Streetwise

Lauren Rudd

Sunday, August 1, 2010

Today Streetwise Celebrates 22 Years

This week’s column marks the anniversary of a journey that began on Sunday, July 31, 1988, with the following prologue appearing in the Trenton Times of Trenton, NJ.

 “Today Lauren Rudd begins writing a weekly column about Wall Street for The Times...”

The Times forgot to mention that I was only being given a three month trial. Today Streetwise is 22 years old without a single missed a week and is offered up to what has become a national audience. In case you were wondering, those years represent 1,144 columns.

The irony of it all is what I wrote on that fateful day many years ago. Space does not permit a full recital, but the following words that began the column back then might well be considered a prescient commentary on today’s market activity.

“The individual investor has been pummeled and is ready to surrender. What with the debacle of last October (Ed note: refers to the market crash of Oct. 19, 1987), many are deciding that they have had enough and are leaving Wall Street, an action reminiscent of an audience walking out on a bad play. The recent bull market resulted in many investors becoming overconfident. After going down in flames in October, they retreated to lick their wounds and decide what to do next. This leaves Wall Street worried and well it should be. The individual investor has always been its bread and butter. However, these same investors are now beginning to feel that their trust in Wall Street may have been misplaced and that the game is rigged with the spoils going to the large institutions.”

However, Wall Street has changed over the ensuing 22 years and individual investors have benefited. The fair disclosure rule requires that everyone receive the same information at the same time, while Sarbanes Oxley helps ensure that what you read in a financial statement is accurate.

No, the system is not perfect, as victims of one of the many Ponzi schemes can attest to. Even more damaging is the ability of banks and investment houses to amass the financial resources that, when used improperly, can upend the nation’s economy.

Main Street knows this only to well as it writhes under the pain inflicted by the Great Recession. Meanwhile, less than one percent of the work force flaunts what many consider to be ill gotten gains. Such actions can only breed social unrest.

That point was recognized several years ago by the analysts at Citigroup, of all people. In an Equity Strategy Note dated March 5, 2006, they wrote that the rich are the dominate drivers of demand as they enjoy an increasing share of the country’s income and wealth that has been generated over the past 20 years. To define this phenomenon, the analysts coined the term, “plutonomy.” They went on to say that the CEOs who lead the charge of converting global resources into personal wealth at the expense of labor are major contributors to plutonomy.

A similar conclusion was reached by David Gordon and Ian Drew-Becker of the National Bureau of Economic Research. According to their research the top 10 percent, and more specifically, the top 1 percent of the population, have benefited disproportionately from the country’s productivity surge.

To its credit, Citigroup also made it clear that plutonomy is not without risk. The report stated that while the rich are receiving a greater share of the wealth, and the poor a lesser share, political enfranchisement remains as one person, one vote.

They also made it clear that at some point labor will fight back and there will be a political backlash against the rising wealth of the rich. This rebellion could potentially be felt through higher taxation or in a pushback to protect indigenous laborers through anti-immigration policies or protectionism.

And now a faction in Congress want to extend permanently the Bush era tax cuts where 46.3 percent of the savings went to the top 10 percent of wage earners, those making over $163,839 per year. Oh, and those tax cuts cost the government $2.34 trillion.