After the meltdown and the bailout, many Americans -- perhaps most Americans -- are inclined to see Wall Street as predatory and all-devouring. Striding into the lion's den and calling the beast to heel, as President Obama did Thursday, was a move without a downside.Paul Krugman:
Obama's tone was not that of a sword-wielding avenger - he doesn't do fire and brimstone - but of a stern parent explaining to party-hearty teenagers why their driving privileges are being curtailed.
Remember the 1987 movie “Wall Street,” in which Gordon Gekko declared: Greed is good? By today’s standards, Gekko was a piker. In the years leading up to the 2008 crisis, the financial industry accounted for a third of total domestic profits — about twice its share two decades earlier.The liberal in me wants the government to go further. The big banks should have been broken up at the beginning of the crisis, and derivative trading should be banned all together. But I'm not an economist. In fact, give me a dollar to invest and I'll more than likely get a return of about negative fifty cents.
These profits were justified, we were told, because the industry was doing great things for the economy. It was channeling capital to productive uses; it was spreading risk; it was enhancing financial stability. None of those were true. Capital was channeled not to job-creating innovators, but into an unsustainable housing bubble; and when the housing bubble burst, the supposedly stable financial system imploded, with the worst global slump since the Great Depression as collateral damage.
So what should be done? As I said, I support the reform proposals of the Obama administration and its Congressional allies. Among other things, it would be a shame to see the antireform campaign by Republican leaders — a campaign marked by breathtaking dishonesty and hypocrisy — succeed.
But these reforms should be only the first step. We also need to cut finance down to size. An intriguing proposal is about to be unveiled from, of all places, the International Monetary Fund. In a leaked paper prepared for a meeting this weekend, the fund calls for a Financial Activity Tax — yes, FAT — levied on financial-industry profits and remuneration.
Such a tax, the fund argues, could “mitigate excessive risk-taking.” It could also “tend to reduce the size of the financial sector,” which the fund presents as a good thing.