Business and FinReg
Justin Fox asks an important question: What should the business community want from financial reform? And why aren't we hearing from them?
Take, for example, the by now well-documented phenomenon (it began in the 1980s) of financial workers making substantially more money than those with similar skills and educational backgrounds in other industries. For a while it was possible to contend with a straight face that this was okay because all those brilliant, highly paid financial sector workers were doing such a great job of allocating capital and making the rest of the economy run smoothly. You can't really say that anymore, and we're back to the argument — made by a few economists in the early 1990s but then largely abandoned — that by draining talented workers from the real economy the financial sector's high pay is actually a drag on long-run economic growth.
So while the rest of the business world needs a financial sector that's healthy enough to extend credit, it also ought to favor a regulatory structure that keeps the financiers from getting too big for their britches. Explicit restrictions on pay tend not to work, so the real goal should be to rein in financial-sector profits, especially the phantom profits that come from inflating speculative bubbles. That's where leverage limits come in, and restrictions (like the "Volcker rule" that's kinda/sorta included in the Dodd bill) that try to wall off riskier financial activities from those deemed so essential that they're backed up by government guarantees.
When will we hear nonfinancial business leaders making these arguments? Well, maybe never, and not just because of the conflicted nature of the big business groups. A frothy and powerful financial sector is probably bad news for business as a whole, but it's generally good news for top executives. The spectacular boom in CEO pay that began in the early 1990s has been very much a Wall-Street-driven phenomenon. So it's not really in the short-term interest of individual corporate executives to crack down on the financial sector.
That last point is an important one: What's good for businesses and what's good for CEOs are sometimes very different things. CEOs are more conservative than most of the population, they're more annoyed with government because they tend to deal with the regulatory state, and they're less in need of help than many of their workers. But they're the ones who speak for business in this country. It's an interesting contrast with the labor community, which sees itself as speaking more directly for workers and has been a staunch friend of both health and financial reform.
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