How bad is banking?
What should you make of today's big New York Times story about how Wall Street "appears to be in the middle of a humbling transformation"? Maybe you could start with an arithmetic point. Tim Geithner says (brags? laments?), "We’ve cut the profitability of banking roughly in half," and the article attributes the bulk of the humbling to higher capital requirements. If you make -- as I have in the past -- the oversimplifying but not crazy assumptions that (1) debt financing is free and (2) capital requirements have roughly doubled since the crisis, then you have explained 100 percent of the profitability drop. Banks could basically keep doing exactly what they were doing before, exactly as profitably, but they have to share the profits among twice as many shareholders. Whose shares, arguably, are twice as safe, and who should therefore be pleased with the lower returns.