Coming into the 2012 elections, Republican nominee Mitt Romney most likely expected his success to be one of his strongest assets. He probably did not expect that his experience would one day become part of his greatest vulnerability, wrapped up in an ill-judged statement about the "47 percent" and the ideological aftermath of the 2008 financial meltdown.
While I disagree with critiques of Romney's wealth - and frankly I'm surprised that money is suddenly an issue - what is significantly more disturbing is the increasingly harsh characterization of the finance industry.
It is nearly a daily occurrence that I hear students or professors at Brown write off investment bankers and private equity investors as either unnecessary or destructive to the economic system.
A Herald article by Cara Newlon '14.5 ("Let's get personal") offers a stark example of such remarks. "Financial trickery" is the sole source of investment banker's money in the author's mind. She places the blame for the economic crisis on their doorsteps. She even goes so far as to draw a contrast between those who made money through "shady financial dealings" and those who made money by "creating valuable products" - the latter being the only legitimate means of gaining wealth. Though the author's concerns about Romney's fit for president are appropriate questions to pose, these statements show a lack of understanding and appreciation for the centrality of the financial world in global material success. Ms. Newlon is unfortunately far from alone in her opinions. Her statements represent the opinions of Americans across the country and even some of the most intelligent here on campus.
To have a genuine discussion about the ideal role of finance in the American economic system, it is important to first clear the air about finance. I'm here to tell you that investment banking is more than financial trickery and that private equity is more than shady financial dealings. Global material success - from the iPhone in your pocket to the house your parents live in - depends on the financial industry as much as it depends on Steve Jobs and KB Home. I might even slip in the fact that investment bankers did not single-handedly bring down the United States economy in 2008.
Investment bankers match those who want to borrow funds with those who have excess funds to loan out. A potential company might have a fantastic idea for a new product, but without capital, this company cannot invest in producing its idea. Without investment bankers providing this capital, innovation and economic growth would come to a severe and dramatic halt.
Private equity firms, while playing a much smaller role in the financial industry than investment banks, also allow growth and innovation. Private equity firms directly invest money in struggling companies. While the policies private equity firms impose on these companies may not be ideal, they are necessary to save the company from a much worse fate: complete failure.
While we may disagree about the structure of these financial institutions, the functions that they perform are not financial trickery. They are central to economic development because they support innovation.
Also their roles extend beyond the simple examples above. They are an integral part of the modern economy. This brings me to my final point - the causes of the financial crisis. One of the major reasons for the economic downturn was the bubble that developed in the real estate market, driven by the increasingly complex and risky ways of securitizing mortgages. This securitization was in part driven by a flood of credit both domestically and internationally, which drove down interest rates and caused banks to take outsized risks. The financial services industry is not free from blame for the financial crisis. Desire for increased profits drove these institutions to create extremely complex securities backed by bad loans and extreme amounts of leverage.
It is far too simplistic to blame the financial crisis exclusively on bankers. This securitization was, in part, driven by political leaders' decision to prioritize increased home ownership.
This required subprime lending - making loans to borrowers who are less likely to pay back their mortgages in a timely fashion. Subprime mortgages, though, were far more risky than their traditional "prime" counterparts, making them less attractive both to banks and institutional investors. Complex securitization allowed banks to spread the risk incurred by lending to subprime customers. This freed subprime mortgage lenders from responsibility for the entirety of these risks - spurring them to invest. Subprime lending thus came hand in hand with complex securitization. This contributed to the real estate bubble, to increased institutional risk, to increased security complexity and ultimately to the financial crisis after these mortgages ultimately turned sour.
It is imperative that we as a nation have a conversation about the role of finance in post-crisis America. But this conversation must be free of purely ideological, baseless attacks. Instead, the conversation must occur within a nuanced and multifaceted understanding of the truly important role that the financial world plays in the economic and material development that we all desire for the country.
Alex Drechsler '15 is all about the Benjamins. He would love to be reached at alex_drechsler@brown.edu.
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