(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
Sept 12 Of the many regrettable aspects of the
failure of Lehman Brothers, perhaps the worst is that it led to
policies which expanded and reinforced economic inequality in
the U.S., often through unfair means.
When Lehman went down five years ago it set in train forces
which could easily have led to the failure of many financial
institutions. Faced with the possibility of taking large swaths
of the banking system into effective government control, first
the Bush and later the Obama administrations chose instead to
shelter institutions and executives from the consequences of
That involved creating a variety of policies which
subsidized large banks and helped to dig a moat around their
businesses. This went hand in hand with monetary policy which
both supported banks and kept artificially high the value of
financial assets and real estate.
The reasoning behind the bailouts ran that, though it was
patently unfair to shield banks from market discipline, to
continue on despite being not simply illiquid but bankrupt was
better than the damage which would be caused by the alternative.
As for extraordinary and easy monetary policy, central
bankers maintained that keeping banks afloat and ramping up the
value of assets were simply side effects of policies the main
intent of which was to rescue the economy and create jobs.
Both of those arguments are very contentious, but one thing
which isn't is that the net result of the policies has been to
increase economic inequality.
Income in the U.S. is as skewed to the top end as it has
been since the Census Bureau began keeping reliable records in
1947, and after falling in 2007, inequality has risen in each
successive year. When you measure inequality in the distribution
of wealth, the owning of assets, the U.S. is now the fifth most
unequal country in the world, trailing only Namibia, Zimbabwe,
Switzerland and Denmark.
Monetary policy has been key in increasing inequality
because, as the ownership of assets was heavily skewed going
into the crisis, a policy which supports asset prices has the
effect of exacerbating inequality in wealth terms. This is borne
out by a 2012 study from the Bank of England. (here)
Remember too that this is part of the point of quantitative
easing, to create a wealth effect where people feel better off
and hopefully spend some of their paper gains.
MORE EGGS BUT FEWER OMELETS
QE may or may not be temporary, and the uplift to asset
prices isn't likely to last forever. More permanent, and more
troubling, is the way in which the bailout solidified the
position of finance, a sector which at its current size acts as
a private and unproductive tax on the rest of us.
Because regulation has yet to solve the too-big-to-fail
problem, in which the largest banks get cheaper funding due to
the belief that they won't be allowed to follow Lehman into that
great good night, we have an unlevel playing field in finance.
We also have an effective subsidy, or rather multiple
subsidies, to an industry which has proved itself remarkably
immune to the power of technology to bring down costs and
Whereas retail and wholesale trade have shrunk as a
percentage of GDP, finance has risen and risen, from 15 percent
in 1980 to close to 22 percent today, with the rise continuing
even in the face of the greatest financial crisis since the
Great Depression. (here)
That's in large part because finance is a sector run by and
for the benefit of employees, who use complexity and government
licenses to extract unfair rents from clients. That's very clear
if you compare compensation to other similarly complex fields.
To sum up, we had a sector which had grown too big and was
acting as a drag on the economy, all while doling out too much
in client money to insiders. Our reaction to bad decisions and
the verdict of the market was to create even more incentives to
commit capital to banking and give special status to some banks,
all while failing to hold executives accountable.
You can just about make a case that some of the rise of
inequality in the U.S. is the result of globalization and talent
getting its just reward.
It is also, sadly, the result of financialization, in which
we give incentives to the talented to do perverse things with
our money and keep too much of it for themselves.
The policy response to Lehman Brothers has cemented that. We
may have to wait for another crisis to see it undone.
(At the time of publication, Reuters columnist James Saft did
not own any direct investments in securities mentioned in this
article. He may be an owner indirectly as an investor in a fund.
For previous columns by James Saft, click on )
(Editing by James Dalgleish)