Wall Street’s Disaster Was All Too Real

Hollywood has made a film called “Wall Street” about stockbrokers, raiders and inside traders that is loosely based on the illegal activities of arbitrageur Ivan Boesky and investment banker Martin Siegel that came to light a year ago.

It’s a pretty good movie, about a young stockbroker who learns from working for an unprincipled rascal that it’s a tough, cruel world out there. The villain comes across better than the hero, and some of the financial doings are realistic.

Figuratively speaking, that is; Hollywood and Wall Street aren’t supposed to be real, after all. The movies, as everyone knows, aren’t real life. And Wall Street, as many people are saying or hoping, isn’t related to the real economy--so the stock market’s collapse won’t throttle the real economy.

But just as Hollywood decade after decade--from “Public Enemy to “Platoon”--captures changes in American life and attitudes, so Wall Street is closer to the real economy than people like to admit.

The movie “Wall Street” tells us about a few things that happened yesterday in the economy while hinting, if you look carefully, at what may happen tomorrow.

Theater owners say the film won’t attract the common man. But they could be wrong because the common man is an important off-screen character. He’s the fall guy who took a pay cut or lost his job because of restructuring deals conceived on Wall Street. Working people everywhere will recognize the union leaders who go from one takeover artist to another, pledging that their members will take 20% pay cuts if only the financier will keep the company in operation. Right there, the film captures better than any academic treatise what restructuring is all about: getting people to work harder for less money.

Peculiar Inflation

True enough, cinching in the belt, or restructuring, was a necessary response to changed world economics. But there were crimes and abuses and painful job losses suffered in its name.

The movie’s central characters are the middlemen in that process, the investment bankers who got on everyone’s nerves in recent years with their affluent life styles and their claims that they helped America by remaking its industry--asking for applause while lining their pockets.

In reality, the Wall Streeters--their glamour already fading today--were creatures of a peculiar inflation. The money for their takeover raids and their BMWs came not from an increase in society’s supply of goods and services but from a series of events that amount to an historical accident. First there was the tax cut of 1981, designed to give industry money for expansion. But industry didn’t need to expand. There was a surplus of goods in world markets and the real challenge to American companies was to cut costs to compete with foreign producers.

So industry’s cash flow, augmented by the tax cut, piled up in money markets or was used to buy back company stock or given to investment managers to buy the stock of other companies. The curious result: There was excess cash around, yet general inflation was low; the consumer price index rose less than 4% a year.

But there was inflation on Wall Street, where abundant cash drove stock prices up year after year--to 2,722.42 on the Dow Jones index.

Then stock prices crashed, as inflated oil prices and house prices had done before them. More than $500 billion was wiped off stock prices on Oct. 19 and they haven’t recovered much of that, nor are they really expected to.

Yet there is hope, even a growing belief, that somehow that $500-billion loss doesn’t touch the real American economy.

Unfortunately, the hope is false--as you’ll see if you think about it. The $500 billion was real enough when it was increased corporate cash flow; real enough when investors paid it out for stocks at high prices. Stocks do not rise on air, but on somebody paying real money to buy them.

Where is that real money now? It is gone. It is as if that $500 billion had built 10,000 factories and office buildings and homes and shopping centers and they had all burned down in a single day.

Even Hollywood wouldn’t put a happy ending on such a loss.