By Pam Martens and Russ Martens: March 10, 2021 ~
Yesterday’s Senate Banking Committee hearing to assess if the wild trading in meme stocks like GameStop and others requires new regulations on Wall Street turned into an overall assessment that Wall Street’s capital allocation system is broken and the main function of Wall Street today is a wealth transfer system for the rich. The Chair of the Committee, Senator Sherrod Brown (D-OH) summed it up as follows: (Read his full, enlightening remarks here.)
“We’ve seen Wall Street treat the markets as a game for decades – a game they always win, at the expense of pretty much everyone else. Wall Street has never been friendly to the little guy. Surely this time is no different. Yes, some regular people have had success. But fundamentally, the system is set up to funnel more wealth to the already-wealthy. Just like in Las Vegas, the House always wins.”
Senator Elizabeth Warren sized up the current structure of Wall Street like this: “It’s riddled with conflicts of interest that allow the giants to win every single time.” Warren went on to say that Wall Street “is supposed to be about capital formation, to creating long-term value for companies, so they can grow and create jobs. This is good for the American economy and American families. But when big sharks like Citadel and Robinhood come out ahead no matter what happens, and when the information they gather isn’t disclosed, and when it’s secret how that information is used, it’s easier for these giants to skim off the top at the expense of small investors and working families.”
Senator Jon Ossoff, the newly-elected 34-year old Democrat from Georgia, demonstrated that he has been paying close attention to how things play out between the Federal Reserve and Wall Street. Ossoff said that in the American Rescue Plan that was passed by the Senate on Saturday, “unlike traditional monetary expansion which subsidizes investment banks and unlike other recent fiscal measures that have subsidized corporations and wealth donors, zero percent of the stimulus checks and tax credits in this bill goes to the top one percent.”
Ossoff asked a witness on the panel, Rachel Robasciotti, the founder and CEO of Adasina Social Capital, this: “Given that the bottom 50 percent of American households by wealth possess just 1 percent of total national wealth held in the stock market, what in your view are the benefits of economic policy that gets cash directly to low-wealth households by fiscal measures, versus economic policy that adds liquidity to financial markets via the banking sector like traditional monetary policy?”
Robasciotti answered: “When you give to the kind of people who come from the kind of background that I have, they’re more likely to spend it. We learned about this in economic textbooks as the marginal propensity to consume. But it’s just true that if you give money to those who are more in need, they’re going to be more likely to spend it and circulate it throughout the economy. And so it doesn’t just help them, it’s not just something we want to do to help the vulnerable, it’s actually something that creates a multiplier effect throughout the entire economy. So I believe it just makes good economic sense.”
Ossoff then tackled the Federal Reserve’s perpetual money spigot to Wall Street, asking Robasciotti this: “And what in your view are the costs, Ms. Robasciotti, of economic stimulus, like traditional monetary expansion, which adds liquidity to financial markets by allowing investment banks to access credit at extraordinarily low rates or just transfers cash to financial institutions’ balance sheets via processes like quantitative easing?”
Robasciotti responded: “Those who are doing well at this point with their outsized gains, particularly during the pandemic, don’t need any more help. What it actually does is just sequesters that money in the hands of those who are most wealthy and aren’t going to put it back necessarily in the economy. You know we had that argument of trickle-down economics and we can kind of see from where we all are that that’s not actually what happened.”
Ossoff then turned to another witness on the panel, Professor Gina-Gail Fletcher of Duke University School of Law. Ossoff asked her this: “You opened your testimony by rightly noting ‘A core purpose of the financial markets is to facilitate the efficient allocation of capital.’ I’m curious for your perspective on this: over the last 15 years, U.S. investment banks have required multi-trillion dollar bailouts to avoid insolvency. And even after the acute credit crisis in 2007-2008, central banks and the Federal Reserve have continued to grant investment banks access to credit at record low rates and engaged in sustained quantitative easing, adding trillions of dollars to financial markets. Do you believe, Professor Fletcher, that the U.S. financial system in its current configuration facilitates the efficient allocation of capital?”
Fletcher’s response suggested that she felt it might be career suicide to take on the Federal Reserve’s monetary policy that infused $29 trillion cumulatively into Wall Street from 2007 to 2010 and at least $9 trillion cumulatively this time around. Fletcher deflected with this answer:
“I think that the U.S. capital markets are among some of the best capital markets in the world. But there are significant issues with the market structure that we have currently, in that we have retail investors that are able to make risky decisions without fully appreciating the cost of those decisions. Within our capital structure we also have questionable valuations for some companies that may not be fully reflective of an efficient market. So, if I believe that our markets are fully efficient, no, not quite. But do I believe that they are among the most efficient in the world, absolutely.”
As a strong counter to that assessment, see our January 27 article: SEC Chair Jay Clayton Left Markets in the Biggest Mess Since 1929.
Senator Chris Van Hollen (D-MD) said that he and Senator Brian Schatz (D-HI) would be re-introducing legislation to impose a Financial Transaction Tax. Ideally, that would negate the incentive for hedge funds and Wall Street trading desks to engage in tens of thousands of manipulative stock transactions, many of which have been shown by regulators to be illegal front-running, wash sales, or spoofing.
What did Republicans on the Senate Banking Committee do yesterday? They spent their time arguing against any reforms to Wall Street’s predatory practices. In other words, they were talking the book of the Wall Street lobbyists.