When I wrote that most people don’t understand regulatory capture, this is what I meant:
But it’s [i.e. drastically shrinking the financial sector] not going to happen, because the public servants who could enact such a change currently have the ability to earn millions of dollars per year when they leave DC. Government work pays well, but not that well. The real value of a government position, especially in the economic team, is in the marginal net present value of all those juicy future earnings that you’ll be offered upon your departure from the administration. And so any reforms aimed at shrinking the financial sector would do massive damage to the economic health of the reformers themselves. And those reformers are wonks, remember: precisely the kind of people who consider probability-weighted future earnings to be genuinely valuable things.
I’ve worked in the financial regulatory area of government for 6+ years. I’ve seen only a handful of people leave and none of those that left make millions.
Why would we leave? Mr Salmon doesn’t understand the compensation structure of the industry he’s writing about or about government.
Those in the financial sector that make millions are traders and executives. Even the above average bureaucrat isn’t likely to make a good trader. All the bureaucrats that I have known that left government went to work in risk management or compliance (none have left at the executive level). You can made good money working in these areas, but not millions.
Further, the money that you might make by leaving government is highly uncertain. You could even – gasp – get fired.
I’ve only been in government for 6+ years and I already make a bit more than $100,000. As best I can tell, no institutions are willing to give me a base salary that is much higher than my current compensation (I got two offers this years from private companies, both offered raises to base salary of less than 20% – of course the bonuses could be huge). Why would I leave to potentially make more? Plus, I’d have to work past 5:00pm regularly – that would suck.
Mr Salmon is using Occam’s butterknife to try to figure out why regulatory agencies don’t radically reduce the size of banks. Why would they? The ones that regulate mega-banks like the power that comes with regulating huge institutions. Why wouldn’t they? The same regulators suffer no consequences if the financial system is unstable (the vast majority have gotten significant raises since the crisis started). They have no reason to shrink banks and every reason to want to regulate huge ones. There’s no reason to search for more complicated motives.