Paul Krugman: “Don’t Cry for Wall Street”

My friends with net worth in excess of a million bucks have little patience left for Wall Street.  One of my buddies, an astute MBA and retired executive, lost slightly more than 40% in the massacre.  Thankfully, I kept my losses to 28% and my retirement funds are doing well now.  Although I have plenty of background on systems and system thinking, I’m largely in the dark on a lot of notions that the finance industry regularly pushes onto us consumers.  I suspect that I’m not alone.  Thus, Paul Krugman’s article in yesterday’s Times resonates with a lot of us.  Krugman argues that not only should the president put some public distance between himself and the bankers, but that he should do what’s right for the country and if that hurts the bankers, that’s O.K.  The reforms on the table are just fine.What’s unique about Krugman’s analysis is that he argues strongly that the financial industry should be smaller.  That’s a perspective that I hadn’t seen seen before.  Plenty of comments about making the auto industry smaller, but nothing has surfaced about making the finance industry smaller.  Finance has great PR.  We were told that finance channeled capital for productive uses, spread risk and enhanced stability.  Not true, says Krugman. The most intriguing proposal on the financial industry comes from the International Monetary Fund. In a leaked paper the fund calls for an activity tax on financial-industry profits and remuneration.  That, the paper says, would “mitigate excessive risk-taking.”  More significantly, it would “tend to reduce the size of the financial sector,” which the IMF says is a good thing.  What Krugman argues is that that would be a significant plus for the nation.  Financial innovation has a tendency to blow up the economy.It’s obvious that the auto industry needs to be downsized, an action that’s already taken place.  It’s also obvious that my hometown of Detroit needs to be downsized, too.  Something like 40% smaller.  Now I’m learning that the financial industry needs to be downsized.  Finding a better balance for our nation’s economy just might be good, long term, for my grandkids. When it comes to their thinking, most business people are incrementalists.  That is, they think in small bites, largely because that’s their training and that’s what business rewards.  My background is history and that makes for big-picture thinking.  Most in business are knee-jerk, analytical thinkers.  I’m a knee-jerk big-picture thinker.  It makes for a great consulting business (although it could get me in trouble in many situations).  Krugman’s insight makes for an important adjustment to my economic big picture.  I trust that he’s right.  Anybody out there want to argue that he’s wrong?
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