The Dodd–Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, was a response to the financial crisis of 2007 and 2008. Across the political spectrum, there was wide agreement that banks had acted irresponsibly and were at least partially responsible for the crisis. The Dodd-Frank Act imposes new regulations on banks with the intent of curbing excessively risky behavior. For example, banks will face much greater restrictions on trading securities for their own account (“proprietary trading”) and will be forced to observe higher capital requirements that in turn limit the use of leverage.
While salaries on Wall Street are still handsome by just about any measure, there is widespread resignation to the belief that new regulations will curb salaries. Many commentators believe this correction is long overdue. For example, scholars Thomas Philippon and Ariell Reshef have estimated that up to half of the difference between Wall Street salaries and average American salaries did not reflect any added value by Wall Street. They believe that salaries in the finance industry declined as a result of regulation in the aftermath of the Great Depression, but skyrocketed from 1980 onwards due to deregulation. These findings largely accord with a study by Andy Haldane at the Bank of England, which found that the finance sector exploded upon deregulation in the 1970’s. Haldane echoes the view of many on Wall Street when he says that the explosive growth in finance is over.
If Haldane, Philippon, Reshef, and others are correct, people set on becoming ultra-wealthy may start to focus more on entrepreneurship rather than working in finance.