This is an epic article. It’s a must read of the highest order if you care at all about what’s happened to our country not just over the last few years, but over the last 30.
Here’s an excerpt where the writer, John Cassidy, is talking to an ex finance insider, Paul Woolley:
At first, like most economists, he believed that trading drove market prices to levels justified by economic fundamentals. If an energy company struck oil, or an entertainment firm created a new movie franchise, investors would pour money into its stock, but the price would remain tethered to reality. The dotcom bubble of the late nineteen-nineties changed his opinion. GMO is a “value investor” that seeks out stocks on the basis of earnings and cash flows. When the Nasdaq took off, Woolley and his colleagues couldn’t justify buying high-priced Internet stocks, and their funds lagged behind rivals that shifted more of their money into tech. Between June, 1998, and March, 2000, Woolley recalled, the clients of GMO—pension funds and charitable endowments, mostly—withdrew forty per cent of their money. During the ensuing five years, the bubble burst, value stocks fared a lot better than tech stocks, and the clients who had left missed more than a sixty-per-cent gain relative to the market as a whole. After going through that experience, Woolley had an epiphany: financial institutions that react to market incentives in a competitive setting often end up making a mess of things. “I realized we were acting rationally and optimally,” he said. “The clients were acting rationally and optimally. And the outcome was a complete Horlicks.” Financial markets, far from being efficient, as most economists and policymakers at the time believed, were grossly inefficient. “And once you recognize that markets are inefficient a lot of things change.”
Woolley is also quoted making statements like this: “Why on earth should finance be the biggest and most highly paid industry when it’s just a utility, like sewage or gas?”, and: “It is like a cancer that is growing to infinite size, until it takes over the entire body.”
I encourage you to read the whole thing. It shed light on some things without the use of much finance jargon.
- Can Wall Street Justify Its Existence? (dealbook.nytimes.com)