If War Can Have Ethics, Wall Street Can, Too
In war, morality is a propaganda technique to convince mothers to let their sons die hero&#x27;s deaths, and to convince the young and foolhardy to join a crusade that is likely to result in their death.  Periods of the biggest moral clarity in war are the periods where the propaganda is the thickest and human rationality the weakest.<p>To believe otherwise one must believe in forces of evil that animate one side and forces of good that animate another, which is a profoundly supernatural view.<p>Similarly, this article suggests that Wall Street lacks morality and uses as an example a VC considering layoffs that would occur if she fails to fund a round.<p>If there is a finite amount of money, an investor will invest in the firm that shows the most promise.  Many teams of hard working people are seeking investment, but only some will get it.  The investor must use the available information to decide where to place her bet.<p>If the investor is wrong, she will not be able to afford to bet again in the future.  Should we all fell sorry if the investor makes a bad decision and a team of people spent several years getting paid to pursue an ill-fated idea?  Arguably, the cost to society for this misstep is great, so perhaps we ought to appoint a wise <i>investment minister</i> to make the choices judiciously on behalf of investors?  Why not also appoint a hiring minister to direct job-seekers only toward the most promising startups?  For that matter, why not also appoint a business strategy minister to help startups make good decisions and avoid bad ones?<p>While these ministerial posts sound absurd in the context of startups, this is our reality in the world of banking and housing.  Ministers tell our banks how much reserve capital they ought to carry, they tell our housing market what a reasonable rate is for a 30 year mortgage, etc.<p>Fannie and Freddie flew under the radar for years without revealing their balance sheet, drastically altering the US (and world) economy all at the behest of a small number of officials.  I think the reason this was allowed to occur was (ironically enough) to avoid financial bad news when our leaders were trying to sell a war.<p>When you introduce socialized risk the market cannot be counted on to prevent socialized losses.  The game is changed.  The normal incentives and disincentives do not apply.<p>After 9&#x2F;11 for example, the government became the insurer of last resort for terrorism related claims.  This came as a relief to anyone building a skyscraper or running an airline, but at what cost?  It eliminated much of the incentive that would have existed in the economy to prevent terrorism.<p>We let our ministers create very bad policy.  Rather than just writing poor people a check to help them get a mortgage, they create artificial demand for high risk housing loans, which creates a broad incentive for reckless expansion of a whole sector of the economy.  They keep much of this risk on the government&#x27;s books, making taxpayers accountable not for a simple payment to the poor person to allow him&#x2F;her to get housing, but for the entire house of cards built upon those loans.<p>We cannot allow our government to try to address so-called &quot;market failures&quot; by creating <i>infrastructure</i> that distorts and hides information from the market.  Not only is it paternalistic, but it also creates a tremendous amount of risk for the whole economy.<p>This is not an argument against welfare.  We have two options for how we can think about giving welfare, either as a cash payment (with or without strings attached, fwiw) or by greasing the core infrastructure of the economy to slip in some subprime loans among the many non-subprime loans, figuring that the risk won&#x27;t really be discernible by financial markets and all will be well.<p>When capitalism contains a lot of incentives imposed by various government ministers, &quot;free&quot; economic behavior adapts to exploit those incentives.  This is what the author of the article disagrees with. He thinks that we should all act genteel and avoid transactions that have moral consequences.  The problem is that such transactions rarely occur, finance creates abstracted transactions that are rarely correlated with a desirable or undesirable social outcome.<p>In many industries (healthcare, finance, automotive, solar, etc.) government-sponsored incentives dominate free-market incentives.  When we allow this to happen, we are effectively saying that we do not want individuals to have free economic choice, we instead want a select group of ministers to create a socially responsible landscape.<p>Welfare is distortionary, but few would argue that it is unnecessary.  What <i>is</i> very harmful is when welfare programs corrupt the infrastructure of markets and lead to widespread behavior that exploits the programs.<p>The goal of every industry, and of every firm is to become &quot;essential&quot; or &quot;too big to fail&quot;... in other words, to be declared to be worthy of the guaranteed support of taxpayers.<p>Think about it this way, if issued a credit card with very low interest and a very high limit, most people could easily become billionaires simply by using low risk investment strategies.  The problem is that if for even a day, the strategy requires more of a limit than is available, the whole plan comes crashing down.  Even with low-risk endeavors, losses must be covered.  Without forcing firms to cover their own downside risk, they of course will leverage to the max.  This is what has happened in our modern finance industry, the growth since the 1990s has been due to consolidation and increased leveraging.<p>FWIW I think that what is needed is a new financial statement to be added to GAAP which is a statement of risk, which recursively points to all assets and liabilities whose market risks correlate with solvency risk of other firms, so that a broad, a view of the risk a company faces (market, and systemic) that can be viewed in aggregate, so that we can more easily understand the factors that impact an entire portfolio.<p>Ironically, such a statement would allow Wall Street to invest most heavily in firms with socialized risk (for those are the lowest risk bets), but at least then, regulators could impose a limit on the amount of socialized risk firms were allowed to invest in, which is one of the few things that can be done to actually stop the cycle of exploitation.  Firms should have an incentive <i>not to</i> be classified as &quot;too big to fail&quot; and not to attempt reclassification if things go worse than expected.