If you’ve been reading this blog over the past couple of
weeks, you might start wondering if the financial system has any relevance to
the real world at all — and we couldn’t blame you. After all, as Adam Smith pointed out in The Wealth of Nations over two hundred
years ago, the basic postulate of economics is “Consumption is the sole end and
purpose of all production.” Wall Street
seems geared toward making money as an end in itself, not as a tool to
facilitate production or consumption.
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| It's a conspiracy! |
No wonder some people slide so easily into the conspiracy
mindset. Lazy people, that is. These tend to blame “the man” or “the system”
or “the rich” or “whatever pissed me off today” and demand that “somebody”
(usually “the man” or “the system” or “the rich” or “whatever pissed me off
today”) “do something.” Somebody else, that is, such as those bastard
conservatives.
Others think there must be something rational behind all the
nonsense. If they’re lazy — but not
quite as lazy as the foil hat wearers (actual and metaphorical) — they accept
things the way they are and condemn anyone who complains about it as a bunch of
bleeding heart liberals.
A small-but-growing number of others are finding out about
the Just Third Way, which not only admits that there are problems with the
system, but how to fix them, and what the system should look like when you’re
finished. The problems with the system
we’ve already covered, at least in part.
The “how” we’ve also covered in previous postings: the act of social
justice and the principles of economic justice.
Today we’ll look at the proper roles of banks and the stock market.
We’ll take the stock market first because that’s the
easiest. By definition, a stock market
is a secondary market for existing debt and equity. While many of the experts will tell you that
the stock market is the free market’s way of allocating credit fairly, it is no
such thing. The stock market is where
you go to buy or sell securities of companies to which credit has already been
allocated. The company already has its
money. Unless the company itself is
selling you shares directly (which is a primary offering and cannot be done
through the stock market), it doesn’t see one cent of the money you pay for the
stocks or bonds you buy, and unless the company is purchasing shares for
itself, it doesn’t pay you one cent.
That’s it. That’s all
a stock market does: trade in “used” debt and equity. It’s a Second Hande Shoppe, not a primary
market for anything.
So what’s going on with the banks pouring money into the
stock market instead of making loans to business with the money? After all, the rationale seems to be that the
government is creating all kinds of stimulus money, and it’s ending up in the
stock market, where (as we’ve seen) it isn’t “creating jobs”, but piling up
billions in profits for hedge fund operators, who use it to buy existing shares
for themselves, not float new issuances for companies to finance new capital
formation and “create jobs.” (That goes
in quotes because “creating jobs” is another problem we’ve dealt with from time
to time on this blog.)
Here’s the skinny.
When the federal government creates money by issuing debt that is
purchased by the Federal Reserve Bank of New York on the so-called “open
market” (that is closed to everyone except the federal government and the
Federal Reserve Bank of New York), it has to go somewhere. As far as we
know, there are only three places it can go:
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| Too much of a bad thing? |
One, the
government can use the money to “create jobs,” subsidize manufacturing, or
otherwise interfere directly in the market by manipulating demand.
Two, the
government can loan the money at near-zero interest to the commercial banks,
which can use it to make loans to businesses, interfering in the market by
allocating credit based on the amount of existing money instead of being
determined by the financially feasible projects that need financing.
Three, the
government can loan the money at near-zero interest to the commercial banks,
which are tied in with the investment banks, and use it to make enormous
profits by pouring money into the stock market, feeding the speculative frenzy,
and artificially raising share prices.
All three are bad, for reasons we will see starting in the
next posting in this series.