Yesterday, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. It's a 2,300 page bill containing 533 new regulations. 38% of Americans have never heard of it. Another 33% couldn't explain its key deliverable.
If the point of the legislation is to restore confidence in the financial system, it seems like it's dead on delivery, and you can bet that opinion of the bill is only going to get worse (or at best, muddled) as the administration's principled opposition continues to debate settled law and the nutjobs scream that it's further proof of an alien invasion. Consumers are going to continue to lose their faith in the markets.
This isn't good for Wall Street.
Historically, trust in the financial industry has always been tenuous and inconsistent. We've been suspicious of big finance ever since Alexander Hamilton argued its case in the early days of the republic. Financiers are a necessary evil whom we tolerate for what they do even as we're dumbfounded by how they do it; other than celebrating them during the brief years leading up to major market crashes (1920s and 1980s, for starters), Americans have spent most of their time being scared and suspicious.
We've also been mostly uninvolved. You wouldn't know it from any given day's breezy financial news coverage but individual stock ownership is the exception in American life, not the rule. Slightly more than half of households held stocks in 2005 (56.9 million). That's up from 44 million in 1998, and a whopping 2.5 million in 1960. Only 8% of ALL Americans owned stocks in 1955. Before that, financial markets were the exclusive purview of guys in black top hats like that character in Monopoly.
Interestingly, the number of American households that own their own homes has stayed effectively flat (low 60%) since the 1960s.
Has the recent spike in stock market investment been driven by faith in the system? Yes, to a degree: investing's benefits have been aggressively promoted -- we've all seen those long-enough perspectives that prove the stock markets outperform the returns of bonds or bank deposits -- and there have been those investors who enthusiastically convince themselves that a free-market, self-empowering, I-can-outsmart-the-next-guy fantasy can make gambling legit (day trading as sexy slot machine: discuss).
But I'd wager that IRAs (invented in 1974), 401(k) plans, and fears of keeping pace with inflation have driven most folks’ adoption of stock ownership. Not clearly a "best of worst options" commitment, but something in that general direction. For the half of Americans who do it, we've done it because we're supposed to, not because we actively want to.
Only we're losing what little faith we had.
Individual investors have been withdrawing more money from American stock funds than they put in since 2002, with minor exceptions. It started when Enron and WorldCom revealed the depths of manipulation and chicanery that could go on behind closed boardroom doors. The Internet bubble immediately prior didn't help, and our current mortgage miasma has just made it worse. Most people are aware again that there's no good way to understand or predict what the markets will do unless you step back, squint, and see only a big, impersonal picture. If you honestly think you're the incredibly brilliant exception to this fact, you're nuts.
Glass-Steagall was passed in 1932 to curb some of the manipulative excesses that had led to the stock market crash a few years earlier. It was followed by creation of the FDIC in 1933 to give individuals a level of certainty and comfort with their bank deposits as a backstop to any subsequent market crash. I'm sure these bills did hundreds of other things, too, but they offered headline-worthy benefits that non-experts could understand. And it still took over 40 years for individual investors to get into the stock market.
Now we're losing our faith again.
The Obama administration may or may not accrue any political capital for its investment of time and its reputation in the Dodd-Frank Wall Street Reform and Consumer Protection Act. I honestly don't care. But the legislation comes at a crucial time for Wall Street; an inflection point, perhaps, that could determine the content and context of the conversations financial firms will have with individual investors, and the populace at large, for the next decade or more.
Why should we trust stock markets to be efficient and transparent? What are banks doing to make loans more responsibly (and often, hopefully)? How will the new legislation affect operations, and how will that benefit individual clients? How will it ensure that some gigantic deal or practice doesn’t sink the entire economy? What’s actually, specifically, and reliably different -- and better -- today from yesterday or a year ago?
All I've read about Wall Street lately are the enormous profits the big banks collected in the last quarter (Wells Fargo up 12% to $2.9 billion, B of A up 15% to 2.8 billion, JP Morgan Chase earned $4.6 billion and Citigroup $2.7 billion). The advertising and branding from the financial firms has been the same "trust us, don’t worry" nonsense they've been propagating since long before the latest crisis. Enough with the long-view arguments. Our lives are too short for them to work anymore.
The government can't fix this problem, either substantively or perceptually. Wall Street needs to step up and change its conversation with us. Tell us why we should believe again. No, show us proof for our faith. Doing so would constitute a true miracle.
(Photo credit: this image appears on a number of web sites and blogs, so I'm assuming that it's public domain. Please tell me if you know otherwise.)
