"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one." - Charles Mackay
Thursday, December 13, 2007
Marching with Mammon
Thomas Frank

The workings of Wall Street can be understood in terms of industry-building, speculation, manipulation, corporate governance, or simple human greed. But they are perhaps best thought of as a long-running dialogue on the wisdom of the common people and the meaning of democracy itself. As with any Capra movie, the literature of Wall Street alternates between hope and profound pessimism; one year it scoffs at us as a "mob," a clueless mass of dopes to be manipulated and fleeced; a few years later it bows to us as "the people," a collectivity so infinitely wise that it is us who is fleecing them.

This dialectic of public wisdom is best observed by examining the various bull markets of recent years. During the boom years of the 1960s, a period of soaring idealism about "the people" generally, an almost Hamiltonian contempt for the public held sway on Wall Street. The financial journalist "Adam Smith," whose 1967 book The Money Game remains an amusing account of those frenetic years, uses the notion of psychological combat between genius financiers and a herd-like public to give his book whatever narrative continuity it has. The simplest "indicator" used by Wall Street honchos, he wrote, is to

find out what the average investor, or the little investor, is doing. Then you do just the opposite. The sophisticates never feel comfortable unless they can be reassured that relatively uninformed investors are going the other way with some conviction.

The "little people," the "public," in other words, "are always wrong." For the assorted brokers, fund managers, and traders that "Smith" followed, small investors were blundering chumps whose enthusiasm for any particular issue was a clear augury to those in the know that it was time to get out. He even describes fund managers paying regular visits to Merrill Lynch, then the agora of Wall Street democracy, in order to use its clients' moves as a contra-indicator. Such "sophisticates" were said to be avid readers of the deeply antidemocratic turn-of-the-century social psychologist Gustave Le Bon, whose contribution to Western letters was the notion that, given the proper techniques, the public mind could be easily manipulated. They were even more partial to a curious book called Extraordinary Popular Delusions and the Madness of Crowds, written by one Charles Mackay in the 1840s but which only began to find a mass audience during the conformophobic years of the 1960s and 1970s. With its tales of Dutch tulip mania and other memorable financial bubbles, the book served to provide the sanction of the ages for Wall Street's disdainful take on the public mind. The introduction to the 1980 edition, for example, comments with Tory scorn on the absurdity of various fads and popular dances of the Seventies and even blames a "panicked" public for the banking collapse of the 1930s.

This attitude ensured that 1930s style public outrage would continue to erupt periodically. Even in the Eighties popular anger at Wall Street could be summoned forth by movies like Oliver Stone's Wall Street and by journalistic coverage of the era's various financial scandals: leveraged buyouts, junk bonds, insider trading, the 1987 stock market crash, the collapse of the savings and loan industry. One particularly close call provided a bridge between the casual Nietzscheanism of that era and the Wall Street egalitarianism of our own time: The Salomon Brothers treasury bond scandal of the late '80s actually got as far as Congressional hearings before being defused by the timely appearance of populist investor Warren Buffett, who showed up at the last minute to buy the troubled brokerage. Financial journalist Roger Lowenstein attributes the anger that arose on that occasion to Salomon's acting "the picture of Wall Street arrogance--and arrogance, more than any specific crime, is what turned the public's stomach." This is precisely true. Whatever the specific issues at hand, American criticism of the financial industry has always focused itself on this particular venal quality: Vanderbilt's disdain for the People; the banquets and effete sports enjoyed by the Astors, the Belmonts, the DuPonts; J. P. Morgan's yacht. This "arrogance," Americans believe, is the sin of Wall Street; give them a saintly commoner like Warren Buffett, assuring everyone that it wouldn't happen again, and all is quickly forgiven.

The melodrama of Salomon "arrogance" and Buffett "humility" might well have marked the beginning of the People's Market. If the prosperity of the Eighties was one of malevolent, contemptuous insiderdom, that of the Nineties would be exactly the opposite: A bull market that admitted to all the worst suspicions of the Thirties but which presented itself as the solution to upper-class arrogance; a frank acknowledgement of the malice of official Wall Street combined with a soaringly idealistic view of financial markets themselves. What emerged, by the middle of the 1990s, was a historically weird but ideologically potent cultural hybrid bringing together the anti-authoritarian strains of traditional populism with the most orthodox faiths of classical economics. Wall Street would accommodate itself to the language (if not the ideas) of its historical enemies, invent a vision of the nation's banks, stock exchanges, and mutual funds as instruments of the common weal more representative and less corrupt than any government could ever be. This was to be the bull market of the People, their long alienation from Wall Street over at last, voting with their dollars and deliberating with all the majesty attributed to them in TV commercials for Chrysler cars.

Among the founding faiths of the People's Market was the notion that mutual funds were somehow rearranging the landscape of social class. Formally, I suppose, there was a certain logic to this. If the NYSE as a whole allowed everyone to "own their share of America," the mutual fund made the "genius" of the insider available to just about anyone. But before the 1990s market, observers rarely considered mutual funds to be implements of democracy. Financial writer John Brooks had maintained that "the high-performance funds of the 1960s were obviously unfair if not illegal," simply because the reputations of their closely followed "gunslinger" managers made any pick an automatic winner as the millions rushed to follow their lead. Writing of the same period, "Adam Smith" describes Edward Johnson, the owner of the Fidelity company and the colossus of the mutual fund world, not only as a fan of the noxious Gustave Le Bon but as a social conservative of the most stalwart sort, a Harvard-educated Brahmin who we see visiting the Union League Club, discussing Marcus Aurelius, and quoting bits of ancient Greek. And in aftermath of the 1929 crash, of course, the masterminds of the big mutual funds (at the time called "investment trusts") like Alleghany and Shenandoah were regarded as the greatest public thieves of all.

