Salmon Swims Upstream

by Pejman Yousefzadeh on April 13, 2009

Felix Salmon is quite displeased with my recent post on the financial services industry; so upset, in fact, that he felt he needed to write how upset he is on three separate sites.

We appreciate the linkage over here at Chequer-Board, and Salmon is a very smart guy, but I’m not persuaded by his argument. Salmon arbitrarily declares the financial services industry as being “too big” because it earned 41% of domestic corporate profits this decade, stating that since financial services companies are middlemen, this is much too high. I liked the following comment replying to Salmon’s Reuters post:

So now we should regulate corporate profits to make sure that they are in line with Felix Salmon’s view of what is a reasonable profit and ignore the marketplace? I agree that there have been abuses in the financial services sector- too much leverage and risk. A symptom of this bad behaviour was increased profits for a period of time, but don’t rage against the symptom, attack the cause and the abuse. Control the leverage and risk, not the profits. Your adding the the class warfare rhetoric is counter productive and a cheap ploy to appeal to the masses. Also, the purpose of the Goldman Sachs stock issue is to pay back the TARP money- how is that bad for taxpayers?

The last sentence is in reference to Salmon’s statement that he doesn’t want to purchase freshly-issued shares of Goldman Sachs stock since that is a bet on future growth and Salmon believes that Goldman is too big. How Salmon structures his portfolio is his own business, but he doesn’t get to structure portfolios for the rest of us, the tone and tenor of his multiple blog posts notwithstanding.

Salmon would feel better if we bring financial service profits “down to something less than 20% of all domestic corporate profits.” We have no idea, of course, why and how he picked that number; it appears to be straight out of thin air. Given that Salmon appears to want to regulate portfolios, how warm and fuzzy are we supposed to feel about the work he did in getting this number? Should we be content simply because he appears to have been inspired by an excerpt from Simon Johnson? Don’t we demand more rigor from the “more regulation” advocates?

On a very basic level, Salmon completely misreads my argument and my concerns. He appears to believe that I want the financial services industry to remain “big.” But size matters not when it comes to my argument, as Yoda might have said. What matters, however, is the fact that talent is being driven away. I realize that as far as Salmon and many of his commenters are concerned, there is no talent left on Wall Street, everyone is untalented, and everyone is responsible for the current financial crisis. But that’s just absurd on its face; there are plenty of smart people who did nothing whatsoever to contribute to the financial crisis–and many of them are found in lightly regulated hedge funds that did nothing to contribute to the financial crisis (unlike the already-heavily regulated banks). Scaring these people away is daft. Scaring away smart people in business schools who could lend a very helping hand in the near future is also daft. That–not the size of the financial services industry–is my main concern. If Salmon wants to criticize my arguments, that’s fine, and to be sure, he took a civil tone with me which I appreciate. I just wish he would recognize my arguments for what they are, instead of seeming to want to build a strawman to knock down.

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