Simon Johnson's Blog, page 35

Oblivious

By James Kwak

Benjamin Lawsky’s unilateral action against Standard Chartered has apparently upset the “bigger” regulators in Washington and London. According to the Wall Street Journal, “Officials at the U. K. Financial Services Authority complained . . . that the sudden move could have damaged the stability of the bank and that the lack of advance notice breached long-standing protocol among bank regulators.”

Wait. Now how is that supposed to compared with the fact that Standard Chartered almost certainly conspired to evade U. S. sanctions?*  Why are they mad at Benjamin Lawsky instead of at Standard Chartered? And when you think a violation of inter-regulator “protocol” is worse than a systematic plan to defraud the U. S. government and break sanctions against Iran, of all countries—it’s hard to imagine how you could be more captured, without knowing it.

As for the point that the sudden announcement could have threatened the stability of Standard Chartered: First, how does that compare to breaking the law in the first place? Second, if you’re worried about systemic risk, there’s a simple solution. If Standard Chartered’s equity goes to zero, the government should just buy it up and take control of the bank or, alternatively, buy new equity on favorable terms. That would put to rest any systemic concerns. And if, as the U. K. regulators claim, the bank is sound (and it should be, with that booming business in evading U. S. sanctions), then the market value will go up when the brouhaha subsides, and taxpayers will earn a profit.

Whose side are these guys on?

* See, for example, paragraphs 30–32 of the complaint, quoting from an internal manual giving instructions on how to manually override data fields to hide Iranian clients.

Small Government or Smallish-Sort-of-Mediumish-Nicer-Better Government

By James Kwak

The conventional wisdom about Mitt Romney’s choice of Paul Ryan as his running mate is that it sets the stage for a debate about the role of government in society, between Romney and Ryan as champions of small government and Obama and Biden as supporters of big government. Indeed, that’s the thrust of the lead story in the Wall Street Journal this morning. And it’s pretty clear why Mitt Romney wants to have this debate.

First, the politics: The choice of Ryan should be slightly encouraging to Democrats for one reason—it confirms what the polls and Nate Silver have been saying for months: President Obama is winning, though not by much. One of Romney’s options was to simply run against the incumbent, pointing to the bad economy and making a bland case for himself as some kind of business guru. Apparently that wasn’t working, so he decided to double down on the Tea Party and the idea of radically reforming government—something that he’s been distinctly bad at throughout the election so far.

In the longer term, Democrats should be worried, because Romney and Ryan have the better debating position. Their position is simple and superficially compelling: Government is bad. (Cf. the DMV—it’s state, not federal, and the one in Massachusetts works very well, but whatever; BATF; EPA; IRS; whatever agency your audience happens to dislike. Compare to Apple as if all private sector businesses were like Apple.) Government infringes on individual liberty. Cut down the government and we will have (a) more liberty, (b) more economic growth, and (c) lower taxes.

What do the Democrats say in response? Government is good at some things and bad at some things, and needs to be leaner and more efficient. Or people need government services to succeed. (Doesn’t that sound offensive as soon as you say it, even if it’s true?) Or there’s a moral obligation to redistribute income through the tax-and-transfer system. Or government isn’t really that big when you compare it to history. So taxes should go down for some people and up for some other people.

It’s all confused, half-hearted, and unconvincing. It reminds me of George Lakoff’s book Moral Politics. Lakoff does a brilliant job identifying the core of the conservative worldview (the Strict Father ethos) and explaining why it’s so compelling. Then he tries to explain how liberals could and should base their positions on a Nurturing Mother worldview. The problem is, I came away from the book thinking that the conservatives had won, because the Nurturing Mother ethos was so unconvincing.

Now, this certainly doesn’t mean that Obama will lose the election. Although commentators like to think we’ll have a real debate about the role of government, more likely this election will be just like every other one: it will turn on a handful of independent voters’ inchoate, irrational perceptions of which candidate better fits their inchoate, irrational notion of what the president should look like. (If you haven’t made up your mind already, you’re unlikely to base your decision on a considered reflection on the proper size of government.) And while Mitt Romney is pretty terrible on this dimension, Ryan adds a long list of other flaws to the ticket.*

But it couldn’t hurt for the Democrats to have a decent response to the small-government attack line, and that starts with having some kind of understanding of what the federal government actually is and does. As David Moss has written and as Simon and I discussed in White House Burning (mainly chapters 4 and 6),  the primary role of today’s federal government is protect ordinary people from risks that are beyond their control, be they poor health in old age or toxic chemicals in children’s toys. I don’t think ordinary people want to face all of life’s risks alone, and the private sector isn’t going to help them. (The insurance markets that work halfway decently, like auto, home, and workers’ comp, are all characterized by near-mandatory participation, one way or another.)

