By Simon Johnson
A great deal of the popular anger directed at big banks is completely legitimate, as put nicely by John Cassidy at the end of his interview with Treasury Secretary Tim Geithner,
“The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry.”
Paul Volcker is also angry.
Of course, Paul Volcker expresses himself in the measured language of a distinguished technocrat. But he is very worried about our current financial structure and where it is heading. Speaking today at the Peterson Institute in Washington DC, Mr. Volcker made two broad points (Marketwatch coverage) – both of which we also emphasize in 13 Bankers.
1. The financial sector does not add anywhere near as much social value as its proponents claim.
“The question that really jumps out for me is, given all that data, whether the enormous gains in the financial sector — in compensation and profits — reflect the relative contributions that sector has made to the growth of human welfare” (from NYT story)
2. Too big to fail banks are alive and well – and this poses a major problem to our future prosperity.
“There is an expectation that very large and complicated financial institutions will not be allowed to fail,” he said. “Unless that conviction is shaken, the natural result is that risk-taking will be encouraged and in fact subsidized beyond reasonable limits.”
The message yesterday and from other statements made by Mr. Volcker is clear. Our biggest banks are out of control and will not be reined in by the measures currently on the table. We need a much stronger approach to big banks – an approach that will strip government-backed banks of their ability to take crazy risks and, most likely, an approach that significantly constrains (and hopefully even reduces) their size.