Gabriel Sherman wrote what I would call a hopeful article last week called “The End of Wall Street As They Knew It.” The basic premise is that the end of the credit bubble and the advent of Dodd-Frank mean lower profits, more boring businesses, and smaller bonuses on Wall Street—permanently (or at least for the foreseeable future). Sherman also says that the former masters of the universe are now engaged in “soul-searching”: “many acknowledge that the bubble-bust-bubble seesaw of the past decades isn’t the natural order of capitalism—and that the compensation arrangements just may have been a bit out of whack.”
Call me a skeptic, but I’m not convinced. For one thing, there are few people quoted in the article who actually seem to be engaged in anything that might be called soul-searching (as opposed to complaining—like the now-clichéd banker who watches his spending carefully but has a girlfriend who likes to eat out). The story’s featured voices are ones that are not on Wall Street and have been critical of it for a long time, such as Paul Volcker and John Bogle. Another example of “self-criticism” comes from Bill Gross—but’s he’s on the buy side, not Wall Street.
There are certainly bankers saying that the business is getting tougher, but that’s a cyclical thing. Profits were lower in 2011 than in 2010 because the economy was weaker in 2011 than in 2010. Jamie Dimon also gets a lot of words in, saying that banking is becoming a more boring business that he actually likens to Wal-Mart or Costco. But Jamie Dimon is essentially a politician, the elder statesman of the banking industry, so while I like what he says, I wouldn’t take it at face value.
My main worry is that the regulations we have are still fundamentally reactive, the people on Wall Street are extremely smart, they have access to a lot of money, and they will come up with new businesses that will make lots of money and create new risks for the financial system and the economy.
This post originally appeared at The Baseline Scenario and is posted with permission.