But you can’t make that case by just pointing to one program after another. First, most people don’t see themselves as beneficiaries of most programs (many people think that only the current elderly benefit from Social Security and Medicare, even though we all benefit over a lifetime perspective), so focusing on the program level just makes people think their money is paying for someone else’s benefits. (This is in part because many people think they are paying more in taxes than they actually are.) Second, it isn’t a rhetorical match for the Romney-Ryan small government message. Instead, President Obama needs to come up with a vision of what the government is for—one that he hasn’t already compromised away. Isn’t he supposed to be good at that sort of thing?

* What does it say that the Republicans’ poster boy for free markets likes betting on individual bank stocks in the middle of a financial crisis? Does he really think he’s smarter than the market?

Bipartisan Push For More Equity In Big Banks

By Simon Johnson

Proponents of the status quo in the financial sector just cannot catch a break.  Early August is supposed to be a time when regulators and markets slow down, or perhaps even take a break, but this year the news continues to be dominated by mismanagement or worse inside complex financial institutions.

It’s time for a new approach to bank capital.  As proposed by two U.S. Senators, this is not a panacea, but it would have a dramatic effect on big banks and how they operate.

Earlier this week, Standard Chartered, a large global bank (about $600 billion in total assets) based in the UK, was accused of breaking US law in its dealings with Iran and other countries with financial sanctions imposed by the US.  The complaint, lodged by New York’s Department of Financial Services, suggests that the bank’s executives deliberately intended to deceive regulators. 

“For almost ten years, SCB schemed with the Government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion, and reaping SCB hundreds of millions of dollars in fees. SCB‟s actions left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity.”

If these allegations are correct, someone was taking huge risks with the bank’s reputation by breaking the law.

StanChart, as the bank is sometimes known, is pushing back hard against these allegations.  This reminds me of Bob Diamond, the chief executive at Barclays who came under pressure and responded by attempting to take on the Bank of England – until he was forced out.  Bankers benefit from a great deal of state protection and subsidies.  It is unwise for them to break the rules and then turn on the people attempting to enforce the law.

Standard Chartered’s banking license in the United States could easily be revoked – and it should be revoked if the charges are correct.

At the same time, the near failure in recent days of Knight Capital further illustrates the risks inherent in running a complex securities trading operation.  Some sort of programming error resulted in the firm buying stocks that it did not want and quickly suffering large losses, put at $440 million .  The SEC, understandably, declined to let the firm have a “do over”, i.e., withdraw the trades.

Brad Hintz, a banking analyst at Sanford C. Bernstein & Co., drew one lesson.

“Knight Capital should remind investors how the investment banks became bank holding companies four years ago; markets froze, confidence was lost, funding dried up and a reluctant central bank was forced to step in to save the U.S. capital markets.”

Hintz is right that, “As investors learned in 2008-2009, the most significant risk to any major broker-dealer is a loss of confidence.”  But he then draws the policy conclusion that securities trading operations should remain inside megabanks, where they can be backed by essentially unlimited credit from the Federal Reserve.

But it’s precisely the prospect of unlimited and typically unconditional support from central banks that encourages moral hazard – meaning that bank management is not sufficiently careful.  If we increase the government backing and implicit subsidies for megabanks, will they take bigger or smaller reckless risks?  What would you do?

A much better approach would be to force large financial institutions to increase their equity funding relative to how to much they borrow.  When the business is riskier and when its failure would have more dire consequences for the economy, we want any potential bankruptcy to become much less likely.

Senators Sherrod Brown (D-Ohio) and David Vitter (R-La.) made this point in a powerful letter to Federal Reserve Chairman Ben Bernanke this week.  With regard to the Fed’s proposed rules for how large banks fund themselves, the Senators write,

“We urge you to revisit your proposed rule and modify it so megabanks fund themselves with proportionately more loss-absorbing capital per dollar of assets than smaller regional or community banks.  The surcharge on megabanks should be high enough that it will either incent them to become smaller or will help to ensure they can weather the next crisis without another taxpayer bailout.”

