Senators A, B, and C do not usually show up for hearings. A is Aristotle, B is St. Jerome, and C is Martin Luther. One big step on the Five Stages of Recovery from Grief and Loss is to realize that rage against finance has been around for a long time, and not always in a good way. In fact, comrades A, B, and C succeeded in preventing any financial system from operating much at all for many long centuries of poverty. It was only after we got over undiscriminating rage against all financiers, among other things, that we got an Industrial Revolution and the escape from global poverty.
So just like the good old email rule that you should not hit the send button when you’re angry, lawmakers might want to do a little introspection before passing the biggest financial reform since the Great Depression, which will influence policies towards Finance around the developing world.
Don’t get me wrong, part of – maybe most of -- the anger is rational and justified after the catastrophe of 2008. But I also think part is an irrational aversion to finance that has a long and inglorious history. As Jerry Z. Muller puts it in his great book, The Mind and the Market (from which I took the above references), for most of history people thought “economic gain not derived from physical labor” was illegitimate. There was “a failure to recognize the role of knowledge and the evaluation of risk in economic life.”
Part of the problem that fuels Financeaphobia is that many financial deals are indeed zero-sum after the fact. If one side bets housing prices are going up and the other side bets down, one side’s gain is going to be the other side’s loss. Yet finance is NOT zero-sum before you KNOW the outcome. Shorting housing markets is socially useful for a conservative money-manager hedging to protect the savings of widows and orphans. Going long was a socially useful high-risk, high-reward way to deliver financing for housing before the bubble developed.
One of the many signs of irrationality in the current climate is that Wall Street was first pilloried for not anticipating the fall in housing markets, and then the next illogical step was to identify those who DID correctly anticipate the fall as the biggest villains of all.
Again, again, don’t get me wrong – many financiers were deceptive, dishonest, or dumb, or all three. To differing degrees, so were regulators, so were borrowers. The system did go badly askew, and it must be put back inskew. But maybe you should let tempers cool a bit and make sure you do it right.
NOTE: above cartoon is from Rolling Stone magazine.