Doug Henwood Freely Distributes His Book "Wall Street"

It's a very good book:

Wall Street: How It Works and for Whom: A scathing dissection of the wheeling and dealing in the world's greatest financial center. Spot rates, zero coupons, blue chips, futures, options on futures, indexes, options on indexes. The vocabulary of a financial market can seem arcane, even impenetrable. Yet despite its opacity, financial news and comment is ubiquitous. Major national newspapers devote pages of newsprint to the financial sector and television news invariably features a visit to the market for the latest prices. Does this prodigious flow of information have significance for anyone except the tiny percentage of people who have significant holdings of stocks or bonds? And if it does, can non-specialists ever hope to understand what the markets are up to? To these questions Wall Street answers an emphatic yes. Its author Doug Henwood is a notorious scourge of the stock exchange in the pages of his acerbic publication Left Business Observer. The Newsletter has received wide acclamation from J.K. Galbraith, among others, and occasional less favorable comment. Norman Pearlstine, then executive editor of the Wall Street Journal, lamented, `You are scum ... it's tragic that you exist.' With compelling clarity, Henwood dissects the world's greatest financial center, laying open the intricacies of how, and for whom, the market works. The Wall Street which emerges is not a pretty sight. Hidden from public view, the markets are poorly regulated, badly managed, chronically myopic and often corrupt. And though, as Henwood reveals, their activity contributes almost nothing to the real economy where goods are made and jobs created, they nevertheless wield enormous power...

I would disagree with Doug's claim that Wall Street contributes almost nothing to the real economy. I think that it contributes a great deal to the real economy as a (greatly imperfect) system of corporate governance and as an (effective) creator of real value by turning illiquid claims to physical capital and market position into liquid financial assets. It also fleeces enormous sums every day from a great many people who don't understand risk and return, adverse selection and moral hazard, and that the first question one should always ask is, "If buying this stock at this price is such a great thing for me, why isn't it an equally great thing for you? Why are you selling it?"

But highly recommended. And now it is freely available online.

Doug Henwood (1977), Wall Street: (New York: Verso: 0860916707).

Comments

[spencer]

Remember, every time a stock changes hands someone -- either the buyer or seller -- is making a mistake.

[Linkmeister]

It certainly contributes greatly to the local economies of NY and Connecticut. All those highly-compensated investment bankers spend a lot of money.

[Lee A. Arnold]

Brad, I am sure you already have too much to do... I could clone two more me's, and we wouldn't be able to do what you do! And then, if they cloned two more them's, we still couldn't do it either! It'd be a really stupid long line of me's; --and so if there's no stopping me by personalizing their accounts, I may do it anyhow!! (-:} {:-) ...But I hope that some long someday soon, you will find the time to present a scene, even if fictional, wherein several people communicate, interact and trade, all with result to create "real value by turning illiquid claims to physical capital and market position into liquid financial assets." This need not be much of a numerical example, but it should follow all the holdings and trades of all the actors, and go on a little to follow their next trades and future dispositions, on out to touch the larger system of which we are all a part. It might go on to illustrate your contention that society needs to take advantage of an equity premium. Perhaps this is already set-out folksily, in an intro business text somewhere, or more likely it has never been put together at all, but I think such an explanation might help a lot of us to understand exactly why investing in the stock market can be a good idea, beyond the mere blind atomism of "ownership" which has become a propaganda-word, and the corruptions which Congress seems unwilling to stanch.

[Gabriel]

What an excellent book. I've never understood why the arguments of pages 75-76 referring to "research by Philip Vasan showing that manufacturing corporations with under $100 million in assets raised only 2% of their total finance from new share issues between 1960 and 1980" are not more widely known. It really undermines the stock markets' self-image as enablers of the investment which drives growth:

"In sum, big corporations, the ones with easy access to the public (nonbank) capital markets, have more money than they know what to do with; small ones, who invest most of what they earn, don’t find a generous reception in the capital markets."

Lee - try Liar's Poker by Michael Lewis on mortgage backed securites for one illiquid to liquid explanation.

[Lee A. Arnold]

Gabriel, thank you, I am hoping to collect as many narrated scenes as possible.

[Randolph Fritz]

Brad, question is, do the stock markets contribute more than they cost?

I see a PhD topic, out there, somewhere...

[Colin Danby]

I share Brad's admiration for Doug's work, including the more recent _A New Economy?_ One of its merits is that it helps counteract the populist myth that finance is by its nature parasitical.

So re "contributes nothing," I think Doug was betrayed by Verso's blurb-writer. The phrase "contributes almost nothing to the real economy where goods are made and jobs created" does NOT come from the book itself (Being downloadable, that's easy to check) but from Verso's overheated description. Doug *does* use the analytical distinction of finance versus "real economy" ("real economy" shows up 15 times) and he uses it in the way many economists do. And he does argue that in its current configuration the financial system is not doing its job well. But he is not making the simple-minded argument that the blurb suggests and that Brad rightly criticizes.

