Controlling Gambling by Wall St. and the Big Banks – Bad for Business?

Anti-Wall St Does Not Mean Anti-Business

President Obama’s proposals to break up the “too large to fail” mega banks and otherwise reapply the Glass Steagall Act to the financial sector has predictably brought loud complaints that this is populist and anti-business. Even the rhetoric of the reporters and expert talking heads reflects a general bias that anything that we might do to prevent a re-occurrence of last year’s global financial meltdown is anti-business.

How Is It Anti-Business To…. or

Is the New Rule of Banking, “Privatize profits, but socialize losses (risk)”?

As a business person and a citizen I have to point out that having a sector of our economy that caused so much damage to the rest of the economy and citizens continue to conduct themselves in a fashion that is likely to cause a repeat breakdown is not a good state of affairs. How is it anti-business to want to control the gambling addictions of the financial services sector? How is it anti-business to prevent banks and other financial firms to become so large that they can place another call on the the nation’s treasury to bail them out because they indulge another round of gambling with other people’s money through dangerous leveraging? How is it anti-business to want the banking system to perform their primary function that is necessary to make the economy run, that is to take in deposits and make loans? Or, to capture this in a current diddy, we have an economy where for the financial services sector they follow this unique rule of crony capitalism, “Privatize profits, but socialize losses (risk)”.

How Is Gambling With Other People’s Money Good For Us?

How is it anti-business to call out as gambling the markets in financial “products”, these very products that the last year has shown most people in the industry itself do not understand and no one understood the risk of these products to the stability of the entire financial system that we all depend on. And, we have to note that these products depended on the use of huge amounts of other people’s money. Certainly if the creators of the products had to put up their own money instead of other people’s money, very little would ever have been traded. It all depended on a strategy of gambling with other people’s money in so-called market that looked a lot like new version of a Ponzi scheme. How is it anti-business to say to institutions who take deposits from people (insured by the public FDIC) that they should not engage in obviously very risky gambling, rather they should turn these deposits around to be loaned to individuals and businesses in the real economy where goods and services are produced by the traditional methods, not by trading in derivatives, loaning money to hedge funds and other excessively leveraged ventures. How is it anti-business to want our banks to do the traditional business of underwriting and holding their own loans? How is it anti-business that banks be subject to the same rules of capitalism that the rest of the economy is?

How Big Is The Financial Industry Anyways?

GDP Share of US Financial Industry

I suppose that it is no surprise that David Wessel of the Wall St Journal, during an interview on last night’s PBS NewsHour, would conflate anti-Wall St. and anti-business. This reflects a common rhetoric by the media that anything that upsets Wall St. (meaning here the big banks, hedge funds, and other financial services, for the most part recipients of government bailout monies firms) is anti-business. This also reflects the out-sized share of mind that the financial services sector has in our national dialogue. Stop for a moment and imagine what share of the total economy  financial services is? Look at the chart1 shown above to discover that it trends around 4% with a high in 2008 of roughly 8%. So, financial services is a large sector and one that, like electricity, telecommunications, oil, and others, one that we can not do without, yet, it is not the whole economy. It is not anti-business to want this sector to do its job within the whole economy and not do things that endanger the whole economy by risky behaviors. Just imagine our our electrical system carried out activities that might cause a complete meltdown and failure? Would we by anti-business for assuring proper processes were followed in that sector?

  1. borrowed from The Evolution of the US Financial Industry from 1860 to 2007: Theory and Evidence. by Thomas Philippon New York University, NBER, CEPR November 2008 http://pages.stern.nyu.edu/~tphilipp/papers/finsize.pdf []