An inevitable response when anyone on the left mentions that Koch Industries is run more or less as a criminal enterprise is, "Well, George Soros is worse." Never mind that it's nowhere near true, but the left still goes to great lengths to defend Soros from accusations that he's the same kind of "immoral corporate goon" as all the others. On the other hand, the populists left's favorite target is Wall Street, and probably the biggest symbol they hold up of Wall Street's immorality during the financial crisis is Goldman realizing massive profits betting on the collapse of the housing market, while the economy crumbled around them. Now, the first thing to mention is that the argument puts Goldman in an absurd catch-22-- had they gone along with the herd and bet on housing, they would have been blamed for making dumb bets in the same way the rest of Wall Street was. By betting against housing, they were "betting against America" while ordinary people suffered. Either way, they couldn't win. Instead, let's focus on the parallels between Goldman's "big short" against housing and the defining act of Soros's career: his short of the British pound in 1992.
Without getting into the economic details, the essence of Soros's trade was pretty simple: at the time, Britain was in the Exchange Rate Mechanism (the precursor to the Euro), which committed them to maintaining the pound at a certain level relative to other European currencies (not a specific price, but a band). To do that, the Bank of England had to maintain certain levels of foreign exchange reserves and commit to exchange them for foreign currencies on demand. Then, in 1992, Germany and England's economies diverged rapidly. Reunification produced a boom in Germany as the East was built up to restore parity with the West, and inflation started running higher than they wanted, leading the Bundesbank to raise interest rates (which has the side effect of strengthening the currency relative to others). At the same time, Britain was in a nasty recession, so it needed lower interest rates, and a relatively lower value for the pound relative to the deutschmark to make its exports competitive. But staying in the ERM would have required the Bank of England to raise rates, and it did so, exacerbating the Depression. Soros recognized this weakness, and started shorting the pound-- he borrowed pounds and started selling them to the Treasury at the par rate, draining the British Treasury of its foreign exchange reserves. Eventually, he (along with a bunch of other traders doing the same thing) forced Britain out of the ERM, and Soros realized a gain of over $1 billion. It was a brilliant opportunity for Soros-- an ordinary short position is extremely risky because it has unlimited downside-- by borrowing and then selling an asset, you run the risk of that asset rising to infinity in the meantime. This trade, however, was almost risk-free: the pound was never going to RISE relative to other currencies so, at worst, if the British Treasury had somehow managed to defend the pound from the speculative attack, Soros would have lost only the interest rate he paid for borrowing the pounds that he then sold short.
The ultimate loser, however, was the British taxpayer, as the Treasury sold its reserves of foreign currencies for far less than they were worth after it had to devalue the pound. So, in a simple sense, Soros made over $1 billion at the expense of British taxpayers. But the story doesn't end there, of course. Leaving the ERM was ultimately absolutely the right step for England-- it allowed the economy to escape the nasty recession it was in, and kept it out of the trap that was the Euro (today, Britain isn't necessarily doing much better in terms of its budget picture than Spain or Italy, but its borrowing costs are MUCH MUCH lower, the sole reason being that it has its own currency. If David Cameron hadn't stupidly decided to pursue austerity in the middle of a recession, they might actually be recovering nicely now.
Now compare that to Goldman's trade during the crisis. In essence, in 2006, while the rest of Wall Street was knee-deep in housing exposures, Goldman's mortgage desk realized the market was headed for a crash and made a big short bet. In essence, once the market tanked (as it was bound to do anyway), Goldman would profit. The losers, ultimately, were their counterparties (those on the other side of their short positions). The only differences between Goldman's short and Soros's are 1) the asset that was being shorted, and 2) the fact that the entire financial system didn't need to be bailed out after Soros's bet. Another difference is that, while Soros was a hedge fund manager (meaning that his sole business was finding and exploiting market inefficiencies), Goldman is also involved in raising capital for businesses and advising clients on mergers and acquisitions (each of which serves a much more straightforward social purpose, though the latter probably less than the former).
This isn't to say that Goldman necessarily didn't do anything wrong: they did pay a settlement to the SEC for fleecing clients on one of their Abacus deals in 2007. But the ones they might have fleeced on that deal weren't taxpayers; they were German banks who probably should have known better. So, while they did make plenty of money during the crisis, the right response isn't to pick up your pitchfork: it's to ask what you expected them to do.
But I suspect that what the difference might come down to is the fact that Soros has been bankrolling left-leaning causes for the better part of two decades. He funded the Center for American Progress, raised lots of money to defeat George Bush, and is one of the left's highest-profile donors. A dirty little secret, though, is that Goldman is a pretty liberal operation itself. Though ex-Goldman CEO and Treasur Secretary Hank Paulson is nominally a Republican, and former senior partner Steve Friedman also leans to the right, as a whole, Goldman is a pretty left-leaning organization. Their current CEO, Lloyd Blankfein, was a pretty prominent Hillary Clinton supporter in 2008. Clinton's Treasury Secretary (and former senior partner) Robert Rubin is a centrist, but certainly a Democrat. And the company as a whole has historically donated more to Democrats than to Republicans. While which political party an organization supports shouldn't necessarily matter, the fact of the matter is, I'm pretty sure liberals would be up in arms over George Soros if it were the Heritage Foundation that he was funding rather than CAP.
But my point isn't that liberals should hate George Soros, or that conservatives should hate Goldman. It's that there's no real reason to hate either Soros or Goldman-- both play by the rules of the system. The problem is the system has long had flawed rules. Fixing those rules is something Soros publicly welcomes, but it's something that is the responsibility of politicians rather than participants in that system. So instead of complaining about how terrible Goldman Sachs is, liberals should think about electing better politicians who will work to fix the rules of the system in which Goldman plays. Regardless of the environment, firms like Goldman will keep making money, and that is, at bottom, a good thing. But the environment should be one in which regulations prevent firms playing by those rules from endangering the global economy.
No comments:
Post a Comment