How can Wall Street escape its ‘dead end’?

John Snow’s line about how the US “overdid finance versus the real economy” appears in chapter four of the Financial Crisis Inquiry Commission’s report on the causes of the Great Recession in 2008.

Snow and Angelides are not the only people thinking along these lines. Felix Salmon, Reuters’ financial blogger, had an oped yesterday entitled “Wall Street’s Dead End,” anchored in a similar argument.

“…[t]he stock market,” Salmon writes, “is becoming little more than a place for speculators and algorithms to compete over who can trade his way to the most money.” Salmon also points out the depressing fact that the German outfit seeking to buy up the New York Stock Exchange is doing so mainly out of a desire to enlarge its share of the global trade in derivatives – that is, a brand of paper financial instruments that once existed mainly to help mitigate risk, but now fuels a gigantic speculative trade, with little connection to the real economy.

The headline on Salmon’s oped says it all – Wall Street seems to be at a dead-end.

It is too proud to continue in its old role (per Angelides’s complaint) of raising money for American industrial companies to expand production, buy new equipment, train new workers, research and develop new products, etc. At the same time, it is too addicted to back away from trading in exotic instruments like derivatives, mortgage-backed securities, etc.

If there’s an escape from the dead end – and we must hope there is one – it may begin, in all places, in the small town of Niles, OH.

Have you ever been to Niles? Niles’ main claim to fame is that it is the birthplace of President William McKinley. You’ll find a large monument there to McKinley, which includes a set of busts and tablets that pay homage to once-famous 19th century and early 20th century local entrepreneurs.

An old guidebook says that these “busts and tablets [in Niles commemorate] men whose influence has made itself felt in a marked way on the history of America through its industrial development, all of them being pioneers and pathfinders in the discovery and utilization of our natural resources, from which has sprung our national greatness.”

I once stopped in Niles for a couple of hours while on a road trip, and I read over the inscriptions on the tablets. All of the people mentioned on the tablets, as far as I could tell, were involved in manufacturing some product locally, or in introducing some technological process or machinery that permitted new products to be made in Ohio.

All of them had a firm connection with the “real” economy, with the production of tangible goods. Or, put another way: none of them would count as heroes on Wall Street today. None of them created new forms of derivatives contracts. None invented new algorithms for high-frequency trading.

If these tablets in Niles have a message for Wall Street in 2011, what would that message be? It might be a reminder that, to be lasting, America’s “national greatness” has to be based on something more substantial, more tangible than world leadership in the derivatives trade.

There’s still time for Wall Street to hear this message, and change course.