Stephen Labaton has a great piece in the New York Times that takes the sort of longer view that sometimes falls out of the news, narrowly defined. What he does is look at the mortgage cramdown fight as an illustrative case about how much power the banking lobby continued to wield. Irrespective of your views on the merits of the particular issue, the larger trend is clear and it’s also disturbing. When there’s a financial meltdown, and the state needs to step in with hundreds of billions of dollars in funds, you expect a scenario to unfold in which the financial elites have their political power broken and a moment arises in which some fundamental reforms can be enacted. But given the situation that Labaton describes, it’s difficult to see fundamental reforms taking place. That’s not to say that we won’t have some kind of new regulation, but we almost certainly need some sterner stuff than a reshuffling of the regulatory boxes.
Take a look at this excellent post from Brad DeLong. He identifies six important functions of high finance:
— To aggregate the money of people who ought to be savers into pools large enough to finance large-scale enterprises.
— To channel the money of people who ought to be savers to institutions and people who ought to be borrowers.
— To spread risks so that no one individual finds herself ruined by the failure of any one investment or the bankruptcy of any one company or the slow growth of any one region.
— To keep managements efficient by upsetting and replacing teams and organizations that have outlived their usefulness.
— To encourage savings by creating liquidity—the marvelous fact that one can own a piece of an extremely illiquid and durable piece of social capital (an oil refinery, say) and yet get your money out quickly and cheaply should you suddenly have an unexpected need for it.
— To take the money of rich people who like to gamble and, by providing some excitement for them as they watch their gains and losses, use it to buy capital equipment that raises the wages of the rest of us (at the price of paying a 20 percent cut to the Princes of Wall Street). This is a superior use for the rich—and for the rest of us—than, say, taking their wealth to the craps tables of Vegas.
As he observes:
By these standards, the current compensation scheme on Wall Street—large annual bonuses based on annual marked-to-market results—is absurd. It helps achieve none of these six goals, and it greatly increases the chance of a crash by providing everyone with an incentive to help their friends by marking up value, marking down risk, and ignoring the impact of their actions on the long-term survival of the enterprise. Silicon Valley compensation schemes seem much better: no large payouts until assets have reached maturity and portfolio strategies have proved their value in all phases of the business cycle.
And I think that just about everyone who’s looked at it has agreed that there’s something screwy about the compensation systems that were in place on Wall Street as the bubble inflated and then burst. But obviously these schemes are in place because the people running the show like them. And given Wall Street’s continuing clout on the Hill, it seems clear that nobody’s going to take this issue on through legislation. Which means we may well find ourselves having this conversation again in 10 years after a new terrifying bubble-panic cycle.