Look no further than the Occupy Movement to find evidence of the “scandal of profit,” the notion that companies must be penalized when they earn profits that critics label too much. But Kevin D. Williamson reminds us in the latest National Review that there’s also a “scandal of loss,” “probably with its origin in the stock-market crash of 1929.”
There are two problems, probably insurmountable, associated with the scandal of loss. One is that politicians’ self-interest causes them to respond to losses in the wrong way; the second is that Washington is not very good at telling a bad investment from a crime.
Democratic institutions have strong incentives to flatter the feelings of the ignorant and greedy among us, who are a large voting constituency. For this reason, Congress and the regulatory agencies treat the inevitable parting of fools and their money as a deficiency in the marketplace. When Granny puts all her money into baht-denominated commodity swaptions and then loses it, the fault cannot possibly be hers: Surely there is something wrong with the market, surely those marginally employed and penniless borrowers were tricked into thinking they could afford half-million-dollar suburban spreads, surely companies with no profits or assets would have been outstanding investments if only we’d had the right regulations, etc., and we have to figure out a way to give people their money back. But when JPMorgan makes a boneheaded sort-of-a-headge-sort-of-not investment and takes a $5 billion (and counting) lump, obviously JPMorgan is at fault, and it’s a national scandal.