Defending Wall Street

Since the Financial Recession of 2008, Wall Street has been labelled as ruthless, reckless, and imprudent. There is certainly some merit in this view. The construction of asset-backed securities, and their misguided distribution throughout the economy, triggered a severe credit crunch, from which we are still recovering today.

Yet such shocks to the system are exceptions, rather than the rule, of the general framework. In fact, I aim to argue that Wall Street (I use the term to universally represent all financial sectors worldwide) is a significantly important part of a successful and healthy global economy. 

Why is Wall Street, and more importantly finance in general, so crucial? The answer rests in the relationship outlined below. Let's say a business identifies a profit opportunity, but does not possess the relevant resources to execute the initiative. How should the business proceed? Naturally, it would seek the help of an investment bank to finance its investment and create value in the process.

Innovative Idea + Finance = Tangible Progress

Any initiative that creates value and improves the standard of living requires resources to do so. It is the role of financial institutions to raise the necessary funding, usually through equity or debt, that enables a business to convert its idea into something tangible. 

In other words, finance facilitates entrepreneurship, which, in turn, serves as the engine of most developed countries. Thus, the beauty and value of Wall Street does not lies in its existence, per se, but rather in its capacity to search for and identify the relevant businesses that require assistance to make their investments happen. 

Note that the argument I have presented here is not at all complicated, even though it is most definitely overlooked. This fundamental role of finance is brushed aside, largely because the reception of finance in the press focuses on currency manipulation, the rigging of interest rates, and other malicious acts.

These harmful activities do occur on Wall Street. Unfortunately, eliminating them entirely is likely to prove both impossible and unfeasible, though reforms, such as Dodd-Frank, and regulators, such as the FSA, have certainly curbed this type of behaviour in recent years.

There is, moreover, an element of non-profit finance on Wall Street. This is the equivalent of the 'pro bono' work that law firms perform to demonstrate their consideration for the society at large. Non-profit finance focuses on initiatives that enhance progress in communities and schools. 

However, non-profit finance is not the main backbone of Wall Street. To fully appreciate the importance of Wall Street, let us perform a thought experiment.

Imagine that Wall Street did not exist, what would the world look like? (It is often easier to appreciate the importance of something by considering the impact of its absence). 

A short answer is this: we would likely return to the primitive age. Any businessperson hoping to change the world could not do so. The visions of Steve Jobs, Mark Zuckerberg, and Eric Schmidt could not be fulfilled (yes, even these entrepreneurs need finance to give them a boost).

Yes, I accept that Wall Street includes reckless behaviour, but so does Silicon Valley and almost every other industry. Behaving irrationally and at the expense of society if it serves our own interests is a perfectly human feature. 

Let us move beyond these fallacies of Wall Street and finance, focusing instead on their wider impact, which improves lives and creates jobs.