Of course, Saturday’s debate between the Democratic candidates was initially dominated by foreign policy in the wake of the horrific attacks in Paris.
But when they turned to the economy, there were interesting substantive differences at a level of specificity you don’t often hear in these debates. I add my own few sense [sic] in re Glass-Steagall, the minimum wage, and the importance of who’s on the president’s economics team. Over at WaPo.
One thing I don’t get into was Sen. Sanders claim that “the business model of Wall Street is fraud.”
As you’ll see in the WaPo piece, I’m feelin’ the Bern re the senator’s impulse to thoroughly regulate financial markets. Such ideas, to be clear, hark back not to socialism but to smart economics from Adam (Smith) to Hy Minsky, who recognized that as the business cycle progressed, unregulated markets would eventually systematically underprice risk, inflate a bubble, and screw everything up for the rest of us for awhile, until the “shampoo cycle”–bubble, bust, repeat–can get started again.
But I don’t agree with his sweeping condemnation. And I say that fully understanding that campaign rhetoric often needs to reduce complex ideas down to simple assertions.
The reason this doesn’t work for me is that calling the model fraudulent actually makes it sound too easy to solve when the problem is the vast majority of what goes on in contemporary markets is of course legal. The problem isn’t fraud, it’s waste. It’s rent-seeking and anti-productive activities.
The role of early financial markets was to allocate excess savings that would otherwise sit in vaults not doing much of anything to productive endeavors with the potential to expand the economy’s productive frontier. More recent vintages added potentially useful instruments that allow market participants to hedge investments in ways that offset potential losses in investment A with investment B.
But from the very beginning, “innovators” found ways to speculate that generated temporary ebullience and hid the extent of growing risk. More often than not, the innovators were either a step ahead of the regulators or worse, tapped ideology about the wonder of innovation to drug regulators to fall asleep at their switches, dreaming Greenspanian dreams of self-regulating markets.
Fraud is much more concrete than any of that–think Madoff. Or for that matter, investment banks right before the crisis selling MBS long to clients while they, based on information they possessed in real time, were shorting them. That seemed fraudulent to me and should have been prosecuted. (Not the same thing, but it’s this sort of thing that leads me–and Lily B–to fight for the “conflict of interest” rule.)
There is a critical role for financial markets, for credit, for access to capital, for the ability to build assets through saving and investing. The goal of economic policy in this area must be to get back those fundamentals while blocking the shampoo cycle. I’m not sure yelling “fraud” helps to get us there.