The fact that a bad lending and credit crisis brought down the economy six years ago was proof positive for many that the financial sector, and more specifically Wall Street, had grown too large.
The financial crisis and its aftermath of increased regulation was supposed to correct that. It’s up for debate about whether it has. Wall Street profits are not what they used to be. Net income was down at nearly all of the big banks last year, though earnings rebounded somewhat in the first quarter. Still, return on equity, a key measure of profitability for financial firms, is half of what it was before the financial crisis. Most investment bankers say, despite a rebound in business, these are not high times for the former Masters of the Universe.
That hasn’t reined in finance salaries yet. The average bonus last year on Wall Street was $172,860, which was not too far off from the peak pay set in 2006.
Earlier this week, The New York Times declared in a headline that Wall Street was back. Aside from the sky-high paychecks, the Times highlighted the fact that the banking industry constitutes nearly as large of a portion of the U.S. economy as it did shortly before the financial crisis. The Times just looked at the finance industry by itself. Here’s a chart of Wall Street versus other sectors of the economy:
Yes, Wall Street makes up a much bigger portion of the economy’s profits, in economic terms the value-add, than educational services. (That is, at least, the measurable value-add.) But that was aways the case. Take a look at health care. Prior to the crisis, Wall Street made up a larger portion of the economy than health care. In a $17 trillion economy, that’s a big deal. Now, the two sectors are neck and neck. The same is true for professional services in general.
Still, some academics are concerned that in the wake of the financial crisis Wall Street is still too big. A number of studies show that economies that are dominated by finance tend to have slower growth. But at 7%, and neck and neck with health care, the U.S. economy is not dominated by financial services. And it’s not just Wall Street. Economists have long worried that the U.S. spends too much on health care and how that spending affects other parts of the economy.
As for the Wall Street brain drain, it’s perhaps more of a myth than a real concern. The growing list of Silicon Valley startups worth more than $1 billion shows there is a lot of incentive to go to other sectors of the economy. Yes, Wall Street will continue to get its fair share of top graduates. But its not clear that those who head to finance, with its long hours of Excel spreadsheet tweaking and six-figure salaries, are the ones who would be coming up with the next Facebook or technological breakthrough.
Wall Street may be back, somewhat, but that may not be as bad as it seems.
Graphic by Stacy Jones.
