is NOT
overwhelming--only about one-fifth of the population own stock, and a good
portion of them own just one stock.

--The financial press is NOT clever, incisive and unbiased, but rather acts
as unreflective cheerleaders. One journalist, John Liscio, formerly of
Barron's, told Henwood, "Financial writers and even columnists refuse to
think for themselves....Whatever the moron economists and analysts tell the
financial press gets smeared across the page. There's no filter."

When Henwood turns to the economic theory behind finance, his writing is
detailed and complex but well worth the effort. He resurrects the thinking
of British economist John Maynard Keynes (an earlier breaker of classical
economic idols who was also a biting stylist). Approvingly he summarizes
Keynes' theory of capitalist investment: "Asset prices are powered by
volatile swings of temperament, the volatile judgments of an ignorant herd,
and these noisy signals guide real investment, to the detriment of
prosperity. Markets are populated by dispersed investors with little
knowledge of the real businesses they own or lend money to."

Those sympathetic to Henwood's arguments up to this point may disagree when
he discusses the need for large-scale corporate structures. "Big
multinationals," he asserts, "may be too large on social and political
grounds, if not economic ones, but there's no way to sustain an industrial
society without something like the corporate form." It would have been
helpful if he had elaborated further on this contention in anticipation of
the inevitable squawks from people who idealize small, community-based
producer cooperatives. But he is right, at least to some extent. It is hard
to see how a jet airplane, a pharmaceutical cure for AIDS or even a
cassette tape could exist without some form of production larger than the
neighborhood workshop.

Over the past couple of decades, the financial sector has greatly increased
its power over how big enterprises are governed. Back in the '50s and '60s,
the top managers (along with the owners, in many cases) controlled
corporations, a state of affairs noted--and, to some extent, celebrated--in
books such as John Kenneth Galbraith's The New Industrial State.

But today, the top people at places like IBM and General Motors have less
room to maneuver. They have to worry first and foremost about the price of
their stock; if it stagnates, their jobs could be in jeopardy, and their
own compensation, usually linked to the stock price, will suffer. So they
fire masses of workers and take other harsh steps to win favor among Wall
Street analysts and brokers, who now have significant influence over how
much their stock sells for. Their big downsizings are promptly rewarded
with a jump in price.

Henwood is deeply skeptical about various efforts to "reform" Wall Street.
Noting that pension funds own huge blocks of stock, he writes that,
although some make anti-management noises, "their agenda...looks much less
radical than the rhetoric." The "pension fund socialism" that some
observers once predicted has turned out to be a mirage, as fund managers
play the same Wall Street game as everybody else--scrambling to boost their
portfolio values before the next financial quarter rather than seeking out
sensible, longer-term investments."

What Henwood would like to do is eliminate Wall Street shareholders
altogether. The stock market, he writes, is "either irrelevant or harmful
to real economic activity," and "counts for little or nothing as a source
of finance." He concludes, "Shareholders SHOULD be vestigial; they have no
useful role. Instead, they have grown increasingly assertive over the last
15 or 20 years, disguising themselves behind a rhetoric of democracy,
independence and accountability."

Ultimately, Henwood advocates that stock markets shrink in power and that
large enterprises be controlled by their workers and financed by publicly
owned banks that are run on social principles. But as the world stock
markets continue to shoot upward, capitalists are hardly on the verge of
extinction.

He offers some intermediate proposals, including reinstating government
controls on capital flows and raising taxes on great wealth. Another
interesting idea is "transactions" taxes--small levies on trades of
currencies, securities and futures. Such a tax could help stabilize the
world economy, could raise money for national and international projects
and would cost the average person nothing. This tax would not deter the
Joneses from buying stocks for their retirement or Farmer Brown from
hedging a corn crop, but it would slow down the firm of Speculator &
Gambler from betting hundreds of millions of dollars each day, which
Henwood calls "pointless or malignant financial hyperactivity."

It is a tribute to the ideological power of finance capital that
transactions taxes, although they have the approval of sober economists,
are not even being discussed. But the proposal to privatize Social
Security, which Henwood eviscerates as "a truly horrible idea," receives
serious and detailed attention. This imbalance in the debate will not
change right away (unless a market crash suddenly discredits the big
financiers). But Henwood's excellent book at least starts to redress it.

(James North is a writer who lives in New York City. His next book,
"Structures of Sin", is about growing global inequality.) 

For information on how to order "Wall Street", check the Left Business
Observer Web Page at: "www.panix.com/~dhenwood/LBO_home.html"




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