Why Paulson Can’t Clean Up the Pollution on Wall Street

When Adam Smith wrote about the “invisible hand” in 1776, he referred to the natural forces that allow the market to correct for seemingly disastrous situations with no intervention on the part of government. Unfortunately, the natural forces of the market are no longer relevant. Wall Street’s ecosystem has been polluted by a flawed broker-dealer model, leveraged complexity and a lack of proper oversight.

Why Paulson Can't Clean Up the Pollution on Wall Street
Photo: kelnishi, Creative Commons, Flickr

Every crisis, whether it’s financial or environmental, creates the political will to find a solution. So far, political leaders have been slow to react to the financial crisis, but at least they are doing something. They still need to do more, and the decisions they make over the coming weeks will determine our collective fate.

Personally, I have been bearish for more than a year now, and I closed all my short positions last week. I am now sitting around on cash and waiting to see how political leaders resolve the crisis. It’s a very confusing situation and no one knows what lies ahead.

To find some order in the chaos, I use an analogy between the financial crisis and the environmental crisis. Environmentalists argue that we can’t continue to use fossil fuels, and that we need to create more sustainable sources of energy. In the same way, Wall Street can’t continue to rely on unregulated free markets fueled by reckless leverage, and financial regulators will have to develop a more sustainable model for the future. If we don’t use this crisis as a starting point to reshape Wall Street, we will forever be trapped in a cycle of bigger bubbles and bigger crashes.

That is why Paulson should resign as Secretary of the U.S. Treasury. As the previous CEO of Goldman Sachs, he is a symbol for the flawed broker-dealer model that has polluted Wall Street’s ecosystem. He has a vested interest in perpetuating the old ways. To put him in charge of rebuilding Wall Street is like putting a big oil executive in charge of developing alternative energy sources.

I don’t want to sound melodramatic, but we might be in for a “lost decade” in the stock market if the next Treasury Secretary perpetuates Wall Street’s flawed model. I will start buying stocks again when Wall Street’s model becomes more sustainable, and I hope that happens sooner rather than later.

Disclosure: I admire Paulson as an executive but not as a politician. I closed all my short positions last week.