There’s a lot of pro-capitalist ranting in this book. There’s even some name-calling. It’s hardly a scholarly or objective work. It is, however, a succinct but superficial overview of banking and Wall Street. It reminds us (repeatedly) of the legitimate purpose of banks—saving and lending money. I doubt many people would claim otherwise. What most, including myself, are upset about are the abuses, the clever manipulations, the deceptions—what amount to high stakes versions of shell games and pyramid schemes, and of course, the impact of all these on people who may not even realize they’re in the game.
The root cause of all of these, Cohan claims, is that when investment banks went public (starting in 1970 with the IPO of DLJ), investment bankers could make big personal profits without much personal financial risk. As many have pointed out before, this allows them to privatize gains and socialize losses. “When people are rewarded to take big risks with other people’s money, that’s exactly what they will do. The problem is that the top bankers, traders, and executives on Wall Street collectively no longer have enough of their own skin in the game to make a difference to them when the things they do go awry. They get rich either way.” (page 114) That, he says, is pretty much the only problem. Don’t blame Wall Street per se, the problem is a system that shields those making unwise, even knowingly bad loans from the consequences. Worse, it rewards them for it.
Well, maybe. This definitely is a problem. He doesn’t believe the solution is financial regulation, though. He’s clearly opposed to such things. “The fix for Wall Street should be directed at its compensation system, not at the functioning of Wall Street itself. It’s really as simple as that. Fix the compensation system—make bankers, traders, and executives fear for their art collections, their co-ops, and their homes in the Hamptons—and sit back and watch how quickly it works to change people’s bad behavior.” (page 146) As simple as that, huh? It doesn’t sound simple to me. There are a lot of people, people with power, people with influence, people with heaps of money, who are getting more of all of the above through this system. They’re going to resist attempts to stop this gravy train. I certainly don’t see them doing it voluntarily.
I disagree with much of what Cohan is saying in this book, including a couple of his underlying but unstated assumptions (concerning the ‘value’ of money and the desirability of perpetual economic growth). I do, however, agree that those who make risky investments must be held responsible for their actions. There is no prudence if there are no consequences.