Why do bankers make $squillions (and you don’t)?

Road pricing in London in the 18th century

There’s an interesting discussion going on in the blogosphere right now about how Wall St made and lost so much money in the noughties.

It started yesterday our time when George Mason University economist and ‘the world’s most read economics blogger’, Tyler Cowen, announced that he’d written an essay on inequality in The American Interest.

He makes some interesting points – for example, Americans are more likely to be envious of their better paid colleague or their slightly wealthier brother in law than they are of billionaires and financial high rollers. Nevertheless, he focuses on “the pernicious role that big finance plays in modern political economy”.

As I interpret it, his thesis is that the finance sector takes big but self-enriching risks in the good times because it relies on government bailing it out on the odd occasion when real disaster strikes. As Ross Douthat from the New York Times puts it:

The “bust” part of the cycle tends to make taxpayers suffer more than the Wall Street investors themselves, thus incentivizing further recklessness and still worse crack-ups down the road

By this morning (Thursday), the debate has been joined by an army of influential pundits, including Ross Douthat, Ryan Avent from The Economist, Kevin Drum from Mother Jones and political blogger Matthew Yglesias. By the time you read this it is likely there will be many more. Read the rest of this entry »