Rewiring the Banker Brain
A culture shift is still needed to reconnect finance with the real economy.
If you are in any doubt about how little has changed on Wall Street since 2008, check out yesterday’s front page New York Times story about how banks like Goldman Sachs and Morgan Stanley profited wildly by hoarding and slowing the supply of various commodity metals like aluminum, driving up prices on the global market in the process. It was a truly ingenious profit-making scheme, involving sophisticated arbitrage of complex global regulations, all of which resulted in lots of money for banks, and higher prices for companies and consumers.
This story put me in mind once again of the fact that many of the best minds on Wall Street still spend the majority of their time figuring out new and smarter ways to game the system, rather than how to grease the wheels of the real economy. Just look at the record profits posted by a number of the world’s largest banks last week. The six largest are on track to post a 20% earnings increase in the second quarter of this year. But the vast majority of that money came not from lending, but from trading. While the money spigots to the small and new businesses that create most of the jobs in this country are still tight — like last year, small business lending was down again this year, according to the Small Business Administration — trading profits are way up.
Clearly, finance is still disconnected from the real economy, which is one reason that the regulation battle rages on. A new proposal issued jointly a few days back by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency would require some of the country’s largest banks to hold double the amount of reserve capital that they currently do. This has prompted all the usual complaints from the industry about too much regulation. Former Minnesota governor Tim Pawlenty, now the head of bank advocacy group the Financial Services Roundtable, said the new rules would make “it harder for banks to lend and keep the economic recovery going.”
(MORE: Gordon Gekko Lives: New Evidence That Greed Is Rampant on Wall Street)
Putting aside the fact that lending in key areas of economic activity hasn’t been growing, as I noted above, it’s also worth remembering that even before the new rules were proposed, many banks were complaining that they couldn’t lend because there weren’t enough credit-worthy clients to lend to. “You can’t have it both ways,” says Susan Ochs, a former Treasury Department advisor and senior fellow at the Aspen Institute who is doing research on best practices in banking. “The arguments have a certain level of disengenousness.”continue reading »