Much of the change in the image of the mutual fund--and, by extension, in the image of the stock market generally--can be attributed to Peter Lynch of Fidelity's "Magellan" fund, the man who still holds the title of all-time greatest fund manager some ten years after his retirement. His unbroken string of successful annual returns made him a public figure in the late 1980s and early 90s, as much a celebrity "gunslinger" as his predecessors had been in the 1960s. And his celebrity in turn made Magellan the largest mutual fund of them all, the vehicle of choice for average Americans interested in dabbling in the market. Lynch's celebrity was of a different moral kind than his predecessors, however: One admirer describes him as "relentlessly normal," a man of "deeply middle-class instincts and tastes--which is perhaps why the middle class felt so comfortable with him as its designated stock picker." Lynch is said to be humble, not arrogant. Although he worked for Edward Johnson, Lynch was no Brahmin. He graduated from Boston College rather than Harvard, appears publicly in crooked glasses and poorly chosen clothes, and recounts in his books the many hours he spends not in the stuffy confines of the Union League Club but amidst the crowds at various shopping malls and fast food restaurants.

Lynch's stock-picking strategy, as he outlined it in his books One Up on Wall Street (1989) and Beating the Street (1993), reflects his everyman public persona and inverts the public-as-dope theorizing of his predecessors. He begins One Up on Wall Street with this blast against expertise: "Stop listening to professionals! . . . Any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert." Instead of a complex system he proposes the "power of common knowledge," according to which it is one's averageness that determines one's success in the market. Readers hear of people who discovered stock market "ten-baggers" (Lynch's folksy term for a stock that has appreciated to ten times the purchase price) by contemplating products or brands in the grocery store, at the shopping center, in the food court, at work, and literally in the back yard. He tells of all manner of average people who "beat the street," regaling readers with tales of stock-picking firemen, small-town North Carolinians, seventh-graders, and again and again returning to the often-overlooked wisdom of housewives. And even though the Lynch name is indelibly associated with mutual funds, the greatest financial institution in his telling seems to be the local investment club, where a group of friends and neighbors do their own research and invest faithfully on a regular schedule, regardless of the financial weather.

"Buy what you know," the Lynchian stock-picking adage, often seems simply to mean "buy shares in brand names." And the key to identifying the brands in which to invest is being an alert consumer. Many of the stock-stories that make up his books arise from everyday encounters with products, chain stores, or middlebrow restaurants, where a good consuming experience convinces Lynch to take the relationship one step further. So thoroughly intermingled are everyday consuming and stock-picking that Lynch even describes a trip to the local mall not as browsing but as "fundamental analysis on the intriguing lineup of potential investments, arranged side by side for the convenience of stock shoppers." It is no coincidence that Lynch's investing heroes, the housewives and the seventh-graders, are among the demographics most heavily targeted by national marketers. By the middle of the 1990s this would be a stock-picking strategy in such widespread use that it couldn't help but succeed, at least for a time, as millions of Lynchites across the land snapped up shares in the same familiar consumer brands and retail chains.

There is also a distinct anti-intellectualism to Lynch's thinking. Channelling averageness is the essence of his strategy, and the best stock-pickers, in his accounting, always turn out to be those with the least affected, most "normal" tastes of all. The deluded "experts" of Wall Street, meanwhile, are captives to all manner of empty financial scholasticism. "There seems to be an unwritten rule on Wall Street," Lynch sighs: "If you don't understand it, then put your life savings into it. Shun the enterprise around the corner, which can at least be observed, and seek out the one that manufactures an incomprehensible product." The sin of Wall Street turns out to be exactly what the populist always charged: intellectual arrogance in its most highfalutin form. Financial analysts will actually "sit around and debate whether a stock is going up," Lynch writes increduously, "as if the financial muse will give them the answer, instead of checking the company." For us, though, it's levelheaded empiricism, and an almost infantile simplicity: "Never invest in any idea you can't illustrate with a crayon."

It is Wall Street that is in the grip of extraordinary delusions. The Capraesque "normal" person stands pat with his neighborhood investment club while the financiers of Manhattan, driven by imaginary fears and wild superstitions, panic and flee. "It's the amateurs who are prudent and the professionals who are flighty," Lynch insists, inverting the ancient financial mantra. "The public is the comforting and stabilizing factor." Such a formulation leads Lynch inevitably to a curious sort of populist jingoism melding the egghead-baiting of the 1950s with the anti-capitalist broadsides of the 1930s--and all in the service of better stock market returns. Lynch describes, for example, an annual Barron's round-table discussion, where, year after year and regardless of what's actually going on outside, leading brokers and fund managers wax "negative" about market, nation, and world. Average folk, meanwhile, are said to succeed because they "keep the faith" in the people and their corporations, making those monthly contributions to the investment club kitty and continuing to believe "that America is a nation of hardworking and inventive people," that "people will continue to get up in the morning and put their pants on one leg at a time, and that the corporations that make the pants will turn a profit for the shareholders." Looking for a metaphor for Wall Street error, Lynch quite naturally settles on . . . the French, those notorious welfare-staters, consumers of luxury foods, and snubbers of American culture.

Lynch may not consider himself a political figure, but there is nonetheless a politics to his financial populism, a politics that would become quite unavoidable as the decade advanced. When Lynch hails us as a canny and a virtuous people, he is also suggesting that we have little need for government economic intervention and the welfare state generally. After all, who needs Glass-Steagall or AFDC or social security when you've got a few well-managed mutual funds?

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