A Stitch in Haste

Robert J. Samuelson proffers one typically collectivist answer:

Except for oil executives, no group of business leaders is now more resented than the titans of finance — bankers, traders, hedge fund managers. They are blamed for the housing crisis, global financial turmoil and a possible recession. But this broad indictment, though true, is only half the story. The job of modern finance is to allocate Americans' nearly $2 trillion in annual savings to its most productive uses; the paradox of finance is that its virtues and vices come tightly packaged together.

This is, of course, utter nonsense.

The "job" of modern finance is the same as any other industry's "job" — to provide a good or service that customers want. Whether that good or service (i.e., the supply) or customers' desire for it (i.e., the demand) are more or less (or not at all) "productive" is completely beside the point.

The "job" of a food company (or especially a restaurant) is not necessarily "to allocate food to its most productive uses." The "job" of a food company (or very especially a restaurant) is to satisfy customers. "Productivity" (defined however you like) is secondary at best.

So too with "modern finance" — and every other sector in a capitalist (i.e., free) economy: Who wants what, who is willing to provide it, and can they be brought together in voluntary exchange? All else is economic detritus.

If competent consenting adults wanted to take on risky levels of mortgage debt, and if banks and other institutions wanted to loan them the funds to do so, and if other companies wanted to buy up those risky mortgages and package them into complicated (and risky) securities, and if institutional investors wanted to buy those complicated (and risky) securities — then "modern finance" did exactly what it was supposed to do. The fact that so many of these voluntary transactions turned out to be unwise, unprofitable and even calamitous — i.e., if they turned out not to be the "most productive uses" — is not the point. People sought, as is their right in a free society, to take big gambles. The fact that they lost does not constitute a "market failure." Indeed, the exact opposite is true.

There are footnotes, to be sure. Where there was fraud (e.g., predatory borrowers who lied on their mortgage applications in order to exploit lenders), then free markets can indeed be impeded. Such anti-capitalist endeavors were, one could say, an "unproductive allocation of resources." Point conceded.

But that kind of risk is also nothing unique to "modern finance." Unscrupulous sellers — and buyers — try to exploit each other all the time. And in response, we have developed a combination of tort, contract and criminal law to constrain them — glued together by the (capitalist) concept of "due diligence" (i.e., the self-imposed vigilance expected of competent consenting adults in a free society). This system provides all the protection one ought to need.

For the government or its central planner / nanny state apologists to attempt more (bailouts, recisions of contracts, tax breaks, etc.) confuses the orthogonal notions of "market failure" and "market participant failure." The subprime fiasco is strictly a case of the latter; to treat it as the former will only result in the wrong cures being applied to the wrong illness.