What Obama Should Tell the 'Occupy Wall Street' Movement

Financial industry used to play a vital role in economic growth.

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My admittedly impressionistic sense of the "Occupy Wall Street" movement is that those who are protesting would like to see radical change in the way our economy is structured: that the very system of finance capitalism is the root of our troubles.

I'd like to see President Obama, in addition to admonishing OWSers not to "demonize" the financial sector whole cloth, explain to the public how much financial institutions contributed to the lifestyle they had either aspired to or become accustomed to leading.

This is a story that needs to be told from the center, since the right has a constitutional difficulty ascribing any blame whatsoever to the private sector.

[Vote: Should Obama Endorse "Occupy Wall Street?"]

It starts with admitting that, for the last 10 years or so, the financial industry lost its collective mind. Its explosive growth bore almost no relation to any value it was adding to other parts of the economy.

That's the excoriation part of the story.

But it's not the whole story. Before the Aughts, the size of this sector (relative to overall GDP) waxed and waned according to the rate at which economic growth was being driven by emerging industries and start-up firms that needed access to capital.

What did all those "masters of the universe" do to help people in the "real" economy?

They paid for innovation before the rest us were prepared to.

[See a collection of political cartoons on Occupy Wall Street].

Economist Thomas Philippon of New York University's Stern School of Business explained in July 2009:

The financial industry was around 1.5 percent of GDP in the mid-19th century. The first large increase between 1880 to 1900 corresponds to the financing of railroads and early heavy industries.

The second big increase between 1918 and 1933 corresponds to the financing of the electricity revolution, as well as automobile and pharmaceutical companies. GE did its IPO in 1913, GM in 1920 and Procter & Gamble in 1932. Key discoveries of the 1920s and 1930s, such as insulin and penicillin, became mass-manufactured and distributed.

After a continuous collapse in the 1930s and '40s, the GDP share of finance and insurance industries was down to only 2.5 percent of GDP in 1947. It recovered slowly and was mostly stable at around 4 percent until the late 1970s, and then grew quickly to reach 8.3 percent of GDP in 2006.

The third large increase, from 1980 to 2001, corresponds to the financing of the [information technology] revolution.

And then Philippon's kicker: "From 2002 to 2006, I am not quite sure what the financiers were doing. Or rather, I am not sure that the services provided by insane trading volumes and real estate derivatives were worth the price tag."

The point of this narrative is that there's a baby and there's bathwater. 

How many conservatives have snickered at the OWSers because they use iPhones, social networking sites, and other corporate products?

[See photos of the Occupy Wall Street protests]

That's silly.

The financial system that undergirds productive risk-taking isn't the same wildly overleveraged system that engaged in the kind of grossly irresponsible speculation that led us to the brink of depression. (Indeed, as Georges van Hoegaerden observed on the Wall Street Journal's "Venture Capital Dispatch" blog, Steve Jobs succeeded despite, not because of, the prevailing ethos of most venture capitalists.)

Sadly, from critiques of the OWS movement and from the movement itself, all we're getting is competing versions of silly.