Shredding the veil: the Wall Street myth rampaging through Main Street

By Brendan Maton

Financial commentators in the US often talk about Wall Street and Main Street. Wall Street is home to the New York Stock Exchange and several major banks that ply their trades there. Main Street represents the rest of the economy: people who don’t work in big finance.

You might think from the amount of news coverage given to Wall Street that it has always been a central focus of economists. But classical economics concentrated on Main Street; finance and money was elegantly viewed as but a veil to the workings of the “real economy”.

At the latest lectures in UCL Institute for Innovation and Public Purpose (IIPP)’s Rethinking Capitalism series, however, the veil was described by Andy Haldane, Chief Economist at the Bank of England, as a ‘monetary myth’.

The danger with this myth, continued Haldane, is that some economists still held it well into this century. Their naïvety contributed to the Great Financial Crisis of 2008–9, when big banks failed, credit dried up and economic growth collapsed. Which led governments to instigate austerity policies, which stoked the rebirth of populism (not a perfect chain of consequences — other influences are explored in the Rethinking Capitalism lectures — but the links are strong).

Wall Street is not a flimsy veil over Main Street but a rampaging bull. Hundreds of millions have felt some kind of pain because of its recklessness but they still don’t know how banks actually work. For Josh Ryan-Collins, head of research at the IIPP, that matters because ten years and much regulation after the Great Financial Crisis, the bull has hardly been tamed.

He begins with the ABC of banking: deposits are not ‘used’ to make loans as in commonly understood. Instead, when someone takes out a loan from a bank, that money is created with a simple keystroke and a new electronic deposit credited to the borrower’s account. The bank’s balance sheet expands. Smart readers will have deduced already that physical cash — created by the Bank of England — therefore does not equal all the money in circulation. In fact, coins and notes only account for about 3% in advanced economies.

That explains why when the first tremors of the Great Financial Crisis were felt in the UK in September 2007, folk were down on Main Street at their local bank the following morning queuing to withdraw their savings. What maintains the modern banking system where money is created as debt at a ratio many times a bank’s holdings of cash? Banks in the UK have to keep reserves with the Bank of England as a partial guarantee. They also keep hold capital in the event of loans defaulting. Haldane pointed out that these have risen thanks to tougher regulation since the Crisis. But neither covers all a bank’s liabilities, which is why you still get queues forming in times of stress. The rest of the time it is only confidence in the system that perpetuates it.

The Great Financial Crisis was a rare moment when the big banks on Wall Street decided they no longer had confidence in each other as counterparties. A couple, notably Lehman Brothers, died as a result.

How does this look like from the perspective of a central banker? Huge salaries on Wall Street and the City of London have attracted a lot of rocket scientists, engineers and statisticians to work on calculating risk. That is important because risk minimised or at least managed, preserves the vital confidence.

But Haldane is sceptical of banks’ ability to retain confidence by means of their own risk management tools. The Great Financial Crisis demonstrated that all the eggheads were not very good at managing risk. Haldane shows a good graphic of why complexity sometimes does not improve things. Naïve equal weighting of each asset of each bank would have made better predictions than their actual risk models did of assessing which would fail in the Crisis. If you want some sense of how crazy that is, one bank that failed, Lehman Brothers, went down holding assets as diverse as works of art and uranium. Valuing sketches by Lucian Freud, 45,000lb of yellowcake and US$639bn worth of other assets as each equally valuable really should not work.

But surely the Bank of England has superior systems, and surely more integrity than commercial banks, who might listen to the nerds in risk management then decide to put on a risky trade for bull-headed reasons of greed anyway?

Yes and no. Haldane confessed that the Bank got a lot wrong, from risk management to seeing finance as a veil to the real economy. But he staunchly defends the Bank’s main response, which was to inject almost half a trillion pounds of liquidity into the financial system. He claims this measure, Quantitative Easing, saved at least half a million jobs in the UK.

Where does that leave us in 2019? Haldane says this is the most exciting time for anyone entering the world of monetary policy, a characteristically diplomatic hint that there is much more rethinking of the relationship between Wall Street and Main Street to do.

For Ryan-Collins, policy makers, at least in the UK, have failed to address the rotten structure of banking, which has become ever more reliant on mortgage lending and lending to other parts of the financial system while simultaneously reducing the proportion of loans to small and medium businesses.

For the IIPP, lifting the veil on British banking reveals a bloated property market, not a balanced economy.


Josh Ryan-Collins is Head of Research at the UCL Institute for Innovation and Public Purpose (IIPP) and recently presented a lecture as part of of our Rethinking Capitalism undergraduate module on “Money, credit and finance”. These lectures will be released weekly to the public. Follow us on YouTube for more or check this page weekly.

Sign up to the UCL Institute for Innovation and Public Purpose’s mailing list to hear about our latest research, news and events. You can also follow us on Twitter: @IIPP_UCL.

UCL IIPP Blog

The official blog of the UCL Institute for Innovation and Public Purpose | Rethinking how public value is created, nurtured and evaluated | Director @MazzucatoM | https://www.ucl.ac.uk/bartlett/public-purpose/

UCL Institute for Innovation and Public Purpose

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Changing how public value is imagined, practiced and evaluated to tackle societal challenges | Director: Mariana Mazzucato | Deputy Director: Rainer Kattel

UCL IIPP Blog

The official blog of the UCL Institute for Innovation and Public Purpose | Rethinking how public value is created, nurtured and evaluated | Director @MazzucatoM | https://www.ucl.ac.uk/bartlett/public-purpose/

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