What the finance industry deserves

One of my favorite quotes in middle school came from the cinematic classic “Austin Powers” when Fat Bastard exclaims, “I eat because I’m unhappy! And I’m unhappy because I eat! It’s a vicious cycle.”

While at the time I appreciated this for its humor and the fact that it was mumbled by an overweight Scottish man who proceeded to expel a long and utterly disgusting flatulence, no one could have predicted that the quote would one day serve as a great analogy for the relationship between the financial sector and the top segment of the American income distribution.

Of course, by “eat,” I mean making massive profits, and by “unhappy,” I mean getting filthy rich.

The deregulation of the financial sector since the 1980s has largely contributed to income disparities between top earners and the rest of the population. In 2007, the top 1 percent of American earners received 23 percent of U.S. disposable income (a 9 percent increase since 1980). Strikingly, in 1929 the top 1 percent also received 23 percent.

I’m not saying that the deregulation since the 1980s brought us to where we are or that we disregarded the golden nuggets of truth produced by the Great Depression. I simply present the facts. You decide.

In 2007, a year after he retired from the CEO position at Citigroup, Sanford Weil said, “I think that the results our company had, which is where the great majority of my wealth came from, justified what I got.”

Weil is one of the top earners in the United States, a group whose income share sharply rose over the past few decades. Very high incomes in the financial sector, such as Weil’s, have largely contributed to the post-1980s income inequality.

By now you’ve probably read a superfluous number of news stories that shame the lack of regulation for the financial crisis. You’ve probably also been exposed to the whining of self-important, bleeding heart liberals regarding income inequalities and CEO bonuses.

But it’s relatively unknown that the two are inextricably entangled. While it has become the common knowledge that AIG executives must only park in well-lit areas and use the buddy system and that Alan Greenspan has been made into a
Congressional punching bag, few have pointed out the role played by income inequality in the collapse of the financial industry.

Since 1980, some interesting things have been happening in global financial markets.

Deregulation has been “the thing to do.” Between 2005 and 2007, the Securities and Exchange Commission, one of the main U.S. regulating bodies, cut its staff by 11 percent and slashed financial penalties in half. The 1920s economy experienced a similar state of extreme deregulation.

Both times, compensation in the financial industry was relatively imbalanced. In 2006, bankers were taking home approximately 1.7 times what comparable employees in other sectors earned.

Perhaps more importantly, growth in financial sector incomes fueled nationwide income inequality. During the Clinton era, the top 1 percent of earners accounted for 45 percent of the total growth in pre-tax income.

If that sounds impressive, consider the Bush era: During the four-year upswing overseen by none other than America’s most grammatically challenged administration, the top 1 percent captured an astounding 73 percent of the growth.

This concentration of income was a main contributor to the growth of the financial sector and in turn the emergent financial sector fed income to the top of the distribution.

As the financial sector luxuriated, consumer debt soared. While the top earners patted themselves on the back for remarkable economic growth, the average income of the bottom 90 percent actually fell between 1973 and 2006 (a dramatic contrast to the preceding decades since World War II in which that income actually grew twice as quickly as the incomes of the top 10 percent).

We normal folks began to augment our stagnant incomes with credit cards, mortgages and auto loans. Between 1980 and 2006, debt relative to personal disposable income doubled from 65 percent to 136 percent.

Moreover, fast-rising home prices allowed people to use home equity loans to pay for private education and health care. By encouraging massive lending for home purchases, the central bank fueled the indebtedness of the average Joe.

That was a lot of economic terminology and statistics to say one thing: The salaries of overpaid bankers have pillaged the entire world economy. The deregulation seen since the 1980s allowed for skyrocketing incomes, extreme complexity and non-routine risky endeavors in the finance industry. This attracted America’s smartest and most skilled students and created an income bubble within the industry while aggrandizing income inequality.

The result? Massive indebtedness for most Americans and the emergence of a supercharged financial system, increasingly fattened by the top earners who took risks and the rest of society who took loans. In 2006, that system, which had over the past two decades pulled an incredible Hulk, came crashing down.

What we need now is a return to the financial regulation witnessed between the 1930s and the 1980s.

Yes, banking was boring, and banks only paid slightly more than similar jobs in public service and education. But this era of boredom in the banking sphere coexisted simultaneously with an era of prodigious progress for most Americans.

After the Wall Street crash of the 1930s, tight regulation caused banking skill and pay levels to fall to an altitude analogous to other industries. And they stayed there for five decades.

This is terrible news for financiers – but great news for the economy. All the talent and human capital previously occupied in making paper wealth by tinkering with numbers might just begin moving into more productive fields and – gasp – creating real wealth through problem solving and science.

Several bankers have sturdy backgrounds in science or engineering, such as Sanford Weil, who holds a bachelor of science from Cornell. The United States is currently producing 30,000 less engineers than we need.

Not only would they make great engineers, these people would also be excellent supporters of manufacturing, information technology or high-tech startups. The education and nonprofit sectors could greatly benefit. Not to mention that the public sector is in need of some talent in the regulation department.

Besides, what better way to punish the financial industry for their misdeeds of the past 30 years than making them work for the good of the economy? The banking industry needs to be regulated. Forever. But that doesn’t mean that our economy or our bankers can’t prosper.