COMMENTARY: Don’t cry for Wall street

 On April 22, President Barack Obama went to Manhattan, where he urged an audience drawn largely from Wall Street to back financial reform. “I believe,” he declared, “that these reforms are, in the end, not only in the best interest of our country, but in the best interest of the financial sector.”
       Well, I wish he hadn’t said that — and not just because he really needs, as a political matter, to take a populist stance, to put some public distance between himself and the bankers. The fact is that Obama should be trying to do what’s right for the country — full stop. If doing so hurts the bankers, that’s OK.
       More than that, reform actually should hurt the bankers. A growing body of analysis suggests that an oversize financial industry is hurting the broader economy. Shrinking that oversized industry won’t make Wall Street happy, but what’s bad for Wall Street would be good for America.
       Now, the reforms currently on the table — which I support — might end up being good for the financial industry as well as for the rest of Americans. But that’s because they only deal with part of the problem: They would make finance safer, but they might not make it smaller.
       What’s the matter with finance? Start with the fact that the modern financial industry generates huge profits and paychecks, yet delivers few tangible benefits.
       Remember the 1987 movie “Wall Street,” in which Gordon Gekko declared, “Greed is good”? By today’s standards, Gekko was a piker. In the years leading up to the 2008 crisis, the United States financial industry accounted for a third of total domestic profits — about twice its share two decades earlier.
       These profits were justified, Americans were told, because the industry was doing great things for the economy. It was channeling capital to productive uses; it was spreading risk; it was enhancing financial stability. None of those was true. Capital was channeled not to job-creating innovators, but into an unsustainable housing bubble; risk was concentrated, not spread; and when the housing bubble burst, the supposedly stable financial system imploded, with the worst global slump since the Great Depression as collateral damage. So why were bankers raking it in? My take, reflecting the efforts of financial economists to make sense of the catastrophe, is that it was mainly about gambling with other people’s money. The financial industry took big, risky bets with borrowed funds — bets that paid high returns until they went bad — but was able to borrow cheaply because investors didn’t understand how fragile the industry was.
   So what should be done? As I said, I support the reform proposals of the Obama administration and its congressional allies.
       But these reforms should be only the first step. We also need to cut finance down to size.
   An intriguing proposal is about to be unveiled from, of all places, the International Monetary Fund. In a leaked paper prepared for a recent meeting, the fund calls for a Financial Activity Tax — yes, FAT — levied on financial-industry profits and remuneration.
       Such a tax, the fund argues, could “mitigate excessive risk-taking.” It could also “tend to reduce the size of the financial sector,” which the fund presents as a good thing.
       Now, the IMF proposal is actually quite mild. Nonetheless, if it moves toward reality, Wall Street will howl.

0
0

NO COMMENTS