Why won’t banks create jobs?

by david

Disclaimer: I am pro-Occupy. Repeat: pro-Occupy (read to the end, please). Further disclaimer: Off the top of my head, I don’t know a darn thing about Bank of America’s 2010 financial state, beyond the abstract, and for a quick lunchtime post, I don’t plan to do that research.

That out of the way, I just saw this:

There are two ways to read this tweet. I think the more common one is wrongheaded, and I’m going to spend time on it here. That intent being “Bank of America executives made a stupid, greedy decision, when they could have hired people.”

Yes. They could have. But what would have happened? Analysts, looking at their hiring binge, would be looking for a jump in revenue associated with the investment. Bank of America is a business, and a publicly traded one. They can hire when they have reason to believe that hiring will either lead to greater profits or somehow save them money.  If they hire without a plan for usefully turning that labor into revenue or savings, analysts will call them mean names, and their stock prices, bond ratings, and all the rest will suffer.

When they give bonuses, no such expectation exists.  Bonuses (ridiculously?) do not need to be tied to revenue.  Of course, financial industry bonuses of any significant amount are ridiculous right now, and Bank of America should be booed mightily for rewarding failure (or, at best, rewarding morons for investing freely-given government  money in government debt, the single easiest trade in financial history), but they shouldn’t be expected to create jobs with that money. They could lend it out, being, you know, a lending institution, but analysts would call them names for that, too. Or they could pay dividends to investors, I guess.

This is a complicated structural problem. The incentives in our financial system are not currently aligned with the goal of helping the broader economy. The incentives in our financial system are not even aligned with the primary goal of banking: efficiently allocation capital in the broader economy. The incentives in our financial system are aligned with the goal of elevating the profitability of the banking institution and the wealth of the traders and executives that mind that profitability. In a well-coordinated industry in a healthy economy, the profitability of a bank would be intertwined with the healthy spread of capital to useful ends throughout the economy, but we don’t have a well-coordinated industry or a healthy economy.

There is no incentive for Bank of America to hire, and no disincentive for paying bonuses. This is why I prefer a second reading of the tweet, one consistent with the general Occupy ethos, but hard to see through the specificity of this tweet: WHY could Bank of America get away with bonuses like this? What is it about the structure of our economy and the financial sector that is continuing the spread of inequality TWO YEARS after a bust that was supposed to shake the financial industry back to reality? This is a problem well beyond “Nyah, nyah, Bank of America is run by bad guys.” It’s something fundamentally wrong with the way we’re currently practicing capitalism.

I like Occupy because it calls attention to this broader issue. The press is pretty good at calling attention to bonus abuses, but that hasn’t yet lead to significant reform. Occupy stirred people because it offered more than the Gawker-like “look at these assholes.” It said something more like, “how can this be our best option?”