The Occupy Wall Street Victory: Filling a Hole in Democracy

Jeff Madrick

The general scorn for the Occupy Wall Street movement (OWS), now spread to hundreds of cities in the U.S., reveals a lot about Wall Street, the press, and the state of economics. I was invited to speak there early in their campaign and found the people eager to learn, courteous and hell-bent for justice, not revenge.

The scorn has subsided somewhat as the movement grows and has withstood the threat of police and Michael Bloomberg’s demand that they should clear out of the park they occupy because the owners of the park wanted to clean it. It is called Zuccotti Park because it is privately owned by the Zuccotti family with the proviso that it is made available to the public at all times. Now it has become available to all America, and arguably all the world.

The unions joined in and this week, OWS has yet another clear victory. President Obama will announce some kind of student loan relief plan. He is also proposing a more aggressive mortgage refinancing scheme for under-water homeowners. This too may be partly the result of OWS.

The attempt to minimize OWS, or at the least deride them, goes on, however. The press was initially very skeptical and is now more respectful. Still, they wonder what these (mostly) young people really want. The Right calls them a mob so as to distinguish them, I suppose, from gun-toting Tea Partiers. The most reprehensible bit of demagoguery I saw was an ad on a major TV network posted by an international issues lobbying organization with shots of anti-Semitic signs. There are in fact almost no such signs at Zuccotti.

But what irks me most is the charge of economic ignorance by Wall Street. So far, the protesters as a group have avoided specific policy demands. I’d like to see them support a financial transactions tax, for example, and a more formal student debt relief program, among a host of other measures.

The truth, however, is that they are doing something much more important. They are filling a large hole in America’s democracy. Congress, the president, the media, and even the think tanks were not reflecting the frustration, confusion and anger among Americans. They talked, they did not listen. I have witnessed these people several times now, talked to the group twice, talked to them in private—they listen. It is quite wonderful.

But what bugs me most is the widespread criticism of their ignorance of economics. What they know and what Wall Street and much of Washington do not is that the American model has been failing for decades. Look at income inequality. More important, look at average hourly earnings adjusted for inflation, now back to their 1969 level. Look at our crummy roads, our unequal education, our uniquely absurd healthcare system. Look even at relatively weak capital investment.

Then they are lectured by people like the Competitive Enterprise Institute that they do not understand how markets work. There have been no free markets by neo-classical or even Hayekian standards for decades on Wall Street. When there is no transparent pricing of derivatives, there is no free market. When five major banks control the entire market, there is oligopoly, not free markets. When enormous banks in every avenue of finance exchange information within their own companies, information asymmetries, not to mention potential for insider trading and front-running, are rife. When the conflicts of interest between ratings agencies and their clients are built into Wall Street, who can but laugh that this is real competition. And what about asymmetric financial incentives that made the bankers rich? They rewarded risk when you won, but did not penalize when you lost.

Don’t lecture the OWS movement about competitive markets. In league with Washington regulators, Wall Street learned how to rig those markets. And then they could misprice risk and lead to runway speculation that was bound to result in failure. One number always grabs me. Private financial firms wrote 18 percent of mortgages, which resulted in 42 percent of all serious defaults. There is the culprit.   And then they didn’t have the capital to cover the losses. They drove the housing market sky high. Then they built debt on the bad mortgages.

Don’t make the mistake of thinking that even had markets run on more competitive lines speculation and crisis would have been completely avoided. There is little in neo-classical theory that suggests mild corrections are all that is needed to set economic growth on its inevitably stable path. But people like Alan Greenspan, Larry Summers and Ben Bernanke stuffed the deep crises of 1982, 1987, 1989, 1994, 1997, 1998 and 2000 into that mild model. The great moderation was born.

Then wise guys who cannot help but champion Wall Street with little sense of history tell us that all the OWC criticism is unwarranted. Capitalism must be allowed to make mistakes. This is true.

But on balance, OWS is not against capitalism, it is against wild capitalism. And it is against injustice. Is Wall Street?