Welcome to Wonk Wars, a weekly feature from It's A Free Country as part of the Brian Lehrer Show's 30 Issues in 30 Days. Early each week, we'll post one of those issues in the Wonk Wars sections of the website and invite two or more policy experts to start the discussion online, along with your input. Then, each Thursdays, the conversation continues on-air at the Brian Lehrer Show.
Opening statement from Greg David, Director of the Business & Economics Reporting Program at CUNY Graduate School of Journalism
Will financial reform send jobs fleeing from New York?
Actually, this is the wrong question to ask.
The re-regulation of financial services is a worldwide phenomenon. Capital requirements are being raised in every country that is a financial center, and mostly in a coordinated way. Last year, Britain imposed a penalty tax on bonus payments while the United States did not; the bonus tax did not result in a flood of jobs back to the U.S. The geographic threat comes from taxes--the possibility that New York will raise taxes on hedge funds and private equity firms sending them to Connecticut or that ending the Bush tax cuts for the wealthy will send those people abroad.
The question that is of the moment is whether financial deregulation will shrink Wall Street dramatically as star analyst Meredith Whitney believes or that it will reduce compensation in the securities industry. Some shrinkage is certain, but I think it may be offset by growth in smaller firms and boutiques. Similarly, I believe compensation will be less over time and how much less depends on how much boutiques and hedge funds increase.
Opening statement from Nomi Prins, former managing director at Goldman Sachs, Senior Fellow at Demos, and author of It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions.
Meaningful bank reform wouldn’t result in a tangible number of jobs leaving New York City (aside from the yearly pilgrimage of hedge fund god wannabe’s to Connecticut for better tax treatment). As we have witnessed firsthand, recently – it is the inevitable crash of improperly restrained, reckless banking activity that gives rise to widespread economic pain, including job cuts, throughout multiple sectors.
During the past two years since the banking system was given an unprecedented adrenalin shot of cheap money, guarantees, toxic asset transfers, and Fed backing for the biggest institutions to become bigger, two things have happened: Wall Street profits and bonuses have come roaring back, and job prospects and conditions for those outside of the financial industry, have deteriorated. None of that is because of the financial reform bill, not least because no stipulation from that bill has taken effect. Secondly, the bill is exceptionally weak in general.
The financial reform bill doesn’t meaningfully alter the banking landscape. It doesn’t make bigger banks smaller – instead, the Federal Reserve decisions to allow Goldman Sachs and Morgan Stanley to become bank holding companies, to enlarge Bank of America through the acquisition of Merrill Lynch, JPM Chase through the acquisitions of Bear, Stearns and Washington Mutual, and Wells Fargo through the acquisition of Wachovia have only consolidated federally backed practices. Any related job cuts came through the cast-offs that occur when companies merge. They were thus, a result of the opposite of bank reform or prudent regulation.
Further, under the Dodd-Frank Act, banks won’t have to separate into investment vs. commercial entities as they did when Glass-Steagall was enacted in 1933, which would contain problems and choices resulting from the creation of speculative assets at entities providing deposit and lending services to Main Street. The bill barely limits proprietary trading and hedge fund ownership, plus banks don’t garner a sufficient enough revenue percentage for this to make a huge difference. At any rate, prop spinoffs are tending to be staffed by current employees, so no job change there.
The financial reform bill won’t change Wall Street – one need only to look at the recent Bloomberg survey stating that half the financial execs polled, expect their bonuses to rise by 50% or more, to know that banking is at status quo. Meanwhile, people in other fields, from fashion to journalism, teaching to sculpting, caring for the sick to caring for the elderly, don’t have the same prospects for bonuses or jobs. If we had meaningful financial reform, we might be better protected from the next round of speculative excess that will explode in our faces, causing more job losses. We would be better insulated from the illusionary highs and crushing lows that Wall Street can imbue on the rest of the city. Meanwhile, job losses in New York City have not been the result of strong regulation, but of a financial sector that wasn't regulated enough, and still isn't.
The financial industry has fed New York's economy for more than two decades. Finance quadrupled its share of nationwide corporate profits between the early 1980s and the 2006 credit-bubble peak. As finance competed with the economy nationwide rather than supported it, New York benefitted, at least in the short term. Finance's contribution to New Yorkers' wages and salaries topped out at over 35 percent in 2006, an increase of 50 percent in less than two decades.
Such growth can't go on forever, though, or finance eventually would be the economy. Properly governed free markets should prevent this distortion. Banking and finance need the same kind of creative destruction that invigorates the rest of the economy.
Unfortunately, we don't have properly governed free markets in finance. Washington's banking "reforms" indemnify much of the financial industry from such forces and from the renewal that they bring about. Brand-name banks are still too big to fail. The Federal Reserve's current policies, too, artificially prop up finance. The Fed's attempts to jumpstart inflation by purchasing more than a trillion dollars' worth of assets - possibly much more in the coming months - have encouraged speculation in currencies, commodities, and bonds - meaning business for finance, even as other businesses remain paralyzed by uncertainty.
Washington's treatment of finance as its favored "private" industry may seem good for New York. But it's not. New York needs to wean itself off an economy where middle-class job creation doesn't matter and where public-sector costs can rise and rise because there are always a few rich bankers at the top to pay for it all. We need middle-class jobs to define our private sector. But a government-coddled Wall Street suffocates what otherwise would be a natural, healthy evolution.
Washington's treatment of finance isn't good for Wall Street, either. No business can thrive globally when its business model is not customer-oriented innovation but rather maintenance of its status as a protected political class.