National Post (National Edition)
POPE FRANCIS FLUNKS FINANCE.
Pope Francis spent the past month, socialists will be happy to learn, praying for the increased regulation of finance. Turning his monthly prayer intention video into something of an economics lecture, he warned that “financial markets have never been as inflated as they are now” and that “if finance is unregulated, it becomes pure speculation,” which he called “unsustainable” and “dangerous.” Governments must therefore regulate markets, as the Pope explained in a letter last month to the World Bank Group and International Monetary Fund, to “work for the common good.”
Elsewhere in his letter the Pope lamented the “ecological debt” caused by human activity and expressed confidence that the financial industry “will prove capable of developing agile mechanisms for calculating this ecological debt, so that developed countries can pay it,” so perhaps the Pope has in mind that to work for the common good, finance professionals should devote their efforts to calculating the environmental sins of developed countries, instead of, say, actually providing useful financial services.
In addition to financial regulation, the Pope also prayed for people to grow in love, which he defined as respecting other people's freedom and overcoming the ambition to control them. This was puzzling; if the Pope wants to overcome his ambition for control, then what about his urge to control other people's financial activities? This is a logical conundrum that, fortunately, elementary algebra proves useful in solving. In comparing, for example, the equations x = 3 and x + 2 = 5, evidently adding 2 to both sides of the equation does nothing to change the identity of x; by parity of reasoning, adding prayer to both the “less control” and “more control” sides of the equation should produce no net change.
Whatever the Pope meant to accomplish with his conflicting prayers, he is not alone in complaining about financial markets. Formerly the domain of the Occupy movement, today, criticism of the financial sector comes increasingly from industrial-policy advocates. In the United States, the effort is led by Oren Cass, whose think tank American Compass launched its “Coin-Flip Capitalism” project a year ago based on the premise that “the buying and selling of companies, the mergers and divestments, the hedging and leveraging, are not themselves valuable activity. They invent, create, build, and provide nothing.”
As financial market activities supposedly are not valuable and create nothing, Cass advocates government support for domestic manufacturing, which he defines as any sector that makes “physical things.” In Canada, much of Cass' industrial policy agenda, including his enthusiasm for labour unionization, is reflected in the ideas and policies of Erin O'Toole and other influential Conservatives. But while industrial policy advocates have levelled more serious and sophisticated criticisms of financial market activity than, say, Pope Francis, their arguments are no less mistaken.
Take, for example, the idea that buying, selling, and merging companies is not valuable because it creates nothing. In reality, private equity firms buy companies to try to increase company value by replacing management, implementing new processes, or otherwise improving business operations. If the finance industry creates no value by transferring ownership of assets between firms and individuals, then by the same logic, as economist Don Boudreaux has argued, the trucking industry, which does not produce physical things but only transfers them from place to place, often to facilitate the transfer of ownership, also has no value.
Cass dismisses the value of hedge fund activity by pointing to such funds' subpar returns in the past decade, but many people invest in hedge funds to — as the name suggests — hedge against the risk they take with their other investments. Buying insurance is on average a money-losing proposition, too, as premiums must cover insurance company operating expenses and profits on top of the disbursements to insurance policy holders. But this doesn't mean the insurance industry is destructive.
Buying and selling publicly traded shares also, contrary to what American Compass essays suggest, creates economic value. Companies can more easily raise money through share issuances if their shares are expected to be liquid — that is, if lots of people are trading those shares. Buying and selling shares also, by constantly revaluing public companies, imposes discipline on corporate executives. Financial markets reward corporate executives who manage their companies well by bidding up share prices, thereby increasing executive compensation, and punish those who manage their companies poorly by depressing share prices.
Occupy types like Pope Francis and industrial-policy advocates like Oren Cass might not see the value of many financial market activities. That doesn't mean the rest of us should acquiesce in their call for more government control.