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Why having a lot of bankers is dangerous for any economy

By Matt Phillips
Published Last updated This article is more than 2 years old.

In urging would-be do-gooders to head to Wall Street in a recent article for Quartz, ethicist William MacAskill argues that by making a lot of money and then donating it, young people can actually do more to improve the world than by toiling in the low-paid vineyards of the non-profit sector:

Annual salaries in banking or investment start at $80,000 and grow to over $500,000 if you do well. A lifetime salary of over $10 million is typical. Careers in nonprofits start at about $40,000, and don’t typically exceed $100,000, even for executive directors. Over a lifetime, a typical salary is only about $2.5 million. By entering finance and donating 50% of your lifetime earnings, you could pay for two nonprofit workers in your place—while still living on double what you would have if you’d chosen that route.

Brooke Allen’s riposte counters that any philanthropist/banker eager to “save the world” would have to be sure that his contributions to charity aren’t offset by damage he does while carrying out his day job.

From our perspective, it also matters what kind of banking system our imaginary saintly bankers would be joining. If the system is dangerously large, the risks of doing damage to the economy would be higher, and perhaps they would have to up charitable contributions a bit more to offset the deleterious impact of participating in the banking system. This working paper (pdf, p. 14) from the Bank for International Settlements hammers on the point that big banking systems can be bad for growth:

There comes a point where further enlargement of the financial system can reduce real growth. Second, financial sector growth is found to be a drag on productivity growth. Our interpretation is that because the financial sector competes with the rest of the economy for scarce resources, financial booms are not, in general, growth-enhancing. This evidence, together with recent experience during the financial crisis, leads us to conclude that there is a pressing need to reassess the relationship of finance and real growth in modern economic systems. More finance is definitely not always better.

Why is that? Aren’t we told again and again that capital is the key to economic growth? To an extent, yes. But if there are too many bankers and too little real economy, it means there’s not enough quality business to go around. As a result, banks make a dash for the bottom, lending more to riskier borrowers, or operating on skimpier amounts of capital. (Or both!) Without enough capital, banks get jittery about declaring when loans go bad. So instead, they “evergreen” them, pushing out the payback dates, which helps them look healthier but creates an unhealthy banking system and clogs up capital in struggling companies.

In fairness, MacAskill isn’t arguing that society needs more bankers. He’s just saying that those who do become bankers can do a lot of good if they give some of their pay to charity. That’s true. But Allen is also right to point out that a banking system—even if it’s populated with altruistic financiers—can do its share of harm.

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