Let’s hurt the American financial services industry

By Felix Salmon
April 13, 2009

Pejman Yousefzadeh is upset:

The brain drain that the American financial service industry may face thanks to increasing regulation, the pursuit of class warfare rhetoric and policies by the Obama Administration and its allies, and the tendency to blame the current economic downturn on entities like hedge funds, which had nothing to do with the financial crisis, will only serve to hurt the American financial service industry down the road.

Well, yes. Think of it as a Pigovian policy response: you tax and regulate the stuff you want less of. And it’s pretty clear that the financial-services industry was far too big, before its crash. Recall Simon Johnson:

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent.

Financial services companies are meant to be intermediaries, middlemen. And any time that the middleman is taking 41% of the total profits in what’s meant to be a highly competitive industry, there’s something very wrong.

So yes, I do want to “hurt the American financial service industry down the road”, if by “hurt” you mean bringing its profits down to something less than 20% of all domestic corporate profits. That doesn’t seem unreasonable to me. And I especially want to hurt the American financial service industry down the road if by “the American financial service industry” you mean the too-big-to-fail banks which have caused such an enormous systemic risk to the global economy. Yes, I want to see them hobbled, much less powerful, and much less dangerous.

So no, I don’t have any particular interest in buying freshly-issued shares of Goldman Sachs at these levels. Buying shares is a bet on steady future growth. And Goldman is too big already. I want it to get smaller, not bigger. It was the imperative to grow which caused many of the problems at places like Merrill Lynch and Bear Stearns. Which makes this kind of equity offering part of the problem, not part of the solution.

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