The problem of Wall Street profits
Matt Yglesias gets my point wrong here: The profits of Wall Street don't bother me for reasons of social justice or inequality. Rather, I don't believe you can effectively regulate the financial industry so long as it's sucking up about a third of domestic profits. The incentives to take massive risks will just be too great. The power to bribe Washington to dismantle regulations and legislation will be irresistible over time.
The situation is worsened because the financial sector doesn't face the countervailing political pressures that other industries face. Take health-care reform. That's a rich industry, of course, and it gets a lot of what it wants. But there are also forces on the other side. Dozens of powerful legislators such as Henry Waxman and Jay Rockefeller who understand the issue and continually push toward a more just system. Wealthy advocacy groups and foundations that spend heavily to create a better system. An enormous Washington-based expert class that members of Congress trust and ask for counsel.
Wall Street faces none of these opponents. Once the memory of this crisis fades a bit, they're basically alone in the issue space. There's little in the way of politically connected expertise. Few legislators have strong, preexisting interest and understanding of the issue. There's no real advocacy community. Maybe there'll be somewhat more of all this after this crisis finishes. But I doubt there'll be that much. And that makes me very skeptical that regulatory solutions will survive for very long. There's money, expertise and interest on one side of the ledger, and the other side is likely to be spending its time on other things. How long till one party or the other needs to fund a tough reelection campaign and cuts a quiet deal with the financial sector? Particularly in a post-Citizens United election environment? It's probably more than five years, but is it more than 15?
But Matt and I do agree about the solution: Taxing Wall Street such that it's no longer so incredibly profitable. That's how you get at the basic incentive of outsized risk offering unimaginable reward. Such a tax would probably need to be global, as anything like this would really be a material change to the banking sector, which makes it doubly unlikely.
Graph credit: Paul Krugman
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