How does Wall Street use capital allocation to benefit the world?
Time and time again, I hear the claim that Wall Street benefits the world through capital allocation. What does this mean? What are the mechanics that yield a tangible positive impact on the world?
Supply side economics: When (if) HF PMs or analysts make big bonuses, they spend it lavishly and inject money into the economy (construction/design firm for new mansion, car dealer for luxury cars, etc).
But seriously, outside of a few hypocritical shills on CNBC, everyone is just here to make as much money as possible without winding up in AOC's crosshairs. If your priority is to benefit the world, finance should not be one of your top choices of a career.
Yes, of course MBS/car loans/reduced trading costs/investing for pensions/helping companies raise debt/VC are generally beneficial to society but at a very individual level, do people here actually think that they are serving society better on Wall Street than elsewhere? Maybe the VC guy or the impact investor making less than 200k feels so but the HF forum? Calling the right comps/sentiment/guidance for a company and collecting hundreds of thousands for it?
I'm not some hippie but I'm not a hypocrite either.
I'll give you a micro example.
Let's say that investors invest $100 million in two different companies. One is a new social media company, and the other company makes coal-powered cars.
At first, the companies both create a ton of jobs. The social media company hires a bunch of college grads, and the coal-powered car company opens a new factory employing tons of blue collar workers.
One year later, investors have earned a 20% return on the social media company. The media company can hire more people and grow. Investors get to make money which will eventually get put into more investments (hopefully sustainable ones like the media company which will create even more wealth and jobs in society).
Now, the coal-powered car company is a total flop. They're barely making any sales. The investment value has dropped by 50%. The company has to start laying off people and soon may have to shut down if things don't improve. Wealth and resources in society have been wasted on a project that is not profitable for investors and does not provide a sustainable place for workers either.
Basically, we want the capital of society to keep growing and keep allocating to profitable projects. If a society constantly destroys capital and consistently allocates to failing projects, naturally we're all worse off from investors to workers to even government revenues if you want to look at it that way.
*cough cough $GME Earnings *cough cough
Of course wallstreet is important to society. Wallstreets include PE, VC, banks, funds. PE funded start ups. When companies like Google/Tesla needed money at early stage, VC/PE give them money so they can do some explorations, expanding services, hiring people. When they do IPOs, banks help them raising money, so they can access to retail investors and retail investors can share their growth. When people need money, they can borrow from bank(this is wall street too) to buy their properties. These are all wallstreets capital. Insurances too, and without wallstreet, there will be no finance, no insurance, no borrow lending, no fast rising start ups and no ipos.
If it weren't for mortgage backed securities, home ownership would have never taken off
.
Broad question. You can probably get some platonic answer that helps you deal with the brain-strain-cognitive-dissonance but there’s no answer. Are you asking the right question? Or have you succumbed to the beautifully compelling “anti Wall Street” narrative people use to take advantage of others and turn them into political pawns/useful idiots? Narrative is mostly what people care about. I hops people spend less time thinking about abstract macro idealism (“Does my job benefit the world?? Am I important??”) and more time thinking about whatever the fuck is in front of their face.
For discussion purposes, I second the mortgage comments above. Feudalism never ended they just invented the mortgage backed security.
There is an answer. Societies that allow markets to allocate resources to useful and profitable projects prosper. Societies that do not fail.
Think of something like the Soviet Union as a classic example. A factory might employ 2,000 people when it only needed 1,000. Their goal was not capital allocation driven by profit incentive. Hence, the factory loses money every year, does not grow, and has to keep getting subsidies from the government.
On the other hand, you have the U.S. and Western Europe where capital can be allocated to profitable projects (aka sustainable projects which grow and can survive without subsidies). After decades, our economies became enormous thanks to these profitable allocations and the magic of compounding - the Soviet Union on the other hand is history.
Also, an example of capital misallocation is things like the housing bubble. The Federal Reserve and government policies inflated a bubble and encouraged capital allocation to unsustainable levels in housing and financial services. Capital was badly allocated and a ton of it was destroyed.
Side note: I think some people are misunderstanding the question in their comments above. Is the ability to get a mortgage something nice that the financial system provides? Sure. But that is actually a different topic from the role of the financial system as an efficient allocator of capital.
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