Paul Krugman says ...

8 Words of Wisdom for Week Ending 4/17/2009 #4

Thirty-plus years ago, when I was a graduate student in economics, only the least ambitious of my classmates sought careers in the financial world. Even then, investment banks paid more than teaching or public service — but not that much more, and anyway, everyone knew that banking was, well, boring.

In the years that followed, of course, banking became anything but boring. Wheeling and dealing flourished, and pay scales in finance shot up, drawing in many of the nation’s best and brightest young people (O.K., I’m not so sure about the “best” part). And we were assured that our supersized financial sector was the key to prosperity.

Instead, however, finance turned into the monster that ate the world economy ...

Before 1930, banking was an exciting industry featuring a number of larger-than-life figures, who built giant financial empires (some of which later turned out to have been based on fraud). This highflying finance sector presided over a rapid increase in debt: Household debt as a percentage of G.D.P. almost doubled between World War I and 1929.

During this first era of high finance, bankers were, on average, paid much more than their counterparts in other industries. But finance lost its glamour when the banking system collapsed during the Great Depression.

The banking industry that emerged from that collapse was tightly regulated, far less colorful than it had been before the Depression, and far less lucrative for those who ran it. Banking became boring, partly because bankers were so conservative about lending: Household debt, which had fallen sharply as a percentage of G.D.P. during the Depression and World War II, stayed far below pre-1930s levels.

Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.

Wait, unrestrained capitalism doesn't always work? I'm not exactly shocked here. Here's the first indication that an industry should be heavily regulated: its collapse can bring down the entire economy. Seems almost like a no-brainer for me.

Can banking be made boring again? Well, the bankers themselves will fight it tooth and nail. As Krugman points out, "boring banking would mean poorer bankers". Speaking as an American who is not a banker, so? Boring is good. Boring is solid. Boring is better for everybody.

We need a Glass-Steagall Act for the 21st century. It is time to usher in a new era for banking that backs a new period of economic progress. The conservative practice of little to no regulation has been exposed. The time has come to scrap it.

Source - The New York Times