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January 17, 2008
Finance or not-finance
David Wessel's Capital column in the Wall Street Journal today is about the bursting of the financial sector's pay bubble:
First came the bursting of the tech-stock bubble, now the bursting of the housing bubble. The bursting of a bubble in finance -- and the pay of those who helped make the tech and housing bubbles possible -- can't be far behind.
But the column isn't really about punishing the high-fliers. It is about whether we need that much brain power going into financial services:
Modern finance is, truly, as powerful and innovative as modern science. More people own homes -- many of them still making their mortgage payments -- because mortgages were turned into securities sold around the globe. More workers enjoy stable jobs because finance shields their employers from the ups and downs of commodity prices. More genius inventors see dreams realized because of venture capital. More consumers get better, cheaper insurance or fatter retirement checks because of Wall Street wizardry.
But financial innovation is like splitting the atom: Nuclear power offers energy without greenhouse gases, but nuclear weapons can blow up the planet. It all depends on how wisely it is used. Helping promising companies raise capital? Vital to U.S. prosperity. Devising, selling and trading mortgage-backed securities so complex that no one, even those Harvard grads, can fully understand them? Could be a waste of talent and energy.
Yes, the Harvard-trained physician who helps venture capitalists pick among competing cures for cancer may help millions instead of the hundreds of patients he or she might have treated directly. But tens of billions of dollars of losses in new-fangled investments at the largest U.S. financial institutions -- and the belated realization that some of those Ph.D.-wielding, computer-enhanced geniuses were overconfident in the extreme -- strongly suggests some of the brainpower drawn to Wall Street would have been more productively employed elsewhere in the economy.
And it looks like many of those folks will get the chance to find out if that is so.
I'm glad to see that he is differentiating between true financial innovation and extracurricular financial engineering -- the needed and the froth (see my earlier posting). I'm not sure, however, that a downturn that forces folks out of finance will only reduce the froth - and not also prevent real (and needed) financial innovations. I'm also not sure that all these "overconfident" "Ph.D.-wielding, computer-enhanced geniuses" which will be switching to other fields will necessarily increase the productivity of those other areas. To be productive in these creative fields, people need to be passionate about what they are doing. Taking a job in a different industry after being kick out of Wall Street is not necessarily the formula for passion. Let us hope all the (soon to be?) released brain power really does go to productive uses.
Posted by Ken Jarboe at January 17, 2008 11:10 AM
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