I wish I had the time to work through this more systematically but I do not. But can anyone watching the US senate grilling of G&S execs believe in the micro-foundations of orthodox economics (scientific liberalism)? What I liked was Sen. Levin’s interpretation of a Market Maker (MM) and G&S’s interpretation of MM. The G&S position is thus: we can sell anything to anybody without divulging what we think it is worth; in fact our obligation is to sell shit, if it is shit, it is just that shit, and we have no obligation to divulge our position about its quality.
This is simply buyer beware all trussed up. I am kind of sympathetic to this position as far as it applies to capitalism. The job of a capitalist enterprise is to make a profit: Some profit by selling quality and some profit by selling fake versions of Viagra. To paraphrase Marx: “capitalists seek profits; that in the process real or imagined needs get satisfied, satisfied well, or not is of secondary importance to the capitalist.” People sell lemons all the time in the attempt to lay-off their risk. In for the penny into the pound.
The community sets the standards on what is fraud and what is not. Now of course it is clear that firms like G&S bought the regulator (or in more polite form captured the regulator). So all of this is a bit of a smoke screen: political theatre. The real question is about how the state came to give these firms such latitude to determine what is fraud and what is not: or what is a lemon what is not?
Standard micro economic theory has a highly transparent view of information. Between the rational expectations and the implied substance of the efficient market hypothesis G&S should never have been able to push junk onto a market and find buyers in a sustained fashion over a prolonged period of time. But the G&S defence wants it both ways: we can sell shit because buyers should know they are buying shit. And they want to say we can sell shit because nothing obliges us to divulge the fact we are selling and saying shit.
And this is not much different from standard economic theory. Standard economic theory is want to say that shit can be sold because the market will almost instantly recognize that it is shit and that is the natural limit thus we do not need regulation to define shit. But G&S’s actions prove that market makers have an informational advantage that will not necessarily disappear by the discovery processes of market agents; at least not any meaningful sense of what is meant by this. The EMH boyz now want to redefine colossal market failure (the failure for good information to drive out bad) as the financial crisis. The crisis, the market pancaking thus becomes the rectifying process, the proof of real information discovery. That is like saying nautical engineers are successful because when ships sink they really sink.
What the sad story of G&S actually indicates is that market makers really make markets and that information is, by design, and in the absence of regulation, asymmetrical and consciously so. In a more revolutionary direction G&S, along with the entire private financial sector, indicates that private entities, if they have the financial wherewithal, will thwart, to the best of their abilities, the capacity for public oversight and regulation. This being the case it would seem to suggest that some activities ought to be brought under the public domain.