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U.S. Investor Democracy Bites Back

How does the entrance of millions of Americans into the stock market change the way Wall Street works?

July 15, 2002

How does the entrance of millions of Americans into the stock market change the way Wall Street works?

Historically speaking, U.S. financial markets have hardly been democratic. But with more than 50% of U.S. households investing in the stock market, what had once been the prerogative of the country's elite has become “democratic” as all Americans gained access. "Democratic" in the sense of the market means two things: First, it requires that everyone have equal access to investment vehicles. And second, everybody must have an equal say in what happens.

Despite a lot of rhetoric in the past about welcoming all investors, the reality of Wall Street was quite different. Certain investments — often the most lucrative — were available only to the rich or well-connected.

For everybody else, there was the modest interest rate to be earned in savings accounts held at banks.

Decision-making in the financial community was even more limited. Only those in the elite ranks of certain professions could participate in debates about how the markets were run.

Everybody else was told that the issues were either too arcane — or too technical.

Of course, money itself is quite democratic. A dollar is a dollar, and that is why the lure of a few dollars from many people eventually broke apart some of that clubbiness in the early 1990s.

Institutions like mutual funds, which allowed small investors access to what were once elite investments, were finally ready for prime time — and began to shape U.S. financial markets in powerful ways.

More than anything else, they helped propel the boom in the stock markets. And until last year, Wall Street was quite content with the change.

Whatever the talk of "democratic capitalism" and the "retail investor revolution" might have implied, to the investment professional, it primarily meant one thing: higher commissions and more liquid — and rising — markets.

But this revolution also introduced to the markets a lot of new people with different ways of thinking. After all, if over half of Americans are invested in a market, they will expect the market to reflect general U.S. ideals of fairness and democracy — not the strange interpretations of the Wall Street elite.

That is the big misunderstanding that both Washington and Wall Street are grappling with at present. When they talk of restoring that confidence, they just want to prime the pump — and get all those retail investors to put their money into the market again — so priceswill rise.

But the famous U.S. retail investor has become quite leery of seeing himself or herself essentially relegated to the status of financial cannon fodder. They have a starkly different vision of restoring investor confidence.

To them, the real meaning of the current scandals is that they are bringing the ideals of U.S. democracy to U.S. financial markets.

What seemed OK to Wall Street insiders does not seem OK to the millions of people who invested in the market assuming that, as an American institution, it reflected genuine American values.

Those values include democracy, openness, fairness and transparency. And if the markets do not reflect those values — well, all of the new investors are now determined to see a change. Even the president be damned — if he does not make sure of that.

Thus, the usual defenses of Wall Street's typical methods of doing things are simply being brushed aside in the debate. Just because "everybody was doing it" — and it was "legal" — does not make all those shady self-enrichment practices right if they were unfair and undemocratic.

The stance of high Enron executives over that company's 401(K) plan illustrates this. Everything about the plan was perfectly legal and correct.

And yet, the losses of the regular employees that had money in it are held up as exhibit "A" in the case against greedy executives. And faced with that powerful reality, the old "excuses" don't hold up any more.

Ultimately, Wall Street got what it wanted. It achieved an "investor democracy" with large numbers of Americans holding relatively sophisticated investments.

And Wall Street is now discovering that, like political democracy, investment democracy really does take the power out of the hands of the elite — and puts it into the hands of the people.