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May 20, 2009

The Great Rearranging Hits Wall Street

We've long been noting that recessions can actually prove a boon to innovation and to small businesses, as the opportunity cost of not worki

Marc Tracy

bizbox.slate.com



We've long been noting that recessions can actually prove a boon to innovation and to small businesses, as the opportunity cost of not working at a large corporation shrinks, as do the consequences of failure. Most recently, we pointed to iEntrepreneurship--a.k.a. designing iPhone apps--as a perfect example.

Whether you've been laid off by whatever tech company (or other sort of company) that you work for, or whether you've quit out of growing despondency at having to continue the daily rat-race grind even as your prospects for a raise or job growth, to say nothing of your stock options, have decreased, many people with ample talent and enterprise are finding themselves going into business for themselves. It's a great rearranging (or The Great Rearranging: if you can think of a better name for this phenomenon, which you probably can, tell us in the comments!).

Yesterday, the New York Times reported on perhaps The Great Rearranging's epicenter: Wall Street. (See picture: Gordon Gekko is telling you you should leave!) The financial industry's top dogs have seen their glamour factor plummet more steeply than the Dow, and with parallel remunerative loss. And so, says the Times, "Top bankers have been leaving Goldman Sachs, Morgan Stanley, Citigroup and others in rising numbers to join banks that do not face tighter regulation, including foreign banks, or start-up companies eager to build themselves into tomorrow’s financial powerhouses." It's of course the latter that we care about.

Not surprisingly, this rearranging appears to be in everyone's interest (well, except for the Goldman Sachses of the world). "Financial experts believe it is the beginning of a broader and necessary reshaping of Wall Street, too long dominated by a handful of major players that helped to fuel the financial crisis. The country may be better off if the banking industry is less concentrated, they say." The article goes on to quote an NYU finance professor: "Innovation is spreading out too. This is a good thing."

Indeed, the essential disappearance of the investment-banking industry--with all five of the major i-banks having either switched to less flexible and more regulated bank holding companies (Goldman, Morgan Stanley), been bought by bank holding companies with the aid of ample federal government subsidy (Bear Stearns, Merrill Lynch), or, er, filed for bankruptcy and disappeared (Lehman Brothers)--has left an absolutely gigantic vacuum for start-ups who now know that the only way to survive is to stay relatively small. And the fact is that, though those massive institutions listed above got way out of control, i-banking remains a valuable and useful--actually, an essential--service for the economy as a whole.

Furthermore, to echo the NYU professor, even innovation in the financial industry, the fruits of which have been given an extremely bad name in recent months, isn't necessarily a bad thing. In theory, credit default swaps were a good idea, potentially a way for cautious investors to hedge their assets. It was only in the hands of out-of-control and underregulated financial supernovas like AIG that they turned sour (admittedly very, very sour).

So it's not hard to see how The Great Rearranging, even (especially) in the financial sector, is going to benefit the country as a whole: new financial businesses should be able to provide the type of innovation that lets the United States maintain its global financial and economic predominance while using the benefit of experience (and being hemmed in by tougher, smarter regulation) to avoid future catastrophe. And it's not hard to see how The Great Rearranging over all industries will produce similar results.

Our only additional hope is that the influx of small businesses into what even now remains one of the most important, lucrative, and politically powerful of industries will give all small businesses a louder voice in the political process. A blogger's gotta dream.


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About the Author

Marc Tracy

bizbox.slate.com