The letter is well argued and should be required reading for everyone concerned about financial sector stability.  “More capital” is sometimes used as a rhetorical smokescreen by people who actually do not want any reform; in contrast, Senators Brown and Vitter are pressing the Fed on the right specifics – and for amounts of equity funding that would really make a difference.

Highly leveraged financial institutions do not have the incentive to be careful – their executives get the upside when things go well, and the downside is someone else’s problem.  Executives and traders in megabanks are paid based on their return on equity unadjusted for risk.  As Anat Admati and her colleagues have been arguing, these executives want to have less equity and more debt – they don’t care about how this affects the rest of the financial system.

Bigger banks are more dangerous.  They should either have to fund themselves with much more equity or break themselves up.  Their executives can choose.

The financial sector should take up this issue because megabank behavior has become so bad that it damages everyone’s business.  Investor confidence has taken a beating precisely because highly leveraged financial institutions get into so much trouble.  As Dennis Kelleher of Better Markets put it on his blog,

“It’s not the fundamentals or computer trading or Wall Street misconduct or one scandal after another. It is the fundamentals and computer trading and Wall Street scandals and lots more. To ignore or deny the effect of the daily drumbeat of Wall Street mishaps and misconduct like the Knight Capital implosion, JP Morgan’s London Whale losses, the metastasizing Libor Scandal, HSBC and Standard Chartered criminal conduct, plus the Facebook and BATS listings debacles and high frequency trading incidents like the Flash Crash (not to mention the rot revealed by the 2008 financial crisis like no-accountability bailouts and Goldman’s Abacus deal) is to deny reality, how investors think and how markets work.”

“Fair or unfair, all of those incidents plus the lousy fundamentals combine to give people the impression or belief that the markets are a bad investment, that they are rigged, that the professional insiders have an advantage, that whoever has the fastest computer wins, and that individuals and ordinary investors just don’t stand a chance.”

As Senators Brown and Vitter suggest, we should increase the required equity funding for megabanks to make them safer, to improve their behavior, and to help restore investor confidence.

An edited version of this post appeared last week on the NYT.com’s Economix blog.  It is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

Who Wants To Break Up The Big Banks?

By Simon Johnson

Correction: The American Banker slideshow on “Who Else Wants to Break Up the Big Banks“, to which I referred last week, is not behind a paywall.

Thanks to American Banker for making this content freely available.

(If you prefer to see an address before clicking on it: http://www.americanbanker.com/gallery/too-big-too-fail-breaking-up-big-banks-1048735-1.html)

Bad Advice

By James Kwak

I’m starting teaching at the UConn law school this fall, so I got a folder of information in the mail about my retirement plan. UConn professors have a choice between a defined benefit plan (SERS, in which I would be a Tier III member) and a defined contribution plan called the Alternate Retirement Program, or ARP. (There’s also a Hybrid Plan that seems to be the defined benefit plan plus a cash-out option at retirement.)

I chose the Alternate Retirement Program for reasons that are complicated (I used a spreadsheet) and that I may get into another time. The main benefit of defined benefit plans is that they do a pretty good job of protecting you from investment risk and inflation risk, since the state bears most of it. The main downside is that if you will work either for a short time or a very long time at your employer, they have a lower expected value, even given conservative return assumptions. The other downside is counterparty risk.

Anyway, the ARP is a pretty good plan. The administrative costs are a flat 10 basis points.  It includes a reasonable number of index funds (although there are also actively-managed funds—more on that later). And the plan had the sense to ask for institutional share classes with low fees. For example, the S&P 500 index fund is the Vanguard Institutional Index Fund – Institutional Plus Shares, which has an expense ratio of 2 basis points. Adding the 10 bp of administrative fees, that’s still only 12 bp.* (Contrast this with Wal-Mart, for example, which, despite being the largest private-sector employer in the country, stuck its employees with retail fees in its 401(k) plan.)

But despite that, the plan then goes and encourages people to put money into expensive, actively-managed funds. I got a brochure subtitled “A Guide to Helping You Choose an Investment Portfolio” that was almost certainly written by ING, the plan administrator. It has the usual stuff about the importance of asset allocation and your tolerance for risk, and then provides “model portfolios” for various investor types.

