Pinsker: In your paper, you talk about how there's a vicious cycle that arises when public opinion is really negative, and as a result, all the financial sector can do to sustain itself is to dump money into political lobbying. Can you expand on that cycle and how it promotes what you call "bad" finance?

Zingales: I think this is a very important point that I would like as many people as possible to appreciate. For a market system to work well, in particular for a financial system to work well, we need to have rule of law, not only today, but also in the future. People should expect that the law is respected, that there is no arbitrariness, that regulation is done in a proper, unbiased way.

When this expectation is defused, people take it for granted and they work within the system. My best example is when you go to a place that is orderly. You see a line. You see everybody queuing in the line, and you follow the rules and get in line. The moment you see people cutting the line, the temptation for you to jump the line becomes big for two reasons. One, there's a social reason: If everybody does it, why not you? But also there is, if you want an economic reason, if you're the only one not cutting the line, you're going to wait much, much longer than in a normal situation. And so, the incentive to deviate starts to be pretty big.

The same is true in the market system. If everybody follows the rules, you feel like you can thrive following the rules. You don't feel compelled to try to modify the rules to your own advantage.

So, the example I always bring up is, in March 2009, Congress voted with an overwhelming majority to impose a retroactive tax on bank bonuses at a rate of 90 percent. This never became law because the Senate did not approve it, but the fact that an overwhelming majority of the House was in favor of that indicates that when there's outrage, when there is a populist pressure to do something, you can go in the direction of expropriation. A retroactive tax is as much of a violation of the rules as you can imagine.

Now, what is interesting is this retroactive tax is a reaction to populist outrage, but it's also a precondition for more violations to come. Because now, the investors will feel entitled to say, "Wait a minute. I'm not going to invest if I fear being expropriated. I need some guarantee from the government that I either will not be expropriated or else I get some subsidy." So they will start lobbying very heavily to get some privileges, which of course will generate even more outrage, and this is a vicious circle that we see playing out in a lot of countries.

If you go to Latin America and you see how there is at the same time a very populist pressure and a huge amount of privilege for a small elite, you say, "How is it possible that the two things coexist?" And yes, to some extent, they support each other—at the very opposite ends of the distribution—but they support each other. That's exactly the direction we don't want to go in.