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 aviation-fuel price rises, 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, can be well defended in the words of Dean Baker, writing at 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?
Blankley, who had been suffering from stomach cancer, died Saturday night at Sibley Memorial Hospital in Washington, his wife, Lynda Davis, said Sunday.
In his long career as a political operative and pundit, his most visible role was as a spokesman for and adviser to Gingrich from 1990 to 1997. Gingrich became House Speaker when Republicans took control of the U.S. House of Representatives following the 1994 midterm elections.
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