Since medieval times, writers and ethicists have counted envy among the seven deadly sins. In utilitarian terms, envy is at best a zero-sum game because it can only be satisfied when someone loses.
Given this moral and practical failing, it is a shame that envy plays such a large role in the Occupy Wall Street protests spread around the country. And, yet, the Occupy movement does have a point that transcends this negative emotion: the financial industry has grown large on the backs of government handouts, manipulated regulation, and taxpayer bailouts.
While there is no objective size the financial industry should be, it is fair to say it would never have become this large without the crony capitalist system that has masqueraded as a free market. In the process, the financial industry has absorbed resources that could better be used elsewhere while imposing large, systemic risks on the economy. Watching others grow rich from special privilege understandably leads to envy, but from this perspective, the high compensation received by financial industry leaders is merely a symptom of a much larger problem.
Big finance has achieved its present girth on the back of numerous policy decisions - some going back centuries. Many of these policies had the intention of protecting the general public, but often had the unintended consequence of enriching bankers beyond the product of their labor.
For example, central banks often seek to encourage growth by lowering interest rates for small businesses and individuals. But in the process it is mainly large banks that benefit from higher margins, as the Fed provides lendable funds at a steep discount - not all of which is shared with borrowers. Federal policies designed to assist homebuyers also benefit mortgage investors and grant them taxpayer supported guarantees they will get paid (bailing out Fannie Mae and Freddie Mac has already cost $182 billion as a result).
Subsidized mortgages also result in higher home prices - undermining affordability goals. Over the long term, consumers become more leveraged, while financial firms collect more interest and fees.
But special privileges to the financial industry predate discretionary monetary policy and subsidized lending. Indeed, these privileges are so embedded in our system, they never occur to us. Perhaps the most distortionary of these is banking licenses that offer limited liability. Without such licenses, bank owners would have to use their personal assets to redeem deposits if borrowers default. Limited liability reduces the bank owners' risk to just their initial investment. The large number of state banking licenses granted during the nineteenth century allowed "one-percenters" of that era to profit from borrowing and lending, without worrying about large losses. They could also grow their institutions by making loans to less creditworthy borrowers, thereby creating systemic risk.
This risk was usually shouldered by depositors, who often lost money during bank runs. During the Depression, the federal government solved this problem by creating deposit insurance. FDIC insurance enabled banks to grow even more, and it also freed them to take on even greater risks, since depositors no longer worried about how their funds were being deployed.
Marc Joffe is a research associate at the Reason Foundation, and previously worked in the financial services industry for over a decade. Anthony Randazzo is the director of economic research at the Reason Foundation.
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