What would FDR do?

In 1936, Franklin Delano Roosevelt took the podium at Madison Square Garden to deliver a message to his critics. "We [have] had to struggle with the old enemies of peace," he said. "Business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me, and I welcome their hatred."

Earlier this morning, Barack Obama took the podium at Cooper Union and delivered a rather different message to organized money. He asked not for their hatred, but for their support. "I am here today because I want to urge you to join us," he said, "instead of fighting us in this effort. I am here because I believe that these reforms are, in the end, not only in the best interest of our country, but in the best interest of our financial sector." (For a full transcript, head here.)

The point of the contrast isn't to set FDR's stirring populism against Obama's preference for cooperation. It's to ask which is a better policy approach.

There's some reason to be skeptical of Obama's contention that these reforms will be in the best interests of the financial sector. If true reform of the derivatives sector passes into law, for instance, Wall Street will lose the remarkable profits it extracts from writing complex contracts that few can reproduce and no one can price. But that gets to the question of Wall Street's interests. The last few years have been good for the sector. Consider these two graphs, both of which come from James Kwak. The first tracks financial sector profits as a percentage of total domestic products. It begins after the 1929 crash.

The second graph tracks the average wage in the financial industry against the average wage across all other industries. It begins before the crash of 1929, so you can see what the financial sector looked like before it melted down.

There are certainly many in the financial sector who would consider enormous profits and extremely high wages to be in their best interest. But it's not in the country's best interest for the financial sector to consume 40 percent of domestic profits. You can't regulate against that sort of incentive for taking risks. You can't legislate against the sort of political power that much money can buy.

But with a few exceptions -- notably the unexpected strength of the derivatives legislation -- it's not clear that the financial regulation bills under consideration in Congress do much to change the look of these graphs. Comparatively, you can see that after the Great Depression, the average financial wage lost a lot of its appeal in comparison to the average actual wage. Banking became, well, just another job.

The Dodd and Frank bills are not about changing how the financial sector works so much as changing how it's regulated. And there's a real need for regulation modernizing the powers of regulators, so that's not necessarily a bad thing.

But the question is whether that's a sufficient thing. Whether we also need legislation that is decidedly not in the financial sector's best interest. Legislation that brings down their share of total domestic profits and forces down their relative wages and makes it less lucrative for smart college graduates to rush into investment banks. Legislation that leaves firms that are smaller and easier to unwind and that doesn't offer massive rewards to people who develop complex and untested products and then sell them to other people who know even less about them. A financial industry, in other words, that looks more like the one we had after the Great Depression than before.

Photo credit: By Jim Young/Reuters

