Out of Control Policy Blog

Wall Street is Too Profitable?

I'm confused. Peter Stephens wrote a column on Monday for the Financial Times arguing that Britain should not only cut down executive pay, but the size of banks themselves. In the article he quotes Lord Turner, chairman of London's Financial Services Authority, as saying the problem is that we're making too much profit:

Last week Lord Turner threw a grenade into the debate. Thinking aloud during a roundtable discussion reported by Prospect magazine, he said bonuses were as much a symptom as a cause. Policymakers needed to ask more fundamental questions about why financial services generated such vast profits and about whether the industry had grown so big as to outstrip its usefulness to the rest of the society.

His tentative conclusions were damning. Activity for the sake of it – a characteristic of bloated and ever more complex wholesale financial markets – serves only those who manage to extract large profits from the enterprise. “Stunning” levels of pay are not a measure of efficient markets or individual brilliance, but of a market failure providing large “rents” to a small group of players.

I'm just scratching my head a little, because when, in all of history, has an industry outlived itself because it was too successful? (Maybe just armies, but even Genghis Khan and Alexander the Great could have conquered more.) The law of creative destruction says that when an industry ceases to be useful, it is replaced by something else, and that is a good thing. We didn't dump VHS because the quality was too stellar and we liked not having DVD menus with special features and the ability to skip to chapters in HD. The car didn't replace the carriage because horses provided too quick and smooth of a ride.

The financial sector does not exist simply to serve itself. All the wealth production, even activities designed simply to make money and not a product, wind up benefiting the economy on some level. Sure, some people make money from money, but they consume products with that profit. Those investors are benefiting real estate agents, fast food shops, auto dealers, Banana Republic, maid services, ballpark security, and a million other professions that wouldn't exist with out the demand created by those who spend money. And Wall Street brokers spend a lot of money.

And just a continued note on the pay issue, I still don't understand why we're picking on the salaries of financial services employees and not all the other industries that pay well. Nor have I seen a justified reason why anyone can prove they know what the right pay should be. Its all arbitrary.

Anthony Randazzo is Director of Economic Research

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Comments to "Wall Street is Too Profitable?":

Andy | September 3, 2009, 12:51pm | #

Uh, yes they're most definitely making too much profit. There's only so much wealth in the world. Yes, it is finite. If too much money and therefore, power, is concentrated in the hands of a small group of people then you can't have functioning democracies and healthy societies. Just look around. It's obvious.

willie | September 4, 2009, 11:03am | #

I agree with Andy. The profit isn't the issue, it's the wealth.

Financial innovation didn't create wealth, it merely created a way to pretend people and companies had wealth and thus these entities could live as if they did.

Basically, the last decade has been about enabling people and companies to spend more money than they have earned.

If anyone with no accounting background were to be introduced to the books at just about any publicly traded company, they would laugh at the lies that go into their accounting. They are all insolvent, just like the majority of Americans.

Rahn | September 4, 2009, 2:27pm | #

We're picking on the salaries and bonuses of the people that drove themselves AND the economy off a cliff.

Now when you drive the economy off a cliff with insane risks, there is apparently zero downside!

We effectively rewarded those types of actions with risk-free bailouts that go towards paying BILLIONS in bonuses.

Below is the definition of Bonus. I would honestly like to know how the payouts some of these clowns are receiving can be reconciled with the definition below.

1. something given or paid over and above what is due.
2. a sum of money granted or given to an employee, a returned soldier, etc., in addition to regular pay, usually in appreciation for work done, length of service, accumulated favors, etc.

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