The Public's New Fear of Finance

The Wall Street Journal

Too many of the leaders of the world's largest banks, brokerage houses and other financial powerhouses don't get it.

They don't understand why the public is so angry at them and their paychecks. They cannot comprehend why elected politicians who used to court them are now so hostile. They don't see that they are widely seen as the ones who drove the world economy frighteningly close to the abyss of a second Great Depression.

Oh, they know they have a problem. They are, slowly, learning to sound grateful in public that taxpayer money was used, for good reason, to arrest the collapse of the financial system. "All banks are benefiting," says Robert Diamond, president of Barclays PLC, which didn't take government capital. They decry "excesses." But some act as if the past 18 months were a bad dream from which they have awakened; now they can go back to making money much as they did before.

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"You have not come anywhere close to responding with necessary vigor to the crisis we have had," Paul Volcker, the former U.S. Federal Reserve chairman, told financiers this week at The Wall Street Journal's Future of Finance conference outside London.

Politicians, exquisitely sensitive to public sentiment, are warning them: "You have to pass the next-door neighbor test," Alistair Darling, Britain's finance minister, told some of the City of London's best-paid financiers at the conference. "You have to be able to look at your next-door neighbor and justify what you are doing."

And many of them cannot. They cannot even explain what they do. They promise better "risk management," but to many of their neighbors the past few years were all risk, no management. Some veteran bankers agree. "There is something wrong with the huge proprietary trading risks being taken [by banks] at taxpayer risk," says Deryck Maughan, formerly of Salomon Brothers and Citigroup.

Bankers admit that the world proved far more complicated and dangerous than they imagined. Many acknowledge the need for better guardrails on the superhighway of finance. The thoughtful among them offer reasonable suggestions for improving the management of their businesses and reorganizing and strengthening global financial regulation.

What they don't see is the new fear of finance.

For a decade or more, many people resented, or envied, the money winners on Wall Street and in the City of London made. But they weren't fixated on it. They had complaints, but they had jobs. They had bills, but their houses were worth more every year.

Then came the bursting of the bubble, lower house prices and foreclosures, furloughs and unemployment, and new impediments to borrowing. And the public was told that spending hundreds of billions of dollars of taxpayer money to bail out the banks was the only way to prevent catastrophe. Ben Bernanke, the Fed chairman, tried to explain: I didn't set out to save Wall Street. I set out to save Main Street. But to save Main Street, I had to save Wall Street.

Many Americans see simpler logic: Wall Street got bailed out, and Main Street didn't. They are looking for someone to blame. The truth is that the list of checks on the financial system that failed is long; it is hard to identify any one that worked. But the public wants a culprit, and they have found a couple of candidates. One is big finance itself. (Another is the Fed, but that is another column.)

That is what the bankers don't seem to get. Promises to strengthen risk management, pay bonuses in shares instead of cash, promote transparency and coherent accounting, and acquiesce to demands that banks hold bigger capital cushions to absorb future losses are well-intended and prudent -- but insufficient.

To many people, the question is more fundamental: Is big finance about making the economy more productive and improving prospects for our children? Or is it just enriching those who work in the casino in which banks place ever bigger bets, pocketing the profits in good times and sticking the taxpayers with losses in bad times?

Finance is essential to economic prosperity. Allowing people to borrow today to buy a house, pay for college or build a business is crucial to economic growth; giving them ways to safely save for retirement is essential.

Some financial innovation proved more dangerous than useful, yes. But financial innovation also made possible, among other things, loans to credit-worthy borrowers once deemed too risky, by allowing lenders to lay off some of the risks. Now, outrage over bonuses and bailouts risks doing away with both the good and the bad parts of that innovation.

Bankers need to be more candid and self-critical about what they got wrong and what they are going to do differently as a result -- not small steps, but big ones. They need to distinguish clearly between financial innovations that enrich only bankers and those that enrich the entire society, and then convince the rest of us that the result of this crisis is that they are going to do less of the first and more of the second.

There are signs that some bankers understand the world they now inhabit. The assembly at the Journal conference was asked if bankers "do God's work," a reference to an unfortunate phrase Goldman Sachs's chief executive, Lloyd Blankfein, used in an interview with the Times of London. Only 29% said yes.

Write to David Wessel at

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