Thursday, April 29, 2010

"Fabulous Fab," E.J. Dionne and Marx

The devil and development, indeed.

Growing anti-market rhetoric deserves some answer. No one is seriously suggesting we shutter Wall Street, the danger is still reform being watered down, but rhetoric painting Wall Street's problem as greed and the complexity of derivatives a con man's sleight of hand could unintentionally distort the reformist agenda.

Hernando De Soto has shown that the majority of the world's poor are trapped because they are unable to leverage their own assets through capital markets and thereby provide themselves with the resources to start and expand small businesses. They're less victimized by globalization than left without access to the markets generated by globalization (by the way, microfinance isn't the solution to this problem).

E.J. Dionne argues "Fabulous Fab" is a living critique of unregulated capitalism. He's not wrong, but while making the argument he taps into an old, anti-finance current that is tempting to call populist, except that E.J. explicitly grounds it in Marx:

Perhaps Fab once read the Karl Marx who wrote: "The more abstract money is, the less natural its relationship to other commodities."

If money is an abstraction, the investment industry's creative inventions are abstractions of abstractions of abstractions. Banks no longer just give people loans to buy houses. Now Wall Street's geniuses -- and they are ingenious -- trade bizarre financial products in which the original loan is packaged with thousands of others and buried under piles of equations and economic gibberish.

One of the challenges encountered by the poor De Soto identifies is actually relevant to the current reform debate - access to information. Since many of the poor outside the formal property system property document ownership in idiosyncratic ways (e.g. oral tradition) without centralized collection and standardization of data (e.g. your real estate agent's Multiple Listing Service) they cannot take out an optimally designed loan on their property to invest in their own business.

That's right, we live in the internet age and the problem both the public and even Wall Street traders have is a dearth of information. The problem with the financial industry on Wall Street, the beating heart of global capitalism, is the lack of a proper market.

Since derivatives aren't traded on an open exchange no one can identify their objective value, leaving the Wall Street a Hobbesian world where the worth of a bond is contingent on personal trust in the issuer rather than clear market signals. This is part of why a large amount of financial capital hasn't resulted in more loans. And that's why reform legislation establishing an exchange is so vital. The marginal loss in "creativity" is worth it. Think of the exotic derivatives as equivalent to a bond on a property in Tanzania whose legal foundation is contingent on a Swahili oral tradition concerning ownership. If you don't speak Swahili, you probably shouldn't be getting involved. Reform legislation will allow investors to return to the market, and banks to make loans.

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