NYT: Fat Cats Need Their Fat

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Aaron Ross Sorkin offers a dire warning about the perils of low-paid bankers:

Mr. Pandit and others — to the extent you believe they are the right leaders of Citigroup — or whoever takes their roles are unlikely to hang around if they’re not amply paid.

The risk, Mr. Johnson said, is that if we taxpayers don’t offer the possibility of a payday, we won’t get the performance. “If you were in senior management and you knew you’d never get paid, you’re not going to work as hard or you’ll leave,” he said. “It’s actually worse if they stay. If you have a bunch of demoralized people hanging around, it will kill you.”

This seems like an odd worry to me. What would happen if we staffed the banks with a bunch of second-rate people? Would they drive their institutions into the ground, requiring billions in government funds to keep their firms afloat, and in the meantime drive the entire world economy into a serious recession? Oh, right, that’s what already happened. Felix Salmon adds the observation that “insofar as lower bank salaries would drive America’s best and brightest into other sectors of the economy, that would surely be a good thing.”

That last part seems important to me. I think it should be viewed as pretty distressing that over the past twenty years a large proportion of people with high-level quantitative skills have gone into the finance profession rather than working in the science and engineering fields they were trained in. That influx of quants into finance could, in principle, have been about developing a much more efficient allocation of capital, but I see little reason to believe that actually took place. Instead, their role seems to have been something more like that of a celebrity endorser for a product. The fact that LeBron James wears Nikes in exchange for money doesn’t actually do anything to improve the quality of their sneakers, but his association with the product gives it an air of legitimacy and helps the marketing a lot. And running a hedge fund or an investment bank or a private equity whatsits is, yes, in part a question of making savvy financial decisions. But it’s also in large part a question of running a savvy marketing campaign, of tricking people into believing convincing people that they can get super-normal risk-adjusted returns by going with your firm. Having a lot of kids with fancy degrees and weird Russian physics PhDs on hand might help you do that. But long-run growth and productivity would be better-served by having those people do basic research or make stuff.