At the end of 2011, Steve Waldman wrote:
This is the business of banking. Opacity is not something that can be reformed away, because it is essential to banks’ economic function of mobilizing the risk-bearing capacity of people who, if fully informed, wouldn’t bear the risk. Societies that lack opaque, faintly fraudulent, financial systems fail to develop and prosper. Insufficient economic risks are taken to sustain growth and development. You can have opacity and an industrial economy, or you can have transparency and herd goats.
A lamentable side effect of opacity, of course, is that it enables a great deal of theft by those placed at the center of the shell game. But surely that is a small price to pay for civilization itself. No?
Nick Rowe memorably described finance as magic. The analogy I would choose is finance as placebo. Financial systems are sugar pills by which we collectively embolden ourselves to bear economic risk. As with any good placebo, we must never understand that it is just a bit of sugar. We must believe the concoction we are taking to be the product of brilliant science, the details of which we could never understand. The financial placebo peddlers make it so.
Last week, Waldman, apparently moved by Steve Brill’s account of heath care price gouging, or, as Waldman put it, “ass rape,” wrote:
As soon as you delve into the policy wonkery in cases like this, you are submitting to a conspiracy by the powerful against the many. The greater the sphere of disagreeable things that are “complicated”, the more it is possible to construct intricate and inscrutable bureaucracies to “arbitrate”. There will be think-tanks and policy papers, funded by people who are well-meaning (in a narrow, idiotically un-self-aware way) but very rich and powerful. The conclusions of which will be earnest and carefully researched but confined to a window not very upsetting to the very rich and powerful. Undoing the ability of plutocrat hospital “CEOs”, or bankers or lobbyists or whatever, to continue the sort of ass-rape to which their lifestyles have grown accustomed will not be on the table. A good society depends on an active public, first and foremost. A society that has allowed the predations of the powerful to become purely private matters mediated via “markets”, courts, academies, and bureaucracies, that has delegated “activism” to a mostly protected professional class, is nothing more than a herd hoping that today it is somebody else who will be slaughtered.
I would like Waldman to explain how he reconciles these two views. This looks like pure and simple opportunism. Waldman provided a clever defense of abuses by the powerful when they are often so complicated that, as one financier I know who has amassed a nine-figure net worth put it, “It takes them years to figure out what I’ve done to them.” But when a writer provides a long form expose of harm that results when people cannot protect from powerful interests, Waldman is then outraged. Maybe he has had a Pauline conversion, but otherwise, he has some explaining to do.
And please do not try the argument that healthcare is different from finance. Finance is if anything worse. Medicine has inherent opacity. The overwhelming majority of us don’t know enough to judge the caliber of services were are receiving, and rely on poor proxies like bedside manner. Tyler Cowen’s review of Maggie Mahar’s Money Driven Medicine should make the parallels clear:
I interpret the basic story as this: the American health care cost spiral comes from suppliers and their entrepreneurial abilities to market expensive and highly specialized services of dubious medical efficacy. Medical care starts off as ambiguous in value and hard to measure in quality. Customers are cowed by doctors and other family members into accepting or even demanding what is offered to them. Third-party payments make the problem worse, and government intervention has stoked rather than checked the basic dynamic. You end up with massive expenses, lots of stupidity, and – because of its expense — radically incomplete coverage. Every now and then the extra services do pay off, but not frequently enough to boost American stats on health care quality.
Finance not only uses complexity and opacity, as Waldman stressed, to foist risks on the unsuspecting, it further has incentives to create risk, which it also fobs off on the public. As Andrew Haldane of the Bank of England explained:
Tail risk within financial systems is not determined by God but by man; it is not exogenous but endogenous. This has important implications for regulatory control. Finance theory tells us that risk brings return. So there are natural incentives within the financial system to generate tail risk and to avoid regulatory control. In the run-up to this crisis, examples of such risk-hunting and regulatory arbitrage were legion. They included escalating leverage, increased trading portfolios and the design of tail-heavy financial instruments.
So again, contra Waldman, finance does not simply shove risks around to facilitate commerce, it actively creates them for its own feather bedding.
So I hope Waldman resolves the inconsistency between his two propositions. You cannot say you are a fan of abuse of the public in theory and then deplore it in practice.