Last week on The Daily Show with Jon Stewart, Jon had on Edward Conard. Conard is a former Bain Capital executive. That is the same Bain Capital of Mitt Romney fame. Conard was on promoting his ideas in his new book that roughly speaking describes our growing wealth inequality as a good thing. It is one of the most fascinating interviews I've seen in quite some time. Conard is an articulate man, with a pleasant personality, who I feel, genuinely believes his ideas. I believe, however, he has focused his analysis of the financial markets in ways that neglect the system as a whole. As a result he doesn't acknowledge the interplaying roles of other component parts that may have a greater influence on the economy as a whole.
One of the main ideas Conard tries to put forth is the idea that economic growth will cease or at least slow to undesirable levels unless the investor class is adequately rewarded for the risks they take. Stewart does a remarkable job of pressing Conard on the question of what actual risk the investor class is taking. Stewart posits the alternative risk that workers take with putting their life savings into investments for retirement only to have a not so risk adverse investment banker lose all their money just when they will need to rely on it. This is critical, while there is no question that the investment banker is taking risks, He is risking his reputation, he is risking his bonus and maybe even his job, and he is risking shareholders and customer money. I'm certain the investment banker is weighing those risks. I don't, however, believe those risks are the equivalent of 30+ years of work that can be gone in an instant.
Conard believes that without investment bankers taking these extra ordinary risks we wouldn't have the innovative society we have today. He believes this is the primary difference between the US and Europe and Japan. He pours cold water on the idea of divine American exceptionalism as the reason for our differences. This is patently false. While I entirely agree it is not divine American exceptionalism, I'd say that there are cultural differences that are relevant in any discussion of economies of varying nation states. More speaking to the larger point though, the importance of the investor class has for far too long simply been exaggerated. Saying investment bankers create the innovative society we live in is equivalent to saying the record labels created the Beatles.
I have not read Conard's book, but I will give him the benefit of the doubt that the numbers he uses are well sourced and accurate, but over the course of the extended interview he revealed he didn't take a close look at the context of the data beyond his narrow focus. For instance he looked at the boom of internet properties in the US and concludes the remarkable innovation of Silicon Valley is due to the vibrant risk rewards for the investor class. He infers from watching how many successful talented people at Bain would leave to start their own successful investment firms that the same behavior is what created Silicon Valley. Conard again goes on to assume that if the risk rewards were slimmer there would be less innovation in silicon valley as less people would be leaving big companies to start on their own. This is important. This assertion may be the crux of his argument and it is fundamentally flawed.
Conard says in the interview that the creators of Google would not have made Google if they did not have adequate risk rewards. In an admittedly throw away statement he says in the interview "they'd probably still be working at Microsoft." I don't expect Conard to know the histories of Silicon Valley startups. The problem is this false assumption undermines a large part of his argument. Larry Page and Sergey Brin the founders Google created Google while at Stanford. They were not a part of a major corporation; Mark Zuckerberg created Facebook while in college. While Steve Jobs did work for Atari briefly before forming Apple Computers no one could describe the two year old company as a major corporation. In other words these major innovators were not leaving comfortable jobs. More importantly they didn't receive large amounts of money from investors until after they had a product.
This reminds me of a conversation I had with my older cousin. He couldn't fathom why I pursued an interest in improvisation. He kept on asking me why I performed if I wasn't getting paid, much less why would I pay for it. The fact of the matter is most creative pursuits go uncompensated for a long time. Ask any artist, musician, or writer if they received any funding when they started pursing their passions. Even beyond the more "recreational" creative pursuits, most people volunteer for unpaid internships in their career of choice. Surely everyone would like to eventually be compensated for their efforts, if merely for the validation, but considering that large percentages of creative pursuits end in failure, it's hard to say that the only motivation is profit.
Even still, if you want to say that it is the Holy investor society that makes our innovation possible it is not the only way to structure risk rewards. The investor class is useful for large scale capital infusion, however we are told incessantly that the heart and soul of our economy is in small business. As a result the investor class is ill-suited to assess risks of hundreds or thousands of small ventures. Our last two bubbles are a result of this. The housing crisis was partially a result of big money investors pouring money into loans without adequately assessing the risk of default. The tech bubble before it was a result of big money investors all looking for the next Netscape IPO without properly vetting the profitability of nascent internet properties. As a result large chunks of our national GDP were diverted to poorly understood sections of the economy. When they were better understood, the money didn't just flow to more appropriate section instead it was lost.
One of the primary complaints conservatives have for government spending is that it distorts market forces. The only reason a government is capable of distorting a market is because of its size. The investor class of our society wields capital the size of or greater than most governments on the planet. All the arguments against the government distorting the market (They cannot determine good investments from bad, far too much of the economy is in the hands of far too few people, etc.) are just as valid for the investor class. The problem is we cannot elect, or recall, the CEO of a corporation. The accountability of a corporation is left to the shareholders and to a much smaller extent the customers both of whom could have questionable motives. Not to put too fine a point on this but back to this question of risk, shareholders and even customers can hedge their bets and walk away with money even if the company fails miserable and tanks the economy along with it.
All this brings me back to the initial point Jon Stewart made in the interview, the real risk takers in all this are the middle class. They are the ones putting money into banks to be played with by bankers. They are the ones who put their money into homes hoping to grow some actual wealth. They are the ones who invested their pensions and 401ks into the stock market. With this in mind, it is entirely reasonable for government to be deeply involved in regulation of the banking, and hedge fund industry as it is the only method the middle class can effectively manage their risks.
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