Wall Street’s masters of the universe are a shameless bunch, their egos swelled with a sense of entitlement that would make the old railroad robber barons blush. Their predations are largely responsible for the worst economic crisis since the 1930s, but they don’t get it.
They are in denial about the damage they’ve caused worldwide. That’s why Kenneth Feinberg, the so-called pay czar, had no choice but to cut compensation for executives at seven companies that received government bailouts: The companies were prepared to reward abysmal performance with huge paychecks.
But pay cuts won’t tame the excesses on Wall Street. If the White House doesn’t insist on strict regulatory reform, the nation will see another banking crisis, perhaps worse than this one, within a decade, many experts say.
Last year’s huge taxpayer-financed bail-out of the banking industry remains extremely unpopular with Americans, who don’t think they got anything out of it. It’s likely, though, that the massive federal intervention prevented another Great Depression. Without the bail-out, the nation’s economic engines — sputtering even now — would have ground to a halt.
But given the behavior of the bankers, you can understand the resentment from Main Street. With the official unemployment rate at virtually ten percent, most Americans wonder why moguls like Kenneth Lewis, outgoing head of Bank of America, walk away with their reputations blemished but their fortunes largely intact. Wall Street is still expected to pay a record $140 billion in compensation this year.
Unfortunately, the Wall Street wizards have learned only one lesson from the economic cataclysm: They can do whatever they want because they’re too big to fail. The government will have to bail them out if they get in trouble again because their failures would take the entire economy down the tubes. And they’re right. When they implode, they cause collateral damage that ripples throughout a globalized economy.
“Those banks that were too big to fail, are now bigger. . The idea that the government is not going to let these banks fail, which was implicit a year ago, it’s now explicit. . Potentially, we could be in more danger now than we were a year ago,” Neil Barofsky, special inspector general of the Troubled Asset Relief Program, told CNN recently.
Nobody, including President Obama, wants the government in the business of setting compensation for Wall Street executives or automotive industry moguls. America is a country that greatly respects the capitalist impulse — a creative force that rewards risk-taking.
But the government can’t allow industry to get away with privatizing the profits and socializing the risks. We are all best served when investment banks can take risks which affect only their stockholders.
The White House ought to seriously entertain a proposal from former Federal Reserve chairman Paul Volcker, who has proposed preventing commercial banks from participating in the sort of risky investment schemes that brought ruin to many of them.
There’s a good reason why the nation hadn’t seen a crisis like this since the 1930s; the Glass-Steagall Act, passed in 1933, prohibited bank holding companies from owning other financial companies. In other words, it kept a thick wall of separation between traditional banking — holding deposits, making loans, etc. — and the sort of risky trading that was the province of Wall Street investment houses. But Glass-Steagall was watered down over the last several years and finally repealed in 1999 in a bipartisan bit of folly.
The White House, though, has resisted Volcker’s proposal. That’s partly because the bankers are pushing back furiously against even less-sweeping regulation. But it’s also because the Treasury Department is itself a captive of Wall Street. Successive administrations, Democratic and Republican, have been taken in by the siren song of investment bankers, who claim that a new Glass-Steagall would unfairly cripple them in a global economy.
So what if their recklessness cripples the rest of us?