September 24, 2018

WU | A Career in Finance, Ten Years After the Crisis

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Ten years ago, before many of us had the requisite adult teeth to pronounce “synthetic collateralized debt obligation,” capitalism failed.

Or at least it seemed that way. On September 15, 2008, Lehman Brothers, once an investment bank holding assets worth thrice the GDP of Greece, filed for bankruptcy. It was, and remains, the largest bankruptcy in American history. Markets tumbled across the globe in a housing-fueled financial crisis that wiped out over $30 trillion in wealth by March 2009.

Commentators disagree about the root cause of the crisis. Some point to overly loose monetary policy, others to reckless deregulation. Still others blame Wall Street greed, though, as Mark Blyth of Brown University notes, “You can’t explain a variable with a constant.”

Probably the best — and least satisfying — explanation of the crisis is that it is overdetermined. That is, not unlike the election of Donald Trump, it was caused by a confluence of factors all converging to spell disaster.

The trouble for finance-inclined Cornellians is what to make of the post-crisis financial sector. If the industry really is greedy and morally (if not financially) bankrupt, then what bright young person would want to waste her talents trading stocks?

Zoom out for a moment. Finance plays an essential role in society. Financiers move capital, in the form of credit, from those who have it now to those who need it now. Inventors with an idea are paired with investors chasing profits. In theory, both win.

The financial sector also helps people and firms manage risk, chiefly by creating diversified financial products that usually gain value over time. Similarly, derivatives let people bet for or against specified outcomes, which helps mitigate downside risk.

Yet all is not well in modern finance. New business formation has not bounced back from the financial crisis, partly because banks appear less willing to lend money to small businesses. George W. Bush’s bank bailouts, that Barack Obama continued, showed the government’s willingness to prop up risk-happy financial behemoths with taxpayer money.

Some academics have found a relationship between financial-sector expansion and economic growth resembling an upside-down parabola. At first, the economy benefits from the extra efficiency that a burgeoning financial system brings. But later, as the industry grows ever larger, finance begins to suck away resources from the real economy. Productivity falls and so does growth.

This last point is worth dwelling upon. Talk of “sucking away resources from the real economy” is abstract. In concrete terms, that means campus-recruiting divisions at finance firms nudging promising young people into a 20-year career pipeline. That means seducing an aspiring astrophysicist with a six-figure job working on arcane financial models. That means cultivating among students the sense that a profession in finance is prestigious and enviable.

The simple story of human capital outflow — away from the productive economy and into finance — is complicated by another legacy of the financial crisis: inequality. The share of national income that goes to laborers has fallen to historic lows. Median wages have recently ticked up, but were for years stubbornly flat. Economic growth increasingly accrues to the top quintile of earners. These trends began before the financial crisis, but they were exacerbated by it.

And they mold how we think about our careers.

For students mulling possible career paths, the unavoidable question becomes: “Will this job pay?” Generation Z, loosely defined as the cohort born between 1995 and 2005, cares more about financial security than any other generation. The Wall Street Journal’s Janet Adamy characterizes this trend well. Gen Z, Adamy writes, is “sober, industrious and driven by money.” Adamy’s lede tells the tale of Sean McKeon, whose family was pinched by the crisis. McKeon, a senior at Miami University, wanted a “career that’s recession-proof.” He went for a job at EY, a financial auditing firm.

It’s hard to fault McKeon. In a stratified economy, if you’re not on the top, you’re on the bottom — thus the appeal of finance’s juicy salaries. It makes sense for individuals to go into finance. But if too many do so, America has a problem. We need more smart, ambitious people to build rockets, write timeless novels and code the next Tinder-killer. We need fewer smart, ambitious people to dream up the next synthetic collateralized debt obligation.