There is a prevalent belief today that if one has extra money one does not need to spend now or in the near future, then the best thing to do with it is to use it to make even more money. Before, this kind of alchemical monetary growth was only available to those who had large sums of excess money, or those who were unscrupulous enough to engage in the disreputable practice of money-lending, often at exorbitant rates. In the past, the great majority of people simply hid their money somewhere, such as in their dwelling, or they buried it in the ground. But in today’s sophisticated financial world, even those who have only a small amount of savings, measuring in the thousands of dollars, can participate in humanity’s ever-hopeful quest to make their money magically grow without having to do any work.
Although the economists’ highly flattering picture of all kinds of investment – as helping to start new businesses or existing businesses to expand, helping consumers to make expensive purchases like houses and cars, or helping students to pay for their education – is still true to an extent, there have been many changes in investment behaviour that have rendered this rosy picture obsolete. In today’s world, the economists’ pathetically outdated insistence that all investment is beneficial because it creates jobs and stimulates economic growth is about as accurate as the belief that all unmarried girls are still chaste, modest, virtuous, innocent, and blushing maidens. Such a belief may have been true in their great-grandmothers’ time, but it is no longer true in today’s world of multiple and often corrupting influences, where sex and sexual matters are no longer considered to be taboo subjects of depiction and discussion. Similarly, the significant changes that have occurred in the financial world, in particular the myriad novel uses that are being made of money in the hope of making more money, have largely negated the economists’ naive belief about the beneficial nature of financial investment, since a great deal of investment today creates no jobs except in the financial sector, and it does little or nothing to stimulate economic activity, while it has the potential to create dangerous speculative bubbles and encourage reckless behaviours that can destabilize a country’s or even the global economy.
Most people’s brains function in the following simplistic manner: if, by doing something such as buying a company’s stocks or real estate, playing a game of skill or chance, or buying a lottery ticket, one is able to make money, or if one sees or hears of other people who have made money by doing something such as buying stocks, property, or a lottery ticket, then one concludes that if one copies those people or performs the action again, one too will make money or be successful a second time. Clearly this is not necessarily rational behaviour, but then human beings never were rational creatures, despite what a few very silly ancient Greeks named Plato and Aristotle claimed about our entire species.
In financial affairs, what this means is that if some people do something and are able to make money from it, it will encourage others to imitate them, until more and more greedy people perform the same action. But clearly this process cannot go on forever. This is how all speculative bubbles form, only to burst later on. This is hardly a sound and secure basis on which to found an entire economy, as the many free-market fanatics have repeatedly urged us to do, by giving unbridled rein to financial speculation of all kinds.
It is most certainly not true that whatever is produced by or originates from the free market is good, safe, beneficial, or desirable. And this applies just as much to the financial market: whatever is produced, marketed, and bought and sold in an unrestricted and unregulated financial market is most certainly not good, safe, beneficial, or even desirable. Moreover, especially in the United States, it is believed that whatever enables a person or company to make money is good and therefore should be permitted. But there are many things that enable people to make money in the short run that, in the long run, turn out not to be good for a variety of reasons.
It was a very great historical blunder to have allowed all the myriad new financial products, such as derivatives, credit default swaps, collateralized debt obligations, and so on, to multiply like a rapidly-transmitted sexual disease. This reckless financial permissiveness failed to take into consideration the basic truth that the majority of new ideas, inventions, and businesses are bad, foolish, unnecessary, impractical, or unprofitable. Furthermore, greed, like many other human passions, can make people behave irrationally, recklessly, foolishly, and unwisely.
Because the old, traditional, and relatively safe forms of investment failed to provide a sufficiently high or rapid return on their investment, speculators have sought new forms of investment that promise higher returns in a shorter period of time. The problem with these investments, however, is that they are much more risky than traditional investments. Many people who work in the financial industry, as well as for corporations generally, are money addicts, having been lured into the industry by the large salaries and, in some cases, the even larger bonuses that are paid to those who are most successful at speculating with other people’s money. What the free-market fanatics who advocate deregulation in the financial sector are saying is that, in effect, we should trust our entire economic system to these money addicts, whose decisions and transactions comprise an ever-greater share of total economic activity. Like drug addicts who must continually increase the amount of the drug they consume in order to achieve the same feeling of pleasure, these financial speculators, who are addicted to making as much money in as short a time as possible, are also prone to behaving recklessly, carelessly, and foolishly by buying and selling more and more risky investments.
There is an important difference between new financial products and other products that are introduced in a free market: whereas all non-financial products such as cars, phones, computers, pens, shoes, and medicines must prove their utility or superiority by use, that is, by demonstrating their utility or superiority over existing products through actually being used, a new financial product or practice, whose sole or primary purpose, be it remembered, is to enable their owners to make more money, can be profitable, at least for a time, simply if enough people believe that it is possible to make money by buying and selling it. Considering how easily people can be deceived – and, moreover, can deceive themselves – and considering how much wealth there is in today’s world that is looking for investments that will enable its owners to grow even richer, like a fire-breathing dragon that sits on its growing horde of useless riches, it is all the more imperative that new financial products and practices be regulated in order to sift the good from the bad, the useful from the useless, the necessary from the unnecessary, and the safe from the risky or dangerous. But instead, precisely the opposite course was followed in the deregulation-mad United States, where, for many Americans, a blind faith in free markets has replaced belief in God or the Bible.
