The Financial Times reports that U.S. bankers are "enraged" about the pay limitations of the new U.S. recovery plan. Numerous bankers warn that these pay caps will lead to a "brain drain": high paid bankers will flee elsewhere in search of the top dollar.

    Should we be quaking in our boots about this threatened drain of bankers' brains?

    I don't think so.

    For starters, this may simply be an idle threat. There are a lot of questions about how many bankers will really be affected by these pay limitations. And even if they do want to leave, the bankers may not be able to make good on their threat. Anti-banker anger is on the rise just about everywhere and pay caps are being imposed in many of the world's financial centers including London and Paris, and are likely to be instituted elsewhere as well. Bankers in other financial centers simply do not receive the huge salaries and bonuses received by "top" U.S. bankers in recent years. In addition, bankers in other countries, including high priced ones, are losing their jobs. So, where are these angry U.S. bankers going to go?

    One answer is they will go to the unregulated "shadow" banking sector: hedge funds, private equity firms and the like. Of course, these are also under enormous stress. And if the Obama administration is going to prevent another crisis down the road, it will have to start seriously regulating this "shadow" system, including their compensation schemes.

    But, let's take bankers at their word. Let's say many of the "best minds in banking" will go elsewhere if serious pay restrictions are imposed. The question we have to ask is: so what? The answer is: this may be a blessing in not that much of a disguise.

    Most economists agree that our financial industry is now too large. In the boom and bubble of recent years, the financial industry grew enormously relative to the rest of the economy. According to data compiled by James Crotty of the University of Massachusetts, Amherst, the assets of the banking system grew from about the same size as the economy in 1960 to about 4 times its size by 2006. Starting in the mid-eighties, in other words, the size of the financial sector began growing much faster than the economy as a whole and its pace accelerated dramatically in the last 10 years leading up to the crisis. Most economists agree that the financial sector must shrink and as it does, some bankers will be sent off to other pastures.

    But what about the argument that the pay caps will make us loose the "best brains," as this restructuring takes place? Well, who are the highest paid bankers, the ones who should (but might not) chafe most under the new restrictions? The highest paid bankers are the "deal makers," the "rain makers," the ones who figured out how to create the toxic securities, the structured investment vehicles, the credit default swaps and sell them around the globe.

    We do not want these kind of deals to be made anymore and so we do not need these top brains - or any brains - to make them.

    In fact, our real problem has not been a brain drain, but the reverse: a brain rush into banking.

    Over the past twenty years, the vast majority of my economics students have wanted to go into banking upon graduation. The reasons are not hard to find: according to statistics compiled by economists Thomas Phillipon and Ariel Reshef at the National Bureau of Economic Research (NBER), by 2007, average wages in investment and specialized banking had grown to be about 4 times higher than average wages in the economy as a whole (farms, aside). And by the year 2000, students with just an undergraduate degree who went into banking made $10,000 a year more than those going into engineering. For post graduates, the gap was even higher. Overall, by the 2000's, financiers were making 30 - 50% higher wages on average than others with the same level of education, skill and other relevant characteristics.

    It was like we faced a banking black hole-sucking in many of the good young minds of several generations - never to be seen again in the classrooms of schools, hospital wards, engineering firms, or solar cell manufacturing firms. Never, at least, until now.

    Now maybe some of the bankers losing their jobs, and more of my students, will choose to be teachers, doctors, engineers, manufacturers of wind turbines and solar cells, and even public servants. And the bankers that will be left in banking - some of it nationalized or quasi-nationalized - will not have the brains tuned-up for toxic deal making, but will have brains well suited for lending to small and medium sized businesses, for households and firms trying to make the green investments we need, for helping pension funds figure out how to really provide for their participants' retirements.

    So let's say to the government: tighten those pay restrictions, if necessary to make them bite.

    And let's say this to the bankers who are threatening to leave: we call your bluff. Make our day.

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    Gerald Epstein is Professor of Economics and co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst, and Visiting Scholar, Universitè, Paris NORD (Paris XIII). gepstein@econs.umass.edu.

www.truthout.org/021509A