Truthout, October 6, 2008
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There is a joke circulating on the Hill these days. “What is the technical term for a Wall Street investment banker who supports free trade?” The answer of course is “liar.”
In spite of the $700 billion bailout package, Wall Street is going the way of the steel industry in Pittsburgh. The financial industry in the United States is hugely bloated and hopelessly uncompetitive in international markets. In this way, it shares similarities to the U.S. steel industry in the late 70s, except Wall Street is much more poorly situated.
While workers in the steel industry may have been somewhat more highly paid than their counterparts in Europe, Japan, and South Korea, the differences were comparatively small. By contrast, nowhere else in the world do bankers get paid annual salaries in the tens or hundreds of millions of dollars. Until these salaries are pushed down closer to the pay scales in other financial markets, Wall Street will have a very difficult time competing.
The $700 billion bailout package slows Wall Street’s day of reckoning. The Wall Street gang, with its huge campaign contributions and friends in high places, such as Treasury Secretary Henry Paulson, is better positioned to get protection than steelworkers or textile workers. But, as we all know, you can’t just build walls around the country.
Perhaps our trading partners will protest the subsidies to Wall Street, which may violate our commitments under various trade agreements, but even if they don’t, the days of the Wall Street crew are numbered. Their conduct over the last 15 years has shattered their reputation both nationally and internationally.
The fact that so much junk was passed along to international investors as top quality debt means that in the future foreign investors will no longer trust the assets that Wall Street firms are marketing. Similarly, the fact that so many small towns and cities were ripped off on auction rate securities and other financial instruments probably means that the investment bankers will not be welcomed in large parts of the country for many years into the future.
While innocent people will undoubtedly be hurt as Wall Street adjusts to the modern global economy, there will be important gains to the country. In fact, the principles economists cite when extolling the benefits of “free trade” may actually apply to some extent to Wall Street.
The resources tied up in Wall Street will find better uses in other areas. Specifically, the tens of thousands of highly educated workers who made huge salaries on Wall Street may find something more productive to do with their lives than shuffling complex derivative instruments. Some might become doctors, engineers, or research scientists – areas where they could make important contributions to society.
And, if it is not plausible for many of the people who are currently losing their job to pursue these alternative career paths, certainly it will be possible for the people who are now in college or grad school in the hope of pursuing a high-paying Wall Street career. By eliminating the Wall Street path, other relatively high-paying jobs will look much better.
In other words, we will be less likely to have doctors who think that they are making huge sacrifices by earning $200,000 a year. Without Wall Street as a basis of comparison, doctors’ salaries would look very good even to doctors.
The public has every right to be outraged over the bailout. It gives taxpayers’ dollars to some of the richest people in the country, precisely because they messed up on their job. That means money is flowing from school teachers and firefighters to the top executives at Citigroup, Goldman Sachs, and other well-connected financial behemoths.
But this is just a stop gap measure. In the longer term, the financial sector will contract and salaries will be brought back down to earth. Protectionist policies can buy the Wall Street crew some time, but in the longer run, the market will win out, forcing large cuts in pay and employment. At last Wall Street will feel the sort of job loss and pressure on wages that it so eagerly sought to impose on workers in other sectors of the economy.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.