Simon Johnson: Wall Street's Stranglehold on Our Democracy Must Be Broken
Continued from previous page
ZC: The first SEC Chairman was Joe Kennedy, and he wasn't exactly a shining example of business integrity.
SJ: It takes one to know one, right?
ZC: Let's talk about the revolving door, though. A lot of people from Wall Street leave to work in
SJ: Well yes, the revolving door is obviously out of control, and I didn't mean to say you should exclusively employ poachers, that doesn't go well. What you need is a very strong set of incentives and guidelines, and you need people at the top of the regulatory chain who truly believe that the bad aspects of the financial sector need to be curtailed. We haven't had that for a very long time. You saw just last week, a guy left Barney Frank's staff to become a financial lobbyist. Not to pick on that one guy, but it's a perfect illustration of how the whole culture between Wall Street and Washington is just totally out of whack.
You probably need to come in with some overly draconian initial restrictions, like banning anyone from revolving through the door for a period of five years. Once the cultural perceptions about Wall Street change, you can maybe relax those rules a bit. But right now it's just so massively out of control, it really does need strong action.
ZC: I want to ask you some smaller-bore economic questions. At a certain point, there was a lot of public debate on executive compensation, which has subsequently disappeared from the reform push. What role did executive compensation play in the crisis, and do people have a right to be angry about it?
SJ: Yes, people have a right to be angry about it. I think it's a symptom of a deeper problem. I don't think you can just fix executive pay by itself, because people will find other ways to compensate themselves that get those restrictions. But a lot of pay that rewards short-term performance is undoubtedly a reflection of the dangerous incentives in our financial system.
There was a very nice write-up in the Washington Post going through how people are being paid, and the executives of big banks, most notably John Stumpf, head of Wells Fargo, are getting just huge cash payouts. And those payouts are absolutely not in line with what the administration asked them to do.
I think this shows two important things. First, when you ask bankers nicely to do something, they just don't do it. Second, when Wells Fargo was pressed on why Stumpf was getting paid so much, his spokesperson said, "Well, we had a really good year in 2009." I'd say that, actually, no, you didn't have a good year, you were saved like all of the other big banks by the government. That is not a good year from a social point of view, it's not a good year if you're trying to run a bank well, and paying this much cash is completely inappropriate. It reflects how deep we are in this mess. We haven't gotten out of it.
ZC: So would you say that too-big-to-fail and excessive Wall Street pay are connected?
SJ: Yes, I would say they are two sides of the same coin. But I would caution that if you fix too-big-to-fail, I wouldn't have a problem with the compensation. Then I think it's an issue for shareholders and corporate governance that the company's owners can either take on or ignore.