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Colin Powell Plays the Risk Card

11/15/2011 10:44 am ET | Updated Jan 15, 2012
  • Howard Steven Friedman Statistician and health economist for the United Nations; Teacher, Columbia University

In a recent interview with Piers Morgan, Colin Powell was asked about the enormous salaries paid in the financial industry. Powell's reply, in echoing the words that so many have parroted before, praised the capitalist system and expressed the conviction that the rewards in the finance industry are deserved since "with risk goes return." This cliché reply contains so many falsehoods that it forces us to conclude that the former Secretary of State is either completely ignorant of any of the basic facts associated with the financial industry or that he is a paragon of someone who has succeeded in a massively slanted socioeconomic system and so has no interest in seeing this structure even slightly leveled.

Let's try a mock interview with the former Secretary of State, former Chairman of the Joint Chief of Staff and retired General where we assume the former, that he has remained blissfully ignorant throughout his education and career.

"General Powell, your statement indicates that you believe that investment banks and hedge funds deserve to be richly rewarded since they risk their money in making investments."

"Yes, of course. Like I said, risk should be rewarded"

"But, you realize that it isn't their money they are risking. Hedge fund managers are typically paid 2% of the assets and 20% of the profits of the funds they manage where they are investing other people's money. So they get a guaranteed large salary even if they lose other people's money. Does that sound like they are taking on risk?"

"I see. I didn't realize that. Of course the banking industry is very different from hedge funds."

"Actually the banking industry may be even worse than the hedge fund industry regarding risk. The main reason why the investment banks worked tirelessly for decades to tear apart the Glass-Steagall restrictions (the restrictions that prevented investment banking and commercial banking from being performed by the same company) was so banks could risk other people's money and have the federal government back up their gambling. The deposits from commercial banks were insured by the government so they get to play with someone else's money and even have a government-provided insurance policy when they lose."

"But of course after this last financial crisis they reenacted the Glass-Steagall laws."

"Uh... sir? It seems you are unaware that even today, after the massive bailouts of the banks, investment banks and commercial banks are still allowed to coexist. Even if you didn't realize this, you certainly realize that hedge fund managers pay only a 15% tax rate on the income they receive. This rate is much lower than the typical middle income family."

"Well, the law's the law. I am sure it was written to be fair and there was some good reasoning for it."

"In the words of the great (tennis) analyst, John McEnroe 'You can't be serious!' The lower tax rate isn't due to an accidental omission -- it was purposely written into law because the wealthy are able to influence the politicians to make laws that are convenient for them. This gift to the wealthy costs the U.S. taxpayer about $6 billion a year, with almost $2 billion of it attributed to only 25 individuals."

"I hear your facts but I know in my heart that bankers serve a positive good. Like Ayn Rand discussed, the efficient use of capital is one of the most important functions that can be served in society. This important role must be rewarded."

"You are aware that many of the profits made in trading are not due to identifying long term ventures that will profit from investment but rather are due to multiple trades occurring within seconds to take advantage of momentary market inefficiencies and situations where one trader has more information that another. Does that sound like Any Rand to you?"

"No, I guess not. But of course in the post-crisis world things have changed. Any illegal practices that led to the crisis have been punished with appropriate jail times, any gaps in regulations have been filled, any excesses in payments have been curbed and the banking industry, in recognition of the fact that they were saved by the American taxpayer, has been actively loaning money to worthy small business and individuals while curbing those outrageous bonuses."

"Sir, nothing you just said was even remotely accurate. It seems finance isn't your strong suit. Let's shift our discussion to a topic you are more familiar with so you can demonstrate your deep knowledge and insight. How about we chat about that evidence you showed at the UN proving that Iraq had weapons of mass destruction?"

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