The Wall Street meltdown continues and people are asking themselves “How come we have to pay $700 billion to bail out firms that collectively spend more than $700 billion every year paying their employees?” In recent decades Wall Street has grown from 6 percent of the U.S. economy to something like 10 percent, while providing the same basic menu of services: taking companies public, selling bonds, managing investments. The bailout angers taxpayers because anyone who can do arithmetic can see that more than $700 billion was taken out of Wall Street in the form of employee bonuses during the years of the real estate/mortgage bubble. The people who created the bubble, in many cases engaging in frauds of various kinds, were rewarded handsomely and are now relaxing in their Greenwich, Connecticut mansions deciding whether to take out the yacht or the private jet. Wall Street firms did not retain their exceptional profits during the years of fraud, but rather paid out almost all of it to the executives and rank-and-file employees who engineered the fraud. (Actually if they had retained some of these profits they wouldn’t be needing a bailout!)
The anger is easy to understand, but what is tough to understand is why the middleman’s share of the U.S. economy has grown so much. When houses were cheap and people lived in them for 20 years, the realtor’s 6 percent commission wasn’t a huge slice of the economy. Houses became very expensive and people flipped them quickly, which has raised realtor commissions to roughly $60 billion per year. We have a huge sector of the economy mostly doing stuff that wouldn’t need to be done if Americans would get a little more organized in their use of Google Maps and other Web sites (see this New York Times article on Madison, Wisconsin, where “for sale by owner” houses sold for about the same price as realtor-sold houses). The realtor commission was only the beginning of the feast for middlemen during the real estate bubble. Somehow Americans weren’t able to find mortgages on their own, so every town was filled with mortgage brokers making $100,000 to $150,000 per year. Local banks weren’t able to sell mortgages upstream without, apparently, giving tens of billions of dollars in fees every year to Wall Street firms.
The Internet was supposed to make markets more efficient, yet since the early 1990s, when Web access became universal, the American people have devoted an ever-larger share of their paychecks to middlemen.