The Power of Denial on Wall St.

You gotta love this discussion on the mouthpiece for the financial industry, CNBC. First, one of then panelists makes the ever-popular “there isn’t political will” argument regarding breaking up banks which are “too big to fail” — I’d like to see the polling data that he’s basing his opinion on (oh, sorry, there is none, he’s basing his opinion on the other bankers he’s been talking with over drinks). Then, as each of the panelists discusses their suggested regulatory schema (surprise, surprise, the banker wants no new regulations at all), the debate shifts to whether there should be a larger, all-ecompassing regulatory agency, similar to the one in the UK. This of course is a convenient way to frame the argument, because it puts the “blame” for the current — and, yes, it is a current crisis, despite the panel’s insistence that it’s all over now and the markets have stabilized — the blame is all on the regulators who somehow didn’t do enough to stop these companies from taking dangerous actions that were, and continue to be, entirely legal.

What is entirely missing from this discussion is that the crisis — and if you put the focus where it belongs, on balance sheets instead of the Dow Jones Average, it continues to be a crisis — the crisis was caused by innumerable actions by innumerable people who were simply doing what they were incentivized to do.

When briefly during the same discussion it is suggested that perhaps bonuses should be based upon the long-term equity of firms rather than short-term profits, this is dismissed as unworkable, with the nonsensical retort that Wall Street workers would flee to foreign firms, as if, in some Galtian revolt, people with homes and kids will just uproot their families and move en masse if they are asked to be responsible.

The discussion keeps circling around increasing capital requirements as the silver bullet that will solve everything, even though later in the same discussion, increasing capital requirements is derided as a move that would make most of those “too big to fail” financial behemoths unrprofitable.

So, let’s add this all up:

1. Reasonable capital requirements are the only way to fix the system;
2. Reasonable capital requirements would be enough to overwhelm the advantages of scale which are the reason for being of the largest banks;
3. Increasing the regulatory power of the government will not help;
4. Writing regulations which address the underlying causes of the current crisis will not prevent the next one, which is certain to be different;
5. Thus, there is no point in doing anything, including incentivizing safer investment practices through changing bonus structures.

So, essentially, CNBC just wasted your time by presenting a panel whose purpose was to determine how to do the impossible. The only solution is to just let businesses fail, because no one on Wall Street will really suffer, their huge bonuses already tucked away, and who really cares if the rest of the economy (and all those unimportant non-bankers) are thrown in financial ruin and economic chaos?

Let’s get real: one change, and one change only, would have more impact than any of those discussed here: change the tax policy applied to Wall St. bonuses. No need to limit the size of the bonuses legislatively or to regulate the structure. Simply tax the bonuses as income, not as capital gains, and use the funds generated as the basis for a “bailout” fund when banks crash again — i.e., let the people who are causing the problem pay for the problem, and directly assume the risk that they have passed on to all of us.

There are precedents for individual investors, who are disincentivized from “flipping” stocks rather than holding them, because short-term gains are taxed at a punitive rate. While this doesn’t stop all speculative behavior, it does slow the train down a bit.

Let the John Galts of the world take all the risks they want, in a truly “free market”, and let them also pay to clean up the mess that they create through foolhardy actions.