Imagine that…candidates actually debating substantive differences on economic policy

November 16th, 2015 at 9:20 am

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.

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8 comments in reply to "Imagine that…candidates actually debating substantive differences on economic policy"

  1. Rima Regas says:


    Was it not fraud when we had the S&L crisis? Was it not fraud when whatever banker genius it was came up with derivatives and derivatives became a thing? Is it not fraud when so few corporations are able to rig the economy to extract from the middle and working classes to the point we have a precariat that is larger than at any other time? Is it not a model based on fraud when the only thing a corporation aims for is increasing profits for its shareholders through money in politics and interference in policy, no matter the cost to an entire nation? I think if you take Sanders a little less literally in his usage of the word fraud, he makes a lot of sense.

    The worst ideas Milton Friedman ever came up with have become our reality. Back in 1962, when I was born, corporate mentality was different. It isn’t that business-people were saints back then. They surely weren’t. I did a bit of research and mixed it with some Milton Friedman, ending with Ronald Dworkin…

  2. Smith says:

    There very well may be a critical role for financial markets, for credit, for access to capital, for the ability to build assets through saving and investing. But Wall Street and the banks are not fulfilling it. If they did that, and just that, they’d be boring and half the size, as Krugman says they must be for a stable economy. They can only sustain their size and performance by trying to beat the market, and they can’t because they are the market. When they lose they resort to increased risk or various forms of fraud, speculation, and ripping off their customers. The salaries alone are a form of fraud, as they are not worth the money paid.
    The dictionary definition? (plus examples I’ve supplied in parenthesis)
    the crime of using dishonest methods to take something valuable from another person (robo foreclosures)
    a person who pretends to be what he or she is not in order to trick people (self interested investment advisors)
    a copy of something that is meant to look like the real thing in order to trick people (LIBOR rates)
    Check, check, and check.
    It was well after the 2009 crisis when JP Morgan lost $2 Billion. How do you misplace $2 billion? Did they leave it in the trunk? Misplace in someone’s closet. Did they check the couch cushions?

    Last updated: May 11, 2012 3:22 pm
    JPMorgan loses $2bn in ‘egregious’ error
    By Tom Braithwaite in New YorkJPMorgan Chase announced a surprise $2bn trading loss on credit derivatives trading, which chief executive Jamie Dimon blamed on “errors, sloppiness and bad judgement” and warned “could get worse”.

    I too thought he might have been too harsh, but after reading your blog, and reconsidering, no, he’s right on target. I’m afraid you’re off the mark. It just sounds like political rhetoric.

    • Smith says:

      To clarify my closing sentence, the “It” refers to Sanders’ accusation of fraud, and the emphasis is on “sounds”

  3. JoeF says:

    If you don’t think the business model of Wall street is fraud, please acquaint yourself with the work of Bill Black

  4. Richard says:

    The ‘Bern’ uses the word fraud as a way to tap into and express the anger that many ‘average, everyday’ Americans feel about the extent to which the big banks and investment companies and their execs made billions and then got away with fines that amounted to little relatively speaking. Yes, credit, etc is needed for our economy to function. But these guys and their corporations are clearly not in the business to look out for the welfare of the country, let alone the average citizen. Thus, regulations are needed. And these must be simple enough to enforce. Admittedly not easy in this complex world we live in. But the big banks and investment companies want it that way so they can ‘work the system’ in their favor.

  5. Smith says:

    In southern and poor states, is the lower cost of living a benefit or a misfortune (a feature or a bug)? Does it make living on low wages more affordable, or is it actually more a result of the low wages? In light of the historical animosity to labor organizing, labor rights, generally lower wage scale and lack of unionization manufacturers find attractive, one tends to think the latter. Conventional studies of wages and minimums do not factor in this aspect of lower local costs driven in part by wages themselves. Local lack of needed state services can also help drive down living costs. There is also the phenomena of an outflow of revenue from high cost of living areas to lower cost of living areas, a redistribution of income and wealth from prosperous blue coastal states to less prosperous lower cost of living red states. In all cases, a higher local cost of living will cause a period of adjustment in lower cost of living areas. But in some respect this will be beneficial in the same way other reforms, national in scope, have been enacted, in a similar vein and with all due respect, without trivializing the gross suffering of slavery, or the radical nature of New Deal labor reforms (partly reversed by Taft-Hartley).
    It seems this is overlooked, a broader macro view, but is implied by Sanders statement, there are consequences, but “I apologize to no one.” HIs defense, which seems well though out, is putting money into the pockets of people who will spend it, will in the long run, have overall beneficial effects which will extend to everyone, except maybe the ruling billionaire class.

  6. Robert Goodman says:

    I fail to understand your point here Jared. Lots of lawful behavior is deceptive, specifically crafted to evade the intent of the law, designed to exploit one’s advantage in information, power or other resources over those with whom the more powerful party is entering a contract and so forth. Such behaviors qualify as fraudulent in common usage and as fraud in all but the strictest legal sense.

    To say that the business of Wall Street is profoundly characterized by fraudulent practices does not suggest that it is easy to fix. Nor does saying that the problems are “waste and rent seeking or anti-productive activities ” add much light to the subject nor point the way to solutions. Fraudulent practices can cover all of that and in a single easily grasped idea. Certainly “Wall Street” serves a general purpose but as is utterly clear from the development of the financial services industry Wall Street is there to serve itself primarily. Convince us otherwise Jared.