No doubt many of you have been concerned about Goldman Sachs getting a bad rap. People have been getting down on them just because they made $3.4 billion in profits last quarter, betting with the taxpayers' money, and that they intend to hand out this bounty in bonuses to their executives. Fortunately, the Washington Post is there to come to Goldman's aid with a column by Mark Gimien telling us not to punish success. Gimien's basic line is that we should be glad that Goldman made lots of money; would we rather be bailing them out? Here he has a point. After all, Goldman had borrowed $10 billion from Treasury through TARP (recently repaid), $28 billion in FDIC insured bonds, and untold billions from the Fed's special lending facilities. If its bets had not paid off, then the taxpayers would potentially be out some really big bucks. Of course Goldmans' profits do come from somewhere. Insofar as they come from trading, Goldman's gains will largely still come from the rest of us, albeit through a a different pocket than their subsidized loans. There is nothing inherently pernicious about this behavior -- it's just like gambling in Los Vegas. We don't bad gambling, we just tax it. Of course speculation can occasionally serve a productive purpose. Informed speculators share their knowledge with the markets and society. If we had more informed speculators 4-5 years ago, they could have bet against the stock and bonds of Citigroup, Fannie, Freddie and the rest. Perhaps by driving the price of these stocks down enough it might have called attention to the housing bubble. But, those trading on real information will be able to cover the cost of a modest transactions tax. We need not worry if some of those trading on gossip and hunches get driven away by higher transactions costs. Let's take the case of oil. Suppose that Goldman was smart enough or lucky enough to catch oil on the way up. This means that Goldman bought oil at a lower price and sold it to an end user (or another speculator) at a higher price. Due to Goldman's good fortune, an oil producer received less money than otherwise would have been the case or a consumer ended up paying more. In the former case, the oil industry will have less money to invest in new production. (Okay, no one really believes that.) In the latter case, consumers will end up paying higher prices than they might have otherwise. In other words, Goldman's profits were in part the higher prices we paid at the pump. Note that this story assumes no manipulation, just good wholesome speculation. Suppose that the speculation was driven by irrational exuberance about oil prices that Goldman rose up and then jumped ship. In that case, we got hosed, as perhaps did a few speculators who got left holding the bag when oil prices turned. (Think back to last summer when speculators bought oil at $150 a barrel.) In these stories, Goldman did nothing wrong -- they just bet with our money and won. Their gain helped to raise our gas prices. There is nothing illegal in this picture, it is just a simple story of rent-seeking where Goldman won.
--Dean Baker