These model portfolios are overwhelmingly composed of actively-managed funds. For example, for an aggressive investor, it recommends 22 percent in “small/mid/specialty” investments. These are split between the JPMorgan Mid Cap Value Fund (expense ratio: 76 bp), the Vanguard Explorer Fund (34 bp), and the DFA Real Estate Securities Portfolio (22 bp)—with nothing in the Vanguard Mid-Cap Index Fund (10 bp) or the Vanguard REIT Index Fund (8 bp).

I should pause here and remind you that, when it comes to domestic equities, actively managed funds are a great way to throw away your money: over almost any time period, the large majority of active funds underperform their relevant indices (even leaving aside the fact that most active funds also take on more risk). So why are ING and the State of Connecticut recommending that people put their retirement savings into them? The most likely explanation is that ING gets higher kickbacks from JPMorgan than it does from Vanguard. (Payments from fund companies to plan administrators who direct money into their funds are legal, or at least they were the last time I checked).

This is a big reason why I’m skeptical that better financial education and advice are the solution to our country’s retirement savings problems. The education and advice come overwhelmingly from the asset management industry itself. And they have no incentive to give you good advice.

* That still seems high to me, since I can get an S&P index fund from Vanguard for just 5 bp with an initial investment of just $10,000. And I don’t see why the administrative costs for a group plan should be higher than for individual accounts.

When It Pays To Be Wrong

By James Kwak

Last week I wrote an Atlantic column about the fundamental reasons why big banks are always screwing up. In particular, given the effects of leverage and the short-term incentive structure, it pays to have lousy risk management systems, and it pays for frontline traders to evade those systems—even for the CEO, in the short term.

Today the Wall Street Journal reports evidence that the London Whale was told by his boss to boost the valuations of his trades; according to inside sources, “the favorable valuations might have been aimed at giving the losing trades time to recover and avoid setting off potential alarms at the bank.”

This is clear evidence for the too big to manage hypothesis: not only traders but heads of trading desks manipulating marks to take risks that the bank as a whole might crack down on. But we’ve known for decades that rogue traders (Nick Leeson, Jérôme Kerviel) are out there. The question is why bank managers don’t do a better job putting in place systems and processes to detect them. The most plausible answer is that they don’t want to because, in the short term, they have the exact same incentives as those traders: they like the risk and the higher expected returns it generates. It’s only when things blow up that they act all shocked.

Big Banks Fall Back On Three Myths

By Simon Johnson

Global megabanks have had a tough summer.  Jamie Dimon, vociferous opponent of restrictions on reckless risk-taking by big banks, presided over large losses due to exactly such behavior in the London office of JP Morgan Chase.  HSBC, which prided itself on running a uniquely decentralized management model, was found to have violated – massively, over many years, and in a uniquely decentralized manner – US money laundering and other laws; the head of global compliance resigned while on the witness stand during a Senate hearing in July.  And Barclays – which had bulked up on the strength of its capital market activities – conceded that traders from that part of the company had conspired to rig Libor, a key benchmark for global interest rates; in the ensuing public outcry, the top two executives were forced out.

And last week Sandy Weill, who amassed a vast fortune building Citigroup and pushing to dismantle the constraints on such megabanks’ activities, concedes that the entire exercise was a mistake.

“I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable,..”

According to American Banker, former top executives calling for the biggest banks to be broken up now include Phil Purcell, former chief executive of Morgan Stanley; John Reed, former chairman of Citigroup; and David Komansky, former chief executive of Merrill Lynch.  (I am asking American Banker to bring their slide show on this issue out from behind their paywall.)

Backed into a corner, representatives of these Too Big To Fail banks and their allies are forced to fall back on perpetuating three myths.

First, their critics are “populists” who do not understand banking or economics.  But this is belied by the credentials of the people raising serious issues with how global megabanks currently operate.  The American Banker highlights the critiques of Richard Fischer, president of the Dallas Fed (and experienced financial sector executive), Tom Hoenig (former president of the Kansas City Fed and currently number two at the Federal Deposit Insurance Corporation, F.D.I.C.), and Sheila Bair (former head of the F.D.I.C. and now chair of her own Systemic Risk Council – of which I am a member.)

