WALL STREET WALL STREET How It Works and for Whom DOUG HENWOOD Paperback originally published in 1998 by Verso (New York & London). Published on the web by Doug Henwood in 2005 under a Creative Commons license. See copyright page for further details. Aside from the change in copyright, everything else is exactly as in the paperback edition. First published by Verso 1997 This paperback edition 1998 This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivs License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc- nd/2.0/ or send a letter to Creative Commons, 559 Nathan Abbott Way, Stanford, California 94305, USA. This Acrobat file can be circulated freely for non-commercial use. It may not be altered, and the author must be identified and credited. Designed and typeset by LBO Graphics, New York The credit system, which has its focal point in the allegedly national banks and the big money-lenders and usurers that surround them, is one enormous centralization and gives this class of parasites a fabulous power not only to decimate the industrial capitalists periodically but also to interfere in actual production in the most dangerous manner— and this crew know nothing of production and have nothing at all to do with it. — Marx, Capital, vol. 3, chap. 33 I’m not a parasite. I’m an investor. — Lyonya Gulubkov, described by the New York Times as “a bumbling Russian Everyman” responding to “Soviet-style” taunts in an ad for the fraudulent MMM investment scheme which collapsed in 1994 Contents Acknowledgments ix Introduction 1 1 Instruments 10 2 Players 56 3 Ensemble 118 4 Market models 137 5 Renegades 187 6 Governance 246 7What is (not) to be done? 301 Appendix 323 Bibliography 333 Index 357 Acknowledgments Though one name usually appears on the cover, a book is a far more collaborative project than that. I’ve enjoyed splendid research assistance from (in chronological order) Michael Tremonte, who gathered most of the material found in the bibliography; Kim Phillips; Lisa Westberg; Josh Mason, who assembled lots of last-minute articles and numbers; Adria Scharf; and Shana Siegel. Thanks to Jean Bratton for reading the proofs. Thanks too to all the sources, named and unnamed. For all the faults of American society, I’ve long been amazed at its openness; both public- and private-sector sources are almost always happy to help an author out. Thanks as well to my cyber-colleagues in two computer networks, the Progressive Economists Network and Post-Keynesian Thought (for infor- mation on both, visit http://csf.colorado.edu), and to my real-life friends Patrick Bond, Bob Fitch, Dan Lazare, John Liscio, Bob Pollin, and Gregg Wirth. Deep expressions of gratitude are also due to three editors: Ben Sonnenberg of Grand Street and Victor Navasky of The Nation, who gave me a public forum when my newsletter was young and little more than a vanity operation, and Colin Robinson of Verso, who not only offered me a book contract when I was even more obscure than I am now, but who also put up with my endless delays in getting this thing done. Thanks, along with love, to my parents, Harold and Victorine Henwood, for a lifetime of support of every kind, and to Christine Bratton, my com- panion and partner in life and in many aspects of work as well. Chris has not only spent a decade reading and improving my prose, but she put up with me as I wrote this book. For years, I thought that authors’ expres- sions of gratitude for indulgence from intimates were mere boilerplate, but when I think back on what a cranky, preoccupied monster I was for nearly six years (not to mention the brief paperback relapse), I now real- ize just how deeply felt they were. I’ll say once again that life would be unimaginable without her. ix [...]... production and political contradictions, to make itself autonomous in a free-floating, ecstatic and haphazard form, and thus to totalize the world in its own image Capital (if it may still be so called) has barred the way of political economy and the law of value; it is in this sense that it has successfully escaped its own end Henceforward it can function independently of its own former aims, and absolutely... is a nice mechanism for pr ofit making and income r edistribution It pr ovides rich underwriting and trading pr ofits for investment bankers and inter est income for individual and institutional r entiers, courtesy of nonrich taxpayers Wall Str eet, despite its ideological fealty to balanced budgets, has made a fortune distributing and trading the Reagan–Bush–early Clinton deficits This experience... despite its vast scope, it is the product of human intelligence and society, comprehensible with a little effort, and maybe even transformable with a little more In a soundbite, 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... everything’s-changed1 WALL STREET and- capital-no-longer-matters school, and two, a stance of uninformed condemnation An example of the first is this silly but representative eruption from Jean Baudrillard (1993, pp 10–11, 33): Marx simply did not foresee that it would be possible for capital, in the face of the imminent threat to its existence, to transpoliticize itself, as it were: to launch itself into an orbit beyond... options, repos, and swaps This confir ms the accuracy of another of Marx’s (1977, p 919) observations: The public debt becomes one of the most powerful levers of primitive accumulation As with the stroke of an enchanter’s wand, it endows unproductive money with the power of creation and thus turns it into capital, without forcing it to expose itself to the troubles and risks inseparable from its employment... Step back a bit, and the U.S sags badly For the 1989–95 period, when the U.S was stuck in a credit crunch and a sputtering recovery, it was at the bottom of the G7 growth league, along with Canada and the U.K Between 1979 and 1988, there’s no contest, with the U.S tying France for the worst numbers in the G-7 Comparisons with the pre-crisis Asian tigers are hardly worth making It may be as capitalisms... of modern multinational capitalism (It seems especially dizzying as I write this in early 1998, with the U.S stock market at or near its highest levels of valuation in 125 years, and the broad public the most deeply involved it s been in decades, and maybe ever.) As an antidote to that sense of disorientation, Jameson suggested the need for “cognitive mapping,” critical expositions of that vertiginous... years ago This book is an attempt to get down and dirty with how modern American finance works and how it s connected to the real world It s a system that seems overwhelming at times — almost sublime in its complexity and 2 INTRODUCTION power, reminiscent of Fredric Jameson’s (1991, pp 39–44) reading of John Portman’s Bonaventure Hotel, at once packed and empty, a spatial analogue of our disorientation... creditor–rentier class of the First World and their junior partners in the Third I’ve committed at least two commercial sins in writing this book — one, the omission of practical investment advice, and two, going lightly on scandal-mongering and naming of rotten apples As penance for the first, I’ll offer this bit of advice: forget about beating the market; it can be done, but those who can do it are... for the Treasury and another $2.7 trillion for gover nment-r elated financial institutions — and trading is usually sleepy and uninter esting But it can be lucrative for practitioners Underwriting fir ms — the big investment and commer cial banks — contribute mightily to the campaigns of local tr easur ers and comptrollers Since so many give, it s har d to see how the local officials can decide among . not foresee that it would be possible for capital, in the face of the imminent threat to its existence, to transpoliticize itself, as it were: to launch itself. comprehensible with a little effort, and maybe even transformable with a little more. In a soundbite, the U.S. financial system performs dismally at its adver- tised