This doesn\’t bode well, does it?
I am not an economist. Even as an undergraduate, I didn\’t take one class in economics or political science. Instead, I took courses that had more relevance to real life and were of more practical use: The Idealism of Plato, Medieval Proofs of the Existence of God and The Dialectics of Hegel. I wouldn\’t know how to go long, much less short, or the difference between a call and a put. I\’m not interested in derivatives of securitised, collateralised, complex commercial transactions, and I wouldn\’t know asset-backed commercial paper from toilet paper.
Not if you\’re then to go on and describe how to fix the economy.
When financial transactions become an end in themselves, and goods and services exist only to enable financial transactions (rather than the other way around), as sure as night follows day you are headed towards an economic catastrophe.
Ah, I see, you don\’t understand what the financial system exists to do.
It\’s really about two things. Firstly, the moving of risk from those who don\’t want it to those who do. For example, farmers selling wheat futures moves risk from the farmer to the speculator. The existence of a bank moves risk from the depositor (well, almost all of it anyway) to the bank shareholders. Pension companies, annuities and the like from the long term saver to the shareholders of the pension company.
Secondly, about intermediating in the time preference differences between depositors and borrowers. Banks, by definition, borrow short and lend long (I think it was Brad DeLong who said that if you borrow short and lend long then you\’re a bank, if you don\’t, you\’re not).
From those two basic ideas you can build pretty much the entire financial sector. And you have to be very careful indeed about insisting that this or that not be allowed in the financial sector for you\’re at risk, high risk, of stopping people being able to do these two highly desirable things.