Obama: No Love For Wall Street

New York Times economics columnist David Leonhardt has a big interview with Barack Obama in this morning's magazine that, as Matt Yglesias and Tyler Cowen note, is worth reading largely because it shows the president's grasp of economic policy issues. It's long and substantive and conducted without any handlers in the room.

It's also been picked over pretty well for notable quotes, but I thought Obama's answer in response to one question was notable and a bit odd. Leonhardt asked: Are there tangible ways that Wall Street has made the average person's life better in the way that Silicon Valley has? And the president answered:

Well, I think that some of the democratization of finance is actually beneficial if properly regulated. So the fact that large numbers of people could participate in the equity markets in ways that they could not previously -- and for much lower costs than they used to be able to participate -- I think is important.

If I'm not mistaken, the democratization of finance is a concept popularized in at least two of Robert Shiller's books. (I'm going to assume Obama is referring to Shiller because this New Republic article tells me Shiller is a big hit in the White House.) But the democratization of finance has not much to do with Wall Street making lives better and a lot to do with citizens learning more about Wall Street. As Shiller writes (in the Subprime Solution), democratizing finance is about "extending the application of sound financial principles to a larger and larger segment of society and using all the modern technology at our disposal to achieve that goal." It implies that we should do things like subsidize financial advice.

Which is fine, but I think that means Obama's answer was a bit of a cop-out. And that's fine too (he's the president and has to dodge questions all the time), except that I think the answer to Leonhardt's question is obvious and shouldn't be controversial. Of course there are tangible ways in which Wall Street has made the average person's life better.

There is a tendency to view finance less as an industry that contributes to our pile of shared wealth and prosperity and more as an industry that consists of crazy people with dynamite strapped to their chests -- useful only when they're not threatening to destroy civilization with derivatives. It's not hard to see why a view like that would develop. No one writes about all the planes that land safely, or the dogs that don't bite men, or the asset markets that don't implode.

But that view of financial innovation is, I think, wrong. Maybe it's easy to forget that financial arrangements like the bond or the IPO or the joint-stock limited liability company weren't around forever. But, like microchips, someone actually had to come along and invent them. And those inventions have vastly improved the lives of average people. I don't think it should be controversial for the president to say this to the New York Times.

(FWIW, I think the argument above is logically distinct from the argument -- expressed by Paul Krugman and Brad DeLong and Simon Johnson and others -- that the financial service industry is overpaid. An industry can be both beneficial and overpaid!)