For the uninitiated, it’s quite easy to read Simon Johnson’s piece and jump to the conclusion that there is some financial elite conspiracy to take over the US government. However, it’s not quite like that. I’ve read Simon’s articles for a long time now, and the points he’s hammering home are the following:
– people in high positions in the government are not corrupt. But they really believe that a sophisticated financial system is good for the country. It’s been true for so long, after all. The anglo-saxon countries, with deregulated financial systems, did so much better over the past 20 years than the stodgy Continental Europe. Also, many of those people have worked in finance in the past, so they have an inherent bias.
– compensation in the financial services industry has reached stratospheric levels, resulting in a serious mis-allocation of labor. The best and brightest used to go to work for Harvard or MIT, or Boeing or Intel, now they go to Wall Street, because there is so much money to be made. That’s not so good. As someone with a PhD in a math-related field, I can personally attest to that: many of my peers ended up working on Wall Street, and I also considered the prospect quite seriously a few years back.
– finally, since the financial system has grown too large for its own good, it’s time to heavily regulate it. It’s not worth having 20 years of nice growth and fat profits, if it can blow up and take down the entire economy with it periodically. It’s just not worth it.
I think Simon is on to something, although only time will tell whether he’s right or wrong. Most people in charge (Geithner, Bernanke) seem to believe that the financial system needs only to be fixed, rather than completely gutted and replaced. They might turn out to be right in the end. But the truth is, nobody knows for sure today.