As I wrote here last week, Fed Governor Sarah Bloom Raskin has emerged as an important voice calling for rethinking key aspects of big banks, including why they should have implicit government backing for their securities and trading operations.  Mervyn King, governor of the Bank of England, and Jon Huntsman, former Republican presidential candidate, have also expressed articulate and well informed proposals for making big banks less dangerous – primarily by forcing them to become smaller.

In this context, you should read Neil Barofsky’s new book, Bailout, a compelling critique of how the bailout process was handled, including the treatment afforded to banks and the relative lack of effort that went into directly addressing problems with mortgages.  The pushback from the Obama administration is that Mr. Barofsky is some form of populist – in contrast with the supposedly responsible professionals of the Treasury Department (many of whom were previously or have subsequently become employees of large financial firms).

But a close reading of Mr. Barofsky’s narrative and analysis confirms what was evident to anyone who studied the reports he produced when he was Special Inspector General overseeing the Troubled Asset Relief Program (or SIGTARP, in the jargon).  Mr. Barofsky is a distinguished law enforcement professional who was given the job of preventing fraud and abuse in the congressionally-mandated bailout program.  His efforts to ensure TARP was run effectively and more in line with taxpayer interests were opposed by senior Treasury officials almost at every turn.

The true issue is not populism vs. responsible bankers.  Big banks have become a dangerous special interest with powerful friends.  It is the reformers who are responsible.  Executives who run megabanks – and anyone who supports their continued existence – are the ones who have become reckless and damaging to society.

The second myth is that a “cost-benefit analysis” would show that the Dodd-Frank financial reforms are not worth pursuing.  This is actually a clever – or perhaps devious – legal strategy that is being pursued in a low profile but effective manner.  Even well-informed people in Washington frequently have no idea how much damage this myth can still cause within the rule-writing process.

Fortunately, Dennis Kelleher and his colleagues at Better Markets are fighting hard against this myth.  In a report released this week, Kelleher, Stephen Hall, and Katelynn Bradley point out that the industry never wants to take into account the real costs of the crisis – millions of jobs lost, growth derailed, lives disrupted, and massive damage to our public finances.

We had a frank discussion of this report at the Peterson Institute on Monday, and I was struck by how many people have a hard time getting their minds around the scale of the damage wrought by large financial institutions that got out of control.

This relates also to the third myth – which is the claim that financial reform will hurt our growth prospects.  Again, as laid bare by Better Markets, it was reckless risk-taking at the heart of our financial system that led to the largest crisis since the 1930s; the damage will be with us for a long time.

Some dramatic government actions helped to reduce the impact on the real economy – and we avoided a Second Great Depression.

But, as Neil Barofsky makes clear, there is almost nothing about these bailout measures that should make you feel good.  Putting the big banks back on their feet, with essentially no conditions requiring real change, was a mistake – reinforcing the moral hazard and implicit government subsidies that are now at the heart of our financial system.

Today’s global megabanks are too big to manage.  It is not “the market” in any sense that keeps these firms at their current scale; this is the largest and most dangerous government subsidy scheme on record.  Such subsidies can only be ended by government action – it is time to break up the largest banks.  Make them small enough and simple enough to fail.

An edited version of this post appeared yesterday on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

When Did The Economist Become Comically Stupid?

By James Kwak

I recently got around to looking at my latest issue of The Economist.  Here’s the cover:

If you can’t make it out, that’s a huge Barack Obama, a small Mitt Romney, and the following caption: “Big government or small? America’s great debate.”

Now, how you could draw a contrast between two men who passed structurally identical health care plans—in which government regulation is used to incent people to buy insurance from private companies—baffled me. The caption, if anything, should have been “Small government or tiny?” So I peeked inside, where things get worse.

The premise of the article is that President Obama has made government bigger. But there’s no intelligent way to make this case, because it just isn’t true by any meaningful measure. There’s a chart in the print edition (which I can’t find online) showing government employment as a percentage of total employment and as a percentage of the potential labor force (correcting for the overall business cycle). The former line went up from 2007 to 2010 (hey! big government!), but the latter line has only gone down since 2002. In other words, government employment is declining as a share of the working-age population, a point also made by Catherine Rampell earlier. And this isn’t a recent phenomenon: the government’s civilian workforce, which was around 1 percent of the population from the 1950s until the early 1990s, is now down around 0.7 percent (see the BLS, Current Employment Statistics).

