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Should Wall St. reform target greed?

Robert Reich

TEXT OF INTERVIEW

Stacey Vanek-Smith: More bad news for Goldman Sachs: Federal prosecutors have opened an investigation into the investment bank's trading practices. Goldman is already facing civil charges from regulators, and spent the week getting grilled on Capitol Hill. It all made for an interesting backdrop to congressional debates over financial reform this week. Here to talk with us is Robert Reich, professor of public policy at Berkeley and the former Secretary of Labor under Clinton. Good morning, Robert.

Robert Reich: Good morning, Stacey.

Vanek-Smith: So Robert, Wall Street was bailed out over a year and a half ago. What has been taking so long with financial reform?

Reich: Well you know, it's complicated, and lots of money and powerful interests are involved. After the crash of 1929, it took Congress five years to create the Securities and Exchange Commission, the Federal Deposit Insurance, and the Glass-Steagal Act that separated commercial banks from investment banks.

Vanek-Smith: During this week's grilling of Goldman Sachs, some of the senators focused on what they called the bank's lack of social responsibility. Do you think that is what is at the heart of Wall Street's problems?

Reich: Not really. Wall Street's been no more greedy in recent years than it ever was before. I mean take greed out of the Street, and all that's left is the pavement. The question is whether Goldman and maybe some other banks broke the law, and that's going to be decided in the courts. The question before Congress is different, that's whether the law should be changed and how.

Vanek-Smith: Do you think financial reform should try and stop Wall Street from making these really risky bets?

Reich: Well, risky bets are inherent in any financial market. And it's good for the economy when Wall Street manages financial risk responsibly. The goal of reform is to set some limits on those bets so the economy is helped by them more than it's potentially harmed.

Vanek-Smith: If financial reform eventually passes, do you think Wall Street will have less power over the economy?

Reich: Well, that's a very important question, Stacey. I doubt it. Four decades ago, Wall Street worked on behalf of industries that made real products. And real products were where the money was. But as Wall Street itself became the place where the biggest bucks could be made, everything seem to have flipped. Most of American industries is now, in effect, working for the Street, whose analysts and traders can determine the fates of companies every quarter. And a lot of American entrepreneurship, Stacey, has shifted from real products to financial products. This is a long-run problem for the American economy. What's being discussed in Washington right now doesn't come close to addressing it.

Vanek-Smith: Hmmm. Robert Reich is professor of public policy at Berkeley and the former Secretary of Labor under Clinton. Robert, thank you.

Reich: Thanks, Stacey.

About the author

Stacey Vanek Smith is a senior reporter for Marketplace, where she covers banking, consumer finance, housing and advertising.
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I think some of it became an accounting game. I don't know whether the accountants or the investment marketeers came up with it first, but the game is called "Total Return." Before, income from an investment was based on dividends and interest. The value of the underlying stock rested on the book value of the company, to a large extent. However, once the idea came along that "income" was computed as "Interest+Dividends+Capital Gain/Loss," the value of stock on the market became more of an indica of income, and therefore more of an enticement to take risk, investment bankers, brokers, and advisors saw they could report a higher income to the investors. A nice way to say "See how much I'm making for you?" But when the value of the stock of a company has nothing particularly to do with the underlying value of the company that originally issued the stock, risk-taking in a way that would run up the value of the stock became all too tempting. THAT is the area where Social Responsibility needs greater consideration.

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