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Bankers Versus Capitalism

When it comes to defending private enterprise, Wall Street is its own worst enemy.

Jan 16, 2012, Vol. 17, No. 17 • By IRWIN M. STELZER
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Most surprising are the objections of leaders of the banking community to quite sensible reforms, their willingness to sacrifice long-term support for the market system to the desire for short-term profits. It is true, for example, that higher capital requirements for banks, requirements that “don’t go nearly far enough” according to John Cochrane, finance professor at the University of Chicago, will reduce their profits. That is so—but only because requiring banks to hold more capital reduces the risk of failure or the need for bailouts, risks that have until now been borne by taxpayers.

Also difficult to understand is their failure to comprehend that some practices, such as imposing retroactive increases in interest rates on bank credit cards, are deeply objectionable to consumers, even if technically justifiable. And their failure to realize that large bonuses at a time when 25 million Americans can’t find any or enough work are an excess they might want to forgo in the interests of maintaining support for the system that has been kind to them—including bailing them out when they hit the rocks. One investment bank warned its highflyers not to be seen in Porsche showrooms, so it’s not as if these bonus recipients are unaware that something potentially unpleasant is brewing out there in the world beyond their office towers.

Bankers are not alone in their failure to understand that something must be done to prevent the opposition to many features of the current system from creating an atmosphere that will support “reforms” so draconian that the resulting system will retain few of the virtues of the existing one. The corpocracy at times seems equally obtuse, as when its leaders call for repeal of the provisions of the Sarbanes-Oxley law that make it easier for shareholders to rid themselves of underperforming directors, and require that directors be truly independent, rather than chums of the CEO, especially when serving on compensation committees. The breaking of the link between performance and reward that results from friends-of-the-CEO boards of directors does as much to undermine capitalism’s claim to legitimacy as financiers’ obtuseness about their responsibility to act as if they are members of a society that extends beyond executive dining rooms and country clubs.

I am not one who sees in the Occupiers the wave of the future. They are not the real worry to those of us who fear for the future of market capitalism in America. It is the failure of the major beneficiaries of the capitalist system to understand that openness to reform, combined with a bit of restraint when carving up the huge pie that capitalism is capable of producing, is the best way to head off those people who would alter market capitalism beyond recognition by imposing punitive taxes, onerous regulations, investment-distorting subsidies, along with a bloated government. Those folks are dangerous enough to America’s future prosperity without being handed the gift of obtuse opposition to needed change.

Irwin M. Stelzer, a contributing editor to The Weekly Standard, is director of economic policy studies at the Hudson Institute and a columnist for the Sunday Times (London).

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