“Goldman Sachs” is not a term of endearment at my favorite websites, such as Front Porch Republic. And I have reflected my own ill-ease with such too big to fail concerns in recent weeks, as well as passing along some counter-arguments.
Wall Street Journal columnist Gordon Crovitz today defends Goldman Sachs in his own way: short selling a derivative signals the market that a sector may be ready to collapse. I certainly agree with that – just as short selling a stock signals that a particular stock may be ready to tank.
The most telling point for me in Crovitz’s column – apropos of why the SEC may lose its case against Goldman Sachs rather than why derivatives are good – is simply that once you accept the premises that (1) shorting a derivative is beneficial because it signals the market of a possible sector collapse, and (2) long buyers in these specially created securities knew someone else was selling short, it seems to follow that “it would be hard to prove that it mattered who [the short seller] was.” That John Paulson was selling short and that Goldman Sachs bundled the derivative for him seems to be what SEC thinks GS should have disclosed.
All this, of course, ignores John Médaille’s, invocation of Aristotle and Aquina to distinguish natural from unnatural market exchanges, but Distributist economics are, for the time being at least, so far out of the mainstream as to be easily ignored. Considering the repeated failures of mainstream economics, that may be ripe for change.
The Democrats have a bright if peurile idea: “Hey, guys! I’ve got a great idea! Regulation utterly failed to prevent the economic collapse, and voters are mad at Wall Street, so lets grab this chance to make Washington bigger with even more regulation! Whaddya think, guys?!” (I’m not sure the Republicans have a counter-plan. They’re just in denial that a market could fail.)
Pretending to regulate something as complex as derivatives is destined again to fail, so I would be remiss were I to pass up, before Congress passes “the most sweeping overhaul of the financial regulatory system since the aftermath of the Great Depression,” not to sing another rousing chorus of “if they’re too big to fail, bust ’em up!”