In the last few weeks, I have found myself debating on radio and TV programs whether various financial instruments have any social utility — any “real world” purpose other than “speculation or gambling.” (Disclosure: I give professional advice to a number of financial organizations.)
My first instinct was to defend various derivatives as serving useful purposes: to hedge against various risks — such as currency fluctuation or rises in the price of aviation fuel — and to promote innovation, competition, efficiency, and liquidity (paraphrasing Lawrence H. Summers, Alan Greenspan, Arthur Levitt, and William J. Rainer from a 1999 Clinton administration report).
I pointed out that creating a venue to which community banks could sell their mortgages freed up their capital to make more home loans, thus creating more homeowners. That is why Franklin D. Roosevelt set up Fannie Mae in 1938. Secondary markets tend to enlarge the primary market. This is good.
Short-selling, which is now being attacked as immoral, was defended well by Dean Baker in The American Prospect:
Short-selling can play a very important role in the market. If informed investors recognize that a stock is overvalued, they perform a valuable service by selling it short and pushing down its stock price. This can both deprive the company of capital and be a signal to other actors in the market that the company might not be as healthy as is generally believed.
The economy would have benefited enormously if large numbers of traders had shorted Fannie Mae and Freddie Mac four years ago when they were buying up hundreds of billions of mortgages issued to buyers who bought homes at bubble-inflated prices. This would have stopped the bubble years ago. Similarly, we could have prevented the financial chaos at Merrill Lynch, Citigroup, Bear Stearns and the rest, if traders had recognized their financial shenanigans and aggressively shorted their stock. In the same vein, heavy shorting by informed investors could have prevented the boom and bust of the tech bubble.
One could go on making rational arguments to irrational people. But the very idea of being asked to defend freely entered transactions on the grounds of “social utility” is socialist-Marxist bunk. What in the world is “social utility”? And who gets to say so? Why is making a profit as an athlete or a politician better than making a profit as a banker or insurance salesman?
As Ayn Rand explained so long ago: “When the ‘common good’ [i.e., social utility] of a society is regarded as something apart from and superior to the individual good of its members, it means that the good of some men takes precedence over the good of others, with those others consigned to the status of sacrificial animals. It is tacitly assumed, in such cases, that ‘the common good’ means the good of the majority as against the minority or individual.”
It seems unfathomable, after a century of constant failure by every “social utility”–minded government on the planet, that today in 2010, the American government must be re-educated to that history of failure.
Yet we have heard recently from Democrats in Washington that Wall Street makes too much money and is too big a share of the American economy. Compared with what? The financial juggernauts of Libya, Romania, or the Congo? Or, for that matter, France, Russia, or Spain? Or, for that matter, Japan, Saudi Arabia, or China? Yes, China, with its fraudulent banks and corrupt, finagling government.
Well, one of the reasons our economy continues to amount to 25 percent of all human economic activity on this planet (although our population is less than 5 percent) is because a free, risk-taking, innovative Wall Street has been the financial capital of the world. Yes, we have busts from time to time. But our booms have outdone our busts. That’s why we have been the leading economy on earth for over a hundred years.
But the current congressional majority and the White House (and their fellow thinkers in the media) seem to be possessed of cobwebbed, left-wing social-utility theorems compounded by mental devolution to the historic idiocies and bigotries that our ancestors in the Old World — in their ignorance — imputed to money lenders, bankers, the Bavarian Illuminati, the House of Rothschild, etc.
Shakespeare’s moving but anti-Semitic The Merchant of Venice seemed to make a reappearance in the Washington Post’s lead Sunday story headlined “Cheers at Goldman as housing market fell; Executives reveled in bets made against the market.”
Take then thy bond, take thou thy pound of flesh;
But, in the cutting it, if thou dost shed
One drop of Christian blood, thy lands and goods
Are by the laws of Venice confiscate
Unto the state of Venice.
– Portia, The Merchant of Venice, Act IV, scene 1.
The flagrant Securities and Exchange Commission charges of civil fraud against Goldman Sachs last week, followed by Congress’s release of embarrassing interoffice Goldman Sachs e-mails on Sunday, are obviously intended to set a moral tone for the final stage of the debate over the financial-reregulation bill currently before the Senate.
It would seem that statism, historical amnesia, economic ignorance, and bigotry are the mental and moral dispositions that will be shaping the passage of our financial-reregulation bill in the Senate this week.
The current, ill-fated 111th Congress continues to blunder its way into our history books alongside the dreadful 94th, which cut off money to South Vietnam in 1975, lost the war, and triggered the Cambodian genocide; 71st (1929–30), which passed the Smoot-Hawley Act, which led to the Great Depression; 63rd (1913–14), which passed the 16th Amendment (income tax) and the 17th Amendment (direct election of the Senate) and created the Federal Reserve, which led to weakening of the states and the encroachment of the federal government; and 33rd (1854–55), which passed the Kansas-Nebraska Act, which hastened the advent of the Civil War. A couple of more destructive laws enacted and the 111th will be Number One.