The chairman of the Federal Deposit Insurance Corporation, Sheila Bair, spoke today to a conference of the National Association of Business Economics. Among her remarks:
Our financial sector has grown disproportionately in relation to the rest of our economy.
Whereas the financial sector claimed less than 15 percent of total U.S. corporate profits in the 1950s and 1960s ... its share grew to 25 percent in the 1990s ... and to 34 percent by 2008.
We know that a vital and innovative financial sector has long been one of the key competitive advantages of the U.S. economy.
But we must also recognize that the excesses of the past decade were a costly diversion of resources from other sectors of the economy.
How can Ms. Bair -- or any other government offical -- know what is the right proportion of the financial sector in the economy as opposed to other sectors? There are entire sectors of the economy now, like the Internet, that didn't exist in the 1950s. Nor is the financial sector, as she suggests, a kind of zero sum game. "A costly diversion of resources from other sectors of the economy" is a polite way of putting what Jeremy Grantham called a "bloodsucker" or what the Nazis called "parasitic." In fact that financial sector is investing in the rest of America, whether it is mortgage brokers financing new home construction or venture capitalists investing in Google or private equity funds turning around companies or investment banks underwriting new public offerings. It sounds like Ms. Bair wants the financial sector to be less profitable. No one asks the follow-up question -- which profitable firms would she like to go out of business or turn into money-losers to achieve her goal of a less-profitable financial sector, and how does she plan to make that happen?
What's also astonishing is how little accountability is built into the system for someone like Ms. Bair. A former aide to Senator Dole, she was appointed in June 2006 to a term on the FDIC board that lasts through July 2013. She doesn't have to run for re-election every two years like a member of the House of Representatives or every four years like the president. She doesn't run the risk of going out of business like an entrepreneur or businessman who fails to make a profit. She doesn't even have to go to Congress for an appropriation for her agency; it funds itself through fees it levies more or less unilaterally on the banks that it regulates.
Why would anyone invest in a bank stock when the bank regulator is going around complaining that the banks are too profitable? The consequence of less profitable banks is more concern by regulators that bank capital ratios are inadequate and more federal seizures of failing banks. Where does Ms. Bair think those bank profits go? They can be lent out to businesses and individuals to grow the economy, or they can be retained to make the banks more financially solid. If the profits aren't there in the first place, they aren't available for either of those purposes.