High Finance Works, but Only for a Chosen Few

We are in the same position as the people who predict how hard the winter will be by studying the fur on woolly bear caterpillars. In finance, the woolly bear equivalent is the length of women’s hemlines. The folk wisdom has it that when hemlines are up, times are good and so is the chance of war. When hemlines fall, times will turn bad but the danger of war recedes. The not-so-great news is that the other day The Wall Street Journal had a headline reading “Extreme Lengths: Why Hemlines Are Plunging,” followed by a lede that read, “The fashion pendulum is swinging to extremes these days. Pants, which were super-skinny just this summer, are flaring out to sail-like widths this fall. Tent-like trapeze dresses are giving way to close-cut pencil skirts. And now—most dramatically—hemlines are dropping.” Take it for what it is worth.

If the claim to be operating the world’s most efficient capital markets is less than precise, it nevertheless presumes a place where deals are easily made. Yet since the subprime debacle began to play out, the investing and/or home-buying public has heard little else beside the term “credit crunch.” We hear that the architects and operators of the world’s most efficient capital market are too terrified of what may lie down the road to lend money or borrow it. It is said that there is such a money shortage they have to hoard what few billions they have.

In the past 25 years our capital markets have come close to laying us out dead three times. First there was the savings-and-loan disaster, next the dot-com debacle and now the subprime mortgage nightmare.

All three disasters were preceded by much talk about the infallibility of the Wall Street money maestros, not to mention their reassuring tut-tuts in response to any outsider suggesting that what they were conducting looked more like a madhouse than a rational business operation. The insiders knew the moneymaking and jolliness was going to go on, if not forever, at least until all bets paid off and everyone playing the game turned up a winner.

But only those who spin the wheel collect the jackpots. A whiff of how big the jackpots can be turned up in a small back-of-the-business-section story in The Times the other day, which noted that “the average pay in investment banking is 10 times that of all private sector jobs.” The paper noted that investment banking accounts for 0.1 percent of all private sector jobs, “but it accounts for 1.3 percent of all wages. …”

A very efficient capital market, indeed. Not for you and me, but for that 0.1 percent of the workforce.