With Goldman Sachs and Wells Fargo paying multi-billion dollar settlements after admitting to being less than truthful about their mortgage practices, it’s possible other banks on Wall Street might come clean. There is much debate about whether sub-prime mortgages were a conscious (and idiotic) attempt at making a ton of money, or if the banks were as in the dark about the consequences as consumers were before the financial crisis of 2007-2008.
It’s easy to blame the banks, they’re the ones who had the power and they knew exactly what they were doing – right?
Steve Eisman, the hot-headed portfolio manager from the Big Short (played by Steve Carell in the movie), claims that banks suffered enough during the financial crisis. Despite being critical of bank practices, Eisman claims it was the banks’ innocent obsession with leverage (using debt to make more bets and purchases), that led to the crisis – not predatory sub-prime loans. Eisman described Spring 2007 as a “macabre game of musical chairs, whoever was left holding the loans was dead”. After the crash, the Federal Reserve and Securities Exchange Commission set out to make the financial system significantly less risky (with stress tests and the like),and crack down on bank regulators and liquidity requirements.
Eisman claims the banks are not the problem, income inequality is. Breaking up the banks would be “incredibly difficult, long and disruptive… lowing our economy even further”. Instead he says we should focus on the use of more credit to supplement lower incomes, obscuring the fact that incomes haven’t grown since 2007. According to him, personal income growth has stagnated, contributing to a wider income gap.
I appreciate the opinion, but does Eisman really think income inequality and personal income growth are not at all intertwined in big banking? Sure, the CEO of Goldman Sachs and I have a massive difference in income that doesn’t represent income inequality as a whole – but I doubt that Wall Street doesn’t have at least a hand in the stagnation of personal growth. The bottom line is that the banks are the only ones with the money and resources to compensate for the jobs, homes and wealth lost by consumers. Someone making a mistake, even an honest one, does not preclude them from suffering both the natural and imposed consequences.
Good take – here’s another published this week by Noah Smith that in ways complements your argument: