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Feudal Lords of Finance

In some influential circles, these questions are now asked: What’s wrong with high levels of inequality in general, and with having very rich bankers in particular? After all, human societies have survived the presence of extremely wealthy individuals in the past--in fact, some now argue, the presence of such a “new aristocracy” can finance growth and spur innovation.

This argument is deeply flawed along three dimensions.

(1) Such super-elites care very little for anyone other than themselves. Certainly, there will be some charity--but remember that John D. Rockefeller’s greatest donations came after he had been dragged through the mud by some very persuasive rakers (Ida Tarbell).

(2) It is a mistake to assume that any country’s institutions (the laws, rules, and norms that govern behavior) are fixed for all time. In reality, institutions change all the time--partly in reaction to who has wealth and power, and what they are trying to do. What are the odds that our financial super-rich will want to build democracy and strengthen the middle class?

(3) Can the rich and powerful really be counted on to save the system, or just themselves? Go back carefully through the early history of the Great Depression (see Lords of Finance). Certainly the big New York players saved banks and securities firms that were seen to be part of their club (e.g., Kidder Peabody), but they--and the New York Fed--were not so inclined to save financial institutions they regarded as less than central (e.g., Bank of the United States), even if this meant thousands of people lost their life savings.

When the Bank of England’s Andrew Haldane speaks of a “doom loop,” he is describing the declining future for our middle class. Powerful financiers, by and large, did just fine during the Great Depression.

[Cross-posted at The Baseline Scenario.]