The Corporate Law Group

The “Market,” The Big Short, and You

the-market-the-big-short-and-youPresident Obama recently wrote to the Economist magazine commenting on the economy. While he said that, “capitalism has been the greatest driver of prosperity and opportunity the world has ever know,” [Bully, that!] he also said that, “Economists have long recognized that markets, left to their own devices, can fail.” Is that true? A friend of mine expressed the same sentiment at the beginning of the Great Recession. I was actually confused for a second before responding that, “Markets can’t fail. The market did its job.”

What about that? Can a market fail? Does a market have an objective? A goal which it may have failed to achieve? Not really. A market is a collective of persons. A meeting place. The participants in the market may very well fail in whatever it is they are doing, but not the market. A market may be inefficient if its participants don’t have full knowledge. A market may not be very useful if no one uses it. An apple seller in a market may fail if there are no apple buyers in that market. But the market hasn’t failed. A buyer may fail to find what they want at that market, but that is hardly the fault of the market itself. It is just there in case buyer and sellers wish to participate. It is a tool.

What about the Great Recession? Did the market fail then? Not at all. The market did its job. Punishing those who made bad bets. Chastening government policymakers who encouraged easier mortgage underwriting standards. Punishing investment banks for heaping swill in a pile and selling it. Punishing derivatives buyers for not doing enough due diligence before buying the swill. Punishing insurers for insuring the swill. And, let’s not forget, rewarding those betting against the swill. Those rewarded include the subjects of the movie The Big Short. Every market transaction involves at least two parties and very often one wins and one loses.

Do you participate in markets? Thousands of times each day. Whether you know it or not. Philz or Blue Bottle? Lyft or Uber? Apply Pay or Bitcoin? Rent or Own? Every decision you make affects hundreds of other companies and people and gives signals regarding what will win and what will lose. All voluntary transactions which each party thinks will improve their life.

Did we respond to the Great Recession appropriately? Wow. Hardly. We bailed out all the participants the market said should fail. AIG. Goldman. Fannie Mae. The bailouts rewarded the dumb actors and killed hundreds of innovative startups. It drove us backward from the innovation that we need to prosper.

What to do? Leave the market alone. Allow innovation. Let the dead wood die. Don’t help anyone. Don’t hurt anyone. Let everyone compete. The market can’t fail. It’s just us, making the thousands of decisions every day we think make us better off.