By now we are all familiar with the Reddit community known as Wall Street Bets that took down some of Wall Street’s biggest hedge funds last week. The “stonks” stunt was hilarious, tactfully well played and made some people a ton of money. But with small trading apps now working in tandem with the hedge funds to mitigate the risks for Wall Street, I don’t anticipate that this movement will be able to continue to injure the hedge funds with the same brutal blows we saw last week.
Many reddit users joined this community to earn a quick buck, but the motivating factor for others is a lot more personal. Case in point, this user’s heartbreaking reminiscence of his family’s struggles during the 2008 financial crisis. Living off pancake mix, powdered milk, and tomato soup made from ketchup packets. This person definitely had it rough during the crisis, and many posters in the thread shared similar stories.
These people are righteous in their anger, but it’s being aimed at the wrong enemy. Wall Street is certainly not an innocent party. While there is nothing wrong (legally or ethically) with shorting failing business stocks, using the mainstream media as the bullhorn with which to convince other investors to sell the stock you just shorted could easily be argued as a form of market manipulation. Moreover, packaging subprime mortgages into mortgage backed securities to dump onto investors or selling bad mortgages to government enterprises like Fannie May and Freddie Mac is also categorically immoral.
The problem is that the laser like focus on the misdeeds of Wall Street allows our even bigger enemy to obfuscate blame… the federal government.
Why did Wall Street offload these bad mortgages? Why were banks even loaning money to applicants they knew would not be able to repay them in the first place?
Because the federal government forced them to.
Contrary to popular belief, banks make their money off the individuals who actually pay their mortgage. The guy who isn’t paying the home loan and subsequent interest associated with it isn’t actually making money for his lender. Sure, a bank can recoup funding when a home goes into foreclosure, but that is a very long and expensive process. It can take YEARS to get a mortgage defaulter out of the home. It’s much easier and yields better returns to lend to responsible applicants.
In the decades leading up to the 2008 crash, the government collected data on home owners and discovered that certain demographics were less represented than others. To correct this disparity, the government forced banks to lower their lending standards, so much so that the banks, with the metaphorical federal gun to their head, were commanded to accept loan applications from individuals who would likely be unable to repay. The federal government was compelling banks to lose money.
Imagine if you ran a small bakery, and the government came in and dictated that you could not sell the most popular cupcake, had to sell other items well below their market value, or could only open your business between the hours of 12am-3am. You would lose money. Not because you weren’t providing value to your customers, but because the government wouldn’t allow you to provide that value. Might you as the bakery owner, try to operate illegally or find other unscrupulous ways to recover the earnings the government had essentially stolen from you? You certainly might… and that’s what the banks did.
When left with the compulsory edict to lose money, the banks found creative and unethical ways to recoup those losses. It doesn’t make it right, but it should lead one to question “Why is the federal government making policy that will deliberately hurt businesses?”
Let’s take this a step further. Why are there income disparities between demographics in the first place? Could it be that government welfare programs disproportionately targeted black people decades ago and incentivized black mothers not to marry or live with the black fathers of their children? Could it be the appalling state of inner-city public schools that can’t even produce literate black adults after 12 years of schooling? Could it be the refusal of the federal government to allow Native Americans the same private property rights on their reservations that other Americans enjoy on non-native lands?
Every societal ill can be traced back to the brazen malfeasance of the federal government. Whether its income disparity, educational disparity, or bailing out Wall Street, the origin is always the fault of government intervention.
Why are lobbyists allowed to frolic around Washington D.C. writing checks to lawmakers for favorable policy? Because there are plenty of people in government willing to accept the check. Why does the government pick winners and losers in business? Because there is an abundant number of bureaucrats on the payroll of the winners. There will always be commercial businesses big and small looking to grow their capital. Some do it honorably by adding value to the market and some do it via corruption.
So how do we eliminate the latter?
Getting rid of the people who accept the fruits of that corruption… the government.
We have become so corrupt as a nation that like in communist China, bribes are now built into the cost of business. Big government creates big corruption.
And can we even blame these businesses that lobby and exploit lawmakers? If an investment into a House member of $1 million generates a profit of $10 million, why wouldn’t you do it? Hell, if it’s not illegal you have a fiduciary responsibility to your shareholders to make that deal.
No one in this world is turning down free money. Not the welfare recipient, not the corporations, or anyone in between. How many people do you know that turned down a stimulus check?
America rose to greatness because of our founding principle of small government. We use to live in a country where you had to prove your worth to your customers. You couldn’t pay off a government worker to give you a leg up, because the government was so small that there were too few to pay off and they had so little authority there was nothing they could do to intervene in the market.
It is precisely the abandonment of this founding principle that has led us to this federal monstrosity that dictates every aspect of our life, where prosperity can only be purchased by a subset of the population who have proximity to power.
So, to the Wall Street Bets bros, your indignation is honorable but slightly askew. If the hedge funds become recipients of another federal bailout, do not blame the people accepting the checks. Blame the bastards writing them.