The bill of indictment:
The rich under attack: The first charge is that the rich created a new form of heads-I-win-tails-you-lose capitalism. Traders and fund managers got huge rewards for speculating with other people’s money, but when they failed the parent company, the client and ultimately the taxpayer had to pay the bill....
The second charge is that the bankers and fund managers were not doing anything useful. Unlike the “deserving” rich entrepreneurs who set up Microsoft and Google, the “undeserving” traders and brokers just shuffled money around the system to nobody’s profit but their own.... At its peak it contributed 41% of domestic American corporate profits, more than double the rate two decades ago.... Far from epitomising capitalism, the undeserving rich undermined it: it was socialism for the wealthy....
The plea:
(T)he second (charge) has much less justification.... (T)here is nothing inherently undeserving about finance... more liquid markets have brought huge benefits.... The lower cost of capital has made it easier for industry to invest, innovate and protect itself against interest and exchange-rate risk....
The heads-I-win charge is not entirely proven, either: some of the people who ran banks did lose when they went bust. Yet... the basic capitalist bargain, under which genuine risktakers are allowed to garner huge rewards, seems a poor one if taxpayers are landed with a huge bill....
(T)he system is already beginning to correct itself.... (T)he rich are not as rich as they were.... Inequality will decline.... Having discovered how volatile markets can be, banks will be less keen on trading in the future.... Higher taxes will eventually be inevitable, since so many governments have lurched heavily into deficit.... (G)overnments... should first get rid of deductions and reverse unmeritocratic measures (such as George Bush’s repeal of America’s death tax)....
As for heads-I-win capitalism, the problem of asymmetric risk should shrink, because the rule changes needed to make the financial system safer will also remove unwarranted profits.... Curbing the excesses of wealth... will be a side effect of regulations designed to make capitalism work better. Such measures... are going to be better than going after the wealthy. The rich are an easy target. But when you try to bash them, you usually end up punching yourself in the nose.
I find the plea on the first charge--that it is "not entirely proven"--unconvincing. Guilty. The sentence is steep progressive income taxes on the superwealthy.
I find the plea on the second charge unconvincing too. The rise in profits from 20% to 40% would have been justified had finance produced (a) better corporate governnance and thus better management, or (b) more successful diversification and thus a lowered risk-adjusted cost of and a higher risk-adjusted return to capital. There is no evidence that a sector that could not provide good corporate governance to itself was successful at providing good corporate governance to its clients. And the claim that modern financial markets provided successful diversification is to laugh: if it had we would not be here now, would we? Guilty as well.
I think the sources of finance's outsized payrolls are to be found: (a) in the naivete of investors who are not able to calculate what they are paying people who are essentially gambling with their chips in the casino--investor who should be entrusting their money to Vanguard and PIMCO but cannot figure that out--(b) in the naivete of corporate CFOs who overpay for financial products so that they can tell their CEOs "yes, we are hedged"; and (c) in the naivete of the stockholders of financial services corporations who did not insist that the traders they hired keep all their money in the firm in order to give everybody an incentive not to take equity-destroying risks. And none of these three are reasons to believe that the payrolls ever corresponded to the effect of their actions on social welfare.
The sentence should be (a) Silicon Valley compensation structures for Wall Street, (b) government oversight of tax-preferred savings vehicles, with (c) the government hiring Vanguard and PIMCO to run low-fee index funds as the default investments for such vehicles.
The Economist should find a better client.
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