Five years ago when I was at Jungle magazine, Ryan D’Agostino and I had the pleasure of interviewing Jim Cramer, who at the time was merely a smart, shrewd, excitable market commentator on CNBC, and not the self-caricaturing mad man of Mad Money. I had admired his memoir of his days as a hedge-fund operator, called Confessions of a Street Addict, but I felt uneasy about the glib way he surfed the ups and downs of the market in search of a fortune for himself and his clients. “What’s the difference,” I asked him, “between you and a bookie?” He laughed and replied, “Nothing.”
This was an honest answer, and in its way, a profound one, because it gets to the heart of our economic distress. Wall Street has always had a claim to a privileged status in American life because it is supposedly the financial heart that pumps the blood through the entire financial system, backing innovation and supporting dreams of small business and creating jobs and all that stuff we Americans beat our chests about. So when these brokers and bankers have enjoyed a rich and privileged status, we explained the justice of the arrangement to ourselves by pointing to their smarts at allocating capital, and reminding ourselves what was in it for us.
What we’ve certainly learned in the last fourteen months is that when it comes to the hedge fund operators, this is a nasty myth. Bookies aren’t interested in which team wins a game, and hedge funds aren’t interested in investing in companies and helping them grow. The hedge funds just want to make money on the swings. “It’s true that what you do in a hedge fund is like betting on a football game,” Cramer explained to me. “If the Eagles are favored to beat the Giants by six, and you think the Giants will win, then you bet on the Giants. If a company is trading at eight times earnings and you think it’s worth 10 times earnings, buy it! If you think it’s worth six times earnings, sell! So basically, what I did is not different.” And some hedge fund operators don’t simply bet; they manipulate the line, as Cramer indiscreetly and unwisely explained in this video from Wall Street Confidential.
What it comes down to is that the hedge fund operators, who work only for the super wealthy in 
the first place, don’t add any more value to a company or a society any more than a bookie adds to a football game. Which brings us to Paul Krugman’s column in The New York Times today, in which he calls for a special tax on speculators that would serve to deter speculation. Krugman tells us that at the Group of 20 meeting this month, British Prime Minister Gordon Brown presented a proposal to tax financial transactions as a way to discourage “socially useless” activities. “Such a tax would be a trivial expense for people engaged in foreign trade or long-term investment,” writes Krugman, “but it would be a major disincentive for people trying to make a fast buck (or euro, or yen) by outguessing the markets over the course of a few days or weeks . . . [and] would deter much of the churning that now takes place in our hyperactive financial markets. This would be a bad thing if financial hyperactivity were productive. But after the debacle of the past two years, there’s broad agreement — I’m tempted to say, agreement on the part of almost everyone not on the financial industry’s payroll. . . that a lot of what Wall Street and the City do is `socially useless.’ And a transactions tax could generate substantial revenue, helping alleviate fears about government deficits.”
It shouldn’t be hard to back this tax. All it should take is to remember that what killed AIG wasn’t the stable, regulated insurance business that it ran, but the wild, unregulated hedge fun that sat atop it, and that what killed Bear Stearns wasn’t it conventional investments, but the real-estate backed hedge fund that operated within the firm, and that what killed Lehman Brothers was the astonishing overlevraging of its investments designed to hype the profits of its bets. We need Wall Street to raise capital and to underwrite business. We don’t need a casino, and while we shouldn’t prohibit wagering, we should tax the gamblers and the bookies.
As Justice Potter Stewart might have said, “I know gambling when I see it,” Alan Greenspan and Ben Bernanke did their best to keep the high-stake, high-roller market alive by suppressing the interest rates ever since 9/11. Without this, the cost of money would have increased, moving dollars out of the stock market and limiting certain classes of borrowing. All of this would have slowed the economy, but the downturn would have been much softer than the “Great Recession” we’re experiencing today. Unfortunately, these down economic indicators would have sunk the Bush Administration’s ability to wage a war in Iraq.
In addition, the near-zero interest rates offered by the U.S. Treasury and financial institutions have reduced dramatically the income generated from endowments at foundations (curtailing the ability of charities to fund their operations) and universities (helping drive up tuitions and fees for students). They’ve also affected senior citizens, such as my parents, who use interest from CDs to supplement their Social Security payments.
In the last few years, I’ve seen an amazing array of financial products being sold that have little or nothing to do with capitalizing American industry and providing the resources for companies to expand, buy plant and equipment, and research and develop new products and services. For example, I read about one financial instrument that was essentially a bet on whether Sears would default on its long-term bonds—how that helps Sears access capital is beyond me. All of this tells me is that some groups of people in this nation have way too money on their hands, and that it’s time to reinstate a progressive income tax strategy that taxes money made from the sale of paper assets at a much higher rate than the sale of hard assets (such as a business). If the market was prodded to invest in real assets that create jobs and products, we would have the most modern industrial base in the world. Instead, we have to suck up to the Chinese to fund our government and then watch them increasingly take market share and jobs away from us.