[Barry Freed]

BTW, Doug Henwood also produces an excellent weekly hour-long radio program on NYC's Pacifica station WBAI 99.5 FM. I've since moved away from the signal area so I can't recall when it's on (yes, they stream but...) Fortunately DH posts downloadable mp3s of his shows (my only beef concerns the length of time between updates). Check out the page for summaries of each weeks guests and topics. I very highly recommend this.

http://www.leftbusinessobserver.com/Radio.html

[shah8]

To me, stocks are mostly bad for retail investors. A stock/futures/bond market is pretty useful for many actors, but so far in my history readings, stock markets that are easily leveraged by credit or other paper offerings for the retail Joe Schmoe are *really* bad for economies...

[matt]

Doug also has a very good newsletter Left Business Observer which just had a very good analysis of the Social Security issue.

[Macneil]

Brad: isn't another benefit of the stock market that it signals so much about prices? Certainly it must help resources get allocated better.

[david]

I was just looking back over the section on why privatizing social security is such a stupid idea.

I'm with the host on the market's potential value as a system of corporate governance. America's a good idea too, if highly and currently imperfect.

[Randolph Fritz]

By the way, the typography of the book is fairly rough--the kerning is evil. I do wish Mr. Henwood would groom the PDF some and bring the book back into print via lulu.com or some similar service; there is little financial risk in doing so, and I think a good possibility of a modest profit.

[A. Zarkov]

“Remember, every time a stock changes hands someone -- either the buyer or seller -- is making a mistake.”
Not necessarily. People sometimes sell their stock because they need the money for consumption expenditures. Then again people differ in their risk tolerance, so one might sell a stock because he sees an increase in volatility while the counter party, being in different circumstances, is more willing to bear the risk. Market makers have to buy and sell stock to provide the system with liquidity. and they are paid to do that—the bid ask spread. The market maker is not making a mistake in the transaction. Then sometimes companies want to “go dark” (convert from public to private ownership), so it buys back its stock. The company is not necessarily making a mistake by going dark, it’s a business decision that could be right or wrong.

[obscure]

I tried reading the book and got fed up.

At one point Henwood writes a paragraph of explanation, then adds, "That isn't very clear" and proceeds to try again.

I don't find that particularly forgivable. If it isn't clear, don't put it in your book.

[Maynard Handley]

While I'm sympathetic to a lot of what Henwood says, I fear that he's following the standard folk-economics fault of not being able to follow a long chain of causation.

Henwood's first claim is that the stock market is far less important to most people and the larger economy than you'd think based on what you read in the papers and on TV. To first order this is probably true but, in a sense, so what? Sports are even less important, and they get even more coverage. This excess coverage would be a problem if, for example, it resulted in inappropriate legislation, but I don't see much evidence of this. Congress gets panicky and passes legislation, good or not, for the most part in response to what ARE large-scale possible threats to the financial system, not in response to a falling stock-market (October 1987 anyone).

Meanwhile, the fact that the stock market is small compared to other parts of the financial system (govt and private bonds, insurance, commodities, forex, etc) is not the same as saying that it is therefore unimportant; in the same way that the fact that the amount of money spent on basic research is rather less than that spent on product development does not mean that basic research is unimportant. The stock market has a role, as Brad points out, in providing (a) liquidity and (b) a particular type of financial instrument. The fact that companies only raise some small fraction of the money they use via stocks doesn't change the fact that that money is very important in the life-cycle of the company. If VCs couldn't cash out at the end of the day, or if their cash-out consisted of a bond-like fixed return of what, 10%pa, we'd get a whole lot fewer companies being started.

Where things go squirrelly is, I think, the way in which stock certificates are perpetual. 100 years after a company goes public, has had its IPO, and has raised that initial cash, those stock certificates are still out there conferring part ownership of the company. Those part owners have some interest in their company doing well, but the linkages between the company and their stock certificates are pretty flimsy --- they have voting authority at the AGM and that's it. So we get this indirect linkage through the price of the share, but that only influences the company if the company managers care about the stock price. Thus we get options, and then we have the problem of the fact that options reward volatility, not slow and steady growth.

So what do we do?
First, of course, we regard both sides --- the know-nothing leftists who can't even tell the difference between different parts of the financial system and make grand claims like "Wall Street does nothing useful" while having absolutely no idea what "Wall Street" actually does; and the know-nothing rightists who understand just as little and make insane claims like "the Stock Market is how large firms obtain the cash they need to operate and grow".
Second we need to fix the problem of the poor linkage between the stock holder (and part owner) who is justified in caring how the company operates, and management. One way to do this would be more "democracy", but I'm not sure that's a good or a practical idea. Are there any examples of large organizations that are micro-managed successfully by thousands of individuals?
Another alternative might be to switch the management incentives from options to a financial instrument that closer tracks the long-term behavior of the company; for example shares that can't be sold for fifteen years after granting, or five years after leaving the company. IMHO I suspect that tools like this would actually work really well and that the reason they have not been used so far is because, in the first place, options could be subject to strange accounting whereas share grants are harder to pretend away, and secondly because management are well aware that options are a better deal for them than shares --- it's far easier to generate volatility than to generate long-term sustained growth.