Deal Mania and Fictitious Capital
Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
-- John Maynard Keynes, 1936, p. 159
Never have Keynes's words been more relevant than during the past decade, when speculation came to dominate enterprise. In the early 1980s deregulation triggered a revolution in our hitherto highly structured and regulated credit system. Financial institutions introduced a vast array of instruments and created whole new markets around them. That combination of deregulation and innovation benefited almost anyone who held excess cash, from small savers finally earning the going market rate of interest to the giant pension funds hedging risks in the futures markets. But that very revolution also helped to turn our nation into a "casino society" of investors who engaged in high-stakes financial maneuvering as a shortcut to wealth. During the Reagan era a get-rich-quick mentality took hold in our country and soon pervaded the securities markets. With the onset of recovery in late 1982, the volume of financial transactions in the United States soared to unbelievable levels, and securities trading became the fastestgrowing activity in our economy.
It is surely no coincidence that the United States possesses the world's largest economy as well as its most developed capital markets. The two went hand in hand. However, the advent of the casino society has thrown this symbiotic relationship out of whack. Trading of stocks, bonds, and other kinds of securities in financial markets, amounting nowadays to several tens of trillions of dollars per year, represents mere shuffling of paper assets. This is not a productive activity and is therefore excluded from our GNP, except for brokerage commissions and service fees generated in those trades. Moreover, it is by no means clear that our economy needs these huge financial transaction volumes to produce the current level of GNP. On the contrary, a strong case can be made that the spread of