The Price of Everything - Eduardo Porter [61]
Take banking. Finance today is one of the most lucrative industries for bright college graduates. But it wasn’t always this richly paid. Financiers had a great time in the early decades of the twentieth century. From 1909 to the mid-1930s they made about 50 percent to 60 percent more than workers in other industries. But the stock-market collapse of 1929 and the Great Depression changed all that. In 1934, corporate profits in the financial sector shrank to $236 million, one eighth what they were five years earlier. Wages followed. From 1950 through about 1980, bankers and insurers made only 10 percent more than workers outside of finance.
To a large extent this mirrors the ebb and flow of restrictions governing finance. A century ago there were virtually no regulations to restrain banks’ creativity and speculative urges. They could invest where they wanted, deploy depositors’ money as they saw fit. After the Great Depression, President Roosevelt set up a plethora of restrictions to avoid a repeat of the financial bubble that crashed in 1929.
Interstate banking had been limited since 1927. In 1933, the Glass-Steagall Act forbade commercial banks and investment banks from getting into each other’s business—separating deposit taking and lending from playing the markets. Interest-rate ceilings were also imposed that year. The move to regulate bankers continued in 1959 under President Eisenhower, who forbade mixing banks with insurance companies. Barred from applying the full extent of their wits toward maximizing their incomes, many of the nation’s best and brightest who had flocked to make money in banking left for other industries.
Then, in the 1980s, the Reagan administration unleashed an unstoppable surge of deregulation that continued for thirty years. By 1999, the Glass-Steagall Act lay repealed. Banks could commingle with insurance companies at will. Ceilings on interest rates had vanished. Banks could open branches anywhere. Unsurprisingly, the most highly educated returned to finance to make money. By 2005, the share of workers in the finance industry with a college education exceeded that of other industries by nearly 20 percent. These smart financiers turned their creativity on, inventing junk bonds in the 1980s and moving on, in the last few years, to residential mortgage-backed securities and credit default swaps. By 2006, pay in the financial sector was again 70 percent higher than wages elsewhere in the private sector. Then the financial industry blew up.
Since the end of 2008, when the demise of the investment bank Lehman Brothers sent financial markets into a tailspin around the world, bankers have argued insistently against regulatory efforts to limit their remuneration packages, observing that curtailing financial activity will hamstring their ability to hire the best of the best. That’s perhaps true. The new financial regulations passed by Congress in 2010 may reduce the financial sector’s profitability. Bonuses might suffer.
Still, this is probably a good thing. Only 5 percent of the men who graduated from Harvard in 1970 would end up working in finance fifteen years later. By the 1990 class it was 15 percent. Meanwhile, the percentage of male graduates going into law and medicine fell from 39 percent to 30 percent. Of the 2009 Princeton graduates who got jobs after graduation, 33.4 percent went into finance; 6.3 percent took jobs in government. From our current vantage point, this looks like a misallocation of resources. For the good of the rest of the economy, bankers should earn less.
CHAPTER SIX
The Price of Free
TO THOSE WHO believe the Internet will change everything, October 10, 2007, marks a minor watershed. On that day, the British