In defense of Wall Street
It would be an understatement to say that bankers aren’t the world’s most popular people these days. If, however, we forget finance’s indispensable role in modern economies, it’s guaranteed that everyone will be worse off.
Finance establishes links between the economic present and economic future of individuals and communities. It helps us manage risk and develops methods for continually enhancing the management of risk over the short, medium and long term. And it creates economic value by enabling money to assume the characteristics of capital.
Note that none of these functions are exercises in radical individualism. Finance can certainly help make us independent, but it also increases and is a sign of our interdependence.
Without people — companies and institutions willing to invest in each other, sell financial products and services to each other, to take risks on others’ endeavors, loan to and borrow from each other, or speculate on the products and services produced by others — there would be no financial markets. There is no reality to financial markets outside or beyond these relationships.
One contribution that finance can thus make to the common good is to establish relationships of trust and confidence in a variety of settings. Banks and finance are such an everyday part of life that we forget about the ways in which they help to build up and sustain important forms of human interaction, most notably between the holders of capital and those who use the capital.
On a very mundane level, banks provide any number of services including payments systems within communities, money transfers and overdrafts. Without any of these services, our economies would be far less productive.
Building trust in this sphere is far from easy. At the best of times, most of us are reluctant to entrust our resources to those we really don’t know. Part of the core activity of those who work in finance is to help establish confidence in others throughout the economy by making determinations about the likely success or failure of thousands of ideas, initiatives and businesses.
Of course while risk can be managed, no investment is risk-free. Finance cannot eliminate risk. Nor can it guarantee that the results of risk-taking will be the most optimal. Risk is risk, and no risk-assessment can tell the whole story or predict the future with 100 percent accuracy.
Yet despite this inherent limitation, finance’s particular ability to build trust allows it to contribute to the common good in two ways.
First, people working in finance can warn others off schemes that they judge as excessively risky in light of their assessment of the needs, responsibilities and assets of such investors. Ultimately investors must make their own choices. But a basic application of the Golden Rule — do unto others as you would have them do unto you — indicates that investors must be given very clear counsel about what is likely to happen.
Second, finance’s capacity to foster trust by guiding risk-taking helps create greater economic opportunities for millions of people.
Part of the genius of finance is the way it puts to work the whole logic of priced risk through which an individual or company can look at their assets, make a reasonable calculation of the basis of genuine probabilities, engage in a comparison of possibilities, and thereby maximize the opportunities for successful risk-taking while reducing the possibility of failure.
This contributes to the creation of jobs, new and better products and enhanced living standards for large segments of the population. But, crucially, it also facilitates the growth of even more of the fuel that allows the economy to achieve these ends more or less continuously.
Samuel Gregg, research director at the Acton Institute, is the author of “For God and Profit: How Banking and Finance Can Serve the Common Good” from which this has been adapted.