There’s another chart that purports to show growth in “federal regulatory employment.” But simply glancing at the components of the columns shows that the big increases have been in the TSA and, more recently, “Other Homeland Security.” If Mitt Romney wants to differentiate himself from Barack Obama by slashing homeland security staffing, then The Economist has a point—but I doubt it.

Some of these points are made in the body of the article itself (I suspect the writer knows more or less what’s going on, and the more egregious flaws are due to the editors) , but the only logical conclusion of those caveats is that the article should not have been written in the first place, let alone splashed with a silly graphic on the cover. The only thing the article’s author argues is a meaningful increase in the “size” of government is an increase in regulatory policy-making, notably by the EPA, the Affordable Care Act, and the financial regulatory agencies. But the EPA is only more active by comparison to the George W. Bush years, when the agency was under pressure not to do anything; the Affordable Care Act, as mentioned above, is modeled on Romneycare (which we are pretty happy with here in Massachusetts); and who would argue with a straight face that the laissez-faire financial regulation of the pre-crisis years was a good thing?

It is a major problem that many people do not really understand what the federal government does, let alone whether it is growing or shrinking. (Chapter 4 of White House Burning attempts to clear up these questions.) A goofy Photoshop montage portraying President Obama as a booster of big government only reinforces people’s misconceptions.

The One-Sided Deficit Debate

By James Kwak

Michael Hiltzik (hat tip Mark Thoma) wrote a column lamenting the domination of the government deficit debate by the wealthy. He clearly has a point. The fact that Simpson-Bowles—which uses its mandate of deficit reduction to call for . . . lower tax rates?—has become widely perceived as a centrist starting-point for discussion is clear evidence of how far to the right the inside-the-Beltway discourse has shifted, both over time and relative to the preferences of the population as a whole.

What’s more, the “consensus” of the self-styled “centrists” is what now makes the Bush tax cuts of 2001 and 2003 seem positively reasonable. With Simpson-Bowles and Domenici-Rivlin both calling for tax rates below those established in 2001, George W. Bush now looks like a moderate; even many Democrats now endorse the Bush tax cuts for families making up to $250,000 per year, which is still a lot of money (for most people, at least).

But some of the blame for this state of affairs must rest with Democrats, liberals, and their usual mouthpieces as well. For over a year now, the refrain of the left-leaning intellectual class has been that the only thing that matters is increasing growth and reducing unemployment, and any discussion of deficits and the national debt plays into the hands of the Republicans. It may be true that jobs should be the top priority right now, but the fact remains that many Americans think that deficits matter (and most of those left-leaning intellectuals would concede that they matter in the long term). Those Americans are currently getting a menu of proposals with Simpson-Bowles in the right, Paul Ryan and Mitt Romney on the far right, and Fox News on the extreme right. There is no explanation of how to deal with our long-term debt problem in a way that preserves government services and social insurance programs and protects the poor and the middle class.

One of my objectives with White House Burning was to help fill that gap, beginning with an explanation of what the federal government does and why it matters and continuing with a proposal for how to fill the long-term budget gap without gutting Social Security, Medicare, and Medicaid. But Simon and I don’t carry a lot of weight with the Serious People who like talking about deficits and shared sacrifice and belt-tightening (not as much as American hero Jamie Dimon, apparently). As long as those people have the floor to themselves, nothing is going to change.

Things That Don’t Make Sense

By James Kwak

From Sebastian Mallaby’s review of Robert Shiller’s new book:

Psychologists have established that the key to happiness lies not in riches but in social esteem; therefore, Shiller says, financiers face powerful emotional incentives to balance profit seeking with a social conscience. “The futility of conquest in business mirrors the futility of conquest in war,” he writes. Just as it is impossible to extract much wealth from conquered countries, so it is impossible to extract much happiness from wealth earned unscrupulously.

Does anyone actually think that Wall Street traders and Greenwich fund managers, in general, temper their profit seeking because they want to be seen as doing good for society?

(Besides, the first clause above is simply wrong as a matter of fact: psychologists have established that happiness is a complicated thing, and “social esteem” is only one part of it. See Haidt, Kahneman, Gilbert, etc.)