Market "Speculators" Are the Economy's Health (Defending Hedge Fund Managers like John Paulson)

It didn't take long for the non-scandal that allegedly threatened the reputation of Goldman Sachs to die of its own contradictions. As a public company whose sole constituent is its shareholders, evidence quickly revealed that Goldman was serving its owners well through investment vehicles meant to match the needs of both its bullish and bearish customers.

Unfortunately, the non-controversy surrounding Goldman dredged up other, more dangerous notions about market speculation itself. To believe the naïve musings of commentators on the left and right, the oft-mentioned trades engineered by Goldman Sachs, along with others of the "speculative" variety, don't serve any economic purpose other than lining the pockets of the market actors who participate in them. Nothing could be further from the truth.

For background, financial commentator Roger Lowenstein noted in the New York Times recently that, "Wall Street's purpose, you will recall, is to raise money for industry: to finance steel mills and technology companies and, yes, even mortgages. But the collateralized debt obligations involved in the Goldman trades, like billions of dollars of similar trades sponsored by most every Wall Street firm, raised nothing for nobody."

New York Times columnist Andrew Ross Sorkin parroted Lowenstein in asking "What purpose does a synthetic CDO...serve for capital markets, and for society?" On the right, financial historian Niall Ferguson teamed up with LBO billionaire Ted Forstmann in a Wall Street Journal op-ed which reduced the ABACUS investment product structured by Goldman to "a wager with as much economic utility as a gigantic bet on a roulette wheel or a horse race."

Author's argument :

1) Without the price signals provided by traders with varying views on all manner of economic activity, the "economy" as we know it would lack the information necessary for its efficient organization.

THEREFORE, Market speculators provide ESSENTIAL ECONOMIC INPUT.

2) We should more aptly describe speculators as "price givers"; the prices they provide us with essential when it comes to ensuring that limited capital reaches its highest use.

3) RE: John Paulson and his ABACUS deal with ACA, IKB and Goldman Sachs. The fact that Paulson was enriched by the transaction is merely the "seen." The "unseen" in this case is the economic benefit that the trade's end result achieved. Specifically, Paulson's windfall unequivocally signaled to real estate bulls that their continued funding of subprime mortgages would not redound to their returns.

4) That Paulson became a billionaire many times over thanks to his bearish trade on the Goldman CDO is once again the "seen", but the happy "unseen" is all the capital not wasted on profligate borrowers due to Paulson's brilliant detective work.

5) RE: Were any meaningful jobs created or lost as a result of market speculators like Paulson ?

Since there are no companies or jobs without investment first, the trade that is SEEN by many as economically meaningless was nothing of the sort. Instead, it halted blatant economic waste that drove money into the hands of the irresponsible, and away from the productive, job-creating economy. Hence, as evidenced by the collapse among subprime securities, further investment in them represented the very wealth destruction that is inimical to job creation. Paulson's financial bonanza was a certain job creator thanks to his prescient investments exposing investments that were destructive.

HIS CONCLUSION :

Whether "speculators" or traders are right or wrong in their speculations, the market prices they give us are hugely stimulative for the information signaling where capital will best be deployed. THAT's CAPITALISM and we have to live with it.

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