As the market in financial instruments such as derivatives exploded [in the United States in the 1990s], [U.S. Treasury Secretary Robert] Rubin resisted efforts to tighten their oversight, battling even other top Clinton appointees such as Commodity and Futures Trading Commission chief Brooksley Born. Born had urged greater bank disclosure regarding derivatives exposure, but Rubin, [Deputy Treasury Secretary Larry] Summers, Fed chairman Alan Greenspan, and SEC chairman Arthur Levitt all pushed back, suggesting it was best if markets could “regulate themselves.” In June 1998, Rubin publicly denounced Born’s regulatory policies and positions and even recommended that Congress strip the CFTC of its regulatory authority. The ultimate result of his effort was an act passed by Congress on the last day of Clinton’s last year in office, 2000, called the Commodity Futures Modernization Act, which enabled banks to trade derivatives like [credit] default swaps without any government interference to speak of.
If one reads about the history of derivatives, one will learn that these financial instruments were originally invented as a means of reducing the risk of inherently risky business ventures like farming and transoceanic shipping. It is therefore more than just a little ironic that, now that their primary use has become the alchemical one of making money from money, they have increased, rather than decreased, the risk of a calamitous economic event. This is because of the vast amounts of money – totalling, according to various estimates, hundreds of trillions of dollars worldwide – that have been “invested” in them.
When, as was the case in the past, the person or company that issued a loan was also the entity that maintained possession of the loan until it was repaid, there was a prudence on the part of the loaner or creditor in the kinds and the amounts of loans one made. But when it became possible to sell these loans, this led to a rapid decline in prudence and caution for a number of reasons. First, because these loans were bundled together, it gave the buyers a false sense of security since, as they were told by their own analysts, the risks of default were spread out and therefore averaged over a large number of loans, making them, as they naively believed, a safer or even a sure investment. Second, by distancing the owner of the loan from the person who received it, one had less incentive to investigate the person’s financial solvency. Most people would not lend money to someone they don’t know or trust, or whom they believe is not financially responsible. And yet, this practice of reselling loans led to a great many people receiving loans who in the past would have been judged to be bad credit risks.
These kinds of risky practices were among the main causes of the 2008 financial crisis which started in the United States. Instead of being held until they were repaid, mortgages and other loans were being sold to third parties, sometimes as soon as they were issued. As a result of the high demand for these new financial “instruments,” due to the large amounts of money that could be made by buying and selling them, at least for a time, mortgages and loans started being issued to people who, in the more prudent past, would not have qualified for them and therefore would not have received them. This kind of reckless lending was more and more widely imitated as more and more companies and individuals believed that they too could make money by adopting this novel practice. The problem was that, as the total of bad or risky loans increased dramatically in a short period of time, it greatly increased the possibility of a calamitous economic event.
Considered in retrospect, the obvious and sensible course of action would have been to nip this speculative weed in the bud before it could flower and propagate its dangerous seeds throughout the country and the world. But instead, the opposite course of inaction was taken, which allowed this foolish and reckless practice to spread throughout the land and infect a great many large American financial institutions with its intoxicating promise of ever-increasing speculative gains.
In the course of the turbulent twentieth century, the world witnessed the failure of communism to deliver on its grandiose promise to transform societies into egalitarian workers’ paradises. Following communism’s collapse, which took almost seventy-five years from the start of the Russian Revolution in 1917 to the dismemberment of the Soviet Union in 1991, its ideological nemesis, capitalism, and in particular free-market capitalism, has gained the ascendancy. But in recent years and decades, we have witnessed a repetition of the failure of this ideology to deliver on its promises of plenty for all and the eradication of poverty around the world. Instead, we have witnessed the alarming growth of inequality, injustice, corporate tyranny, environmental and cultural degradation, and financial and economic instability. And just as the ideologically blind supporters of communism turned a blind eye to all the many abuses which communism produced in the real world, the many zealous supporters of free-market capitalism are also turning a blind eye to all the many abuses and problems which free-market capitalism has produced, and continues to produce, in the real world. It would truly be a great tragedy if we cannot learn from the failure of communism to put an end to the madness that is free-market capitalism, and have to wait an equally long time before this ideological system collapses and demonstrates conclusively to the world its manifest falsehood, just as communism did before it.
 This is due to the widespread monetary practice of keeping interest rates low in order to encourage people and companies to borrow and spend money. The reverse side of this for savers is that they are not paid much interest on their savings, as they were in the past, and so many of them have been motivated to seek higher returns in other financial areas.
 Power, Inc.: The Epic Rivalry Between Big Business and Government—and the Reckoning That Lies Ahead by David Rothkopf, chapter 8. Viking, New York, 2012.