We all read the op-ed. We all have our opinions on investment banks. And admittedly, it is very easy to demonize people and institutions – it is certainly simpler than addressing the real, complex issues. It also takes the blame off ourselves, because we’re part of the system. But, beyond all the hype and emotion, there is something significant about how investment banks – Goldman Sachs is the most famous – are creating enormous wealth for themselves, but not contributing much (if anything) of value to society.
This is not how capitalism is supposed to work. This is not “creative destruction” – Schumpeter’s vision of entrepreneurs disrupting inefficient systems and profiting from making them better – this is simply the enrichment of a few smart, lucky men at the expense of everyone else.
Theoretically, investment banks help allocate capital towards its most efficient use. They help governments and companies raise money, they help with mergers and acquisitions, and they create securities which should distribute risks or at least give clients more choices about the risks they take. But in reality, up to 80% of M&A destroys value, opaque securities have created endemic risks in our society, and there are astounding conflicts of interests between clients and investment bankers – the very same bank that is floating your company’s shares has a long term relationship with the hedge funds who are purchasing the stock. Who is the bank really serving?
Investment bankers are among the highest paid members of society – the smartest students are falling over themselves to be admitted into summer programs on Wall Street. Society is telling young people: this is where you’ll add the most value, and this is where you’ll be most richly rewarded. It’s not the students’ faults – with the skyrocketing costs of higher education, many need the money just to get back in the black.
But when America starts to tell people that creating nothing (or making things worse) will make them rich, you know there’s a problem. We have a shortage of engineers, catastrophic failures in our medical system, and we have a major political party who is struggling to find even one smart person to run for President (cough). Yet our brightest are going to Wall Street – in many cases, to rip people off.
It’s not clear what has caused this system or how to get out of it. It’s not just because corporate boards want to use the “top tier” firms to avoid potential litigation: the Big Four audit firms have an oligopoly which they don’t seem to be abusing to the same degree. Has capitalism changed somehow? Has America simply stopped creating real wealth in other areas of society so the only thing to do now is to constantly shuffle it around in Manhattan?
The only thing that is clear is that this is bad news, and it foreshadows American decline. We need our smartest brains figuring out how to fix our national budget, deal with the tremendous costs of the baby boomers aging, and figuring how to address climate change – probably the most profound issue that has ever faced our species. But, even with scathing New York Times Op-Eds, the smartest minds won’t be solving real problems; they’ll be applying for jobs at Goldman.