Facts matter: Sign up for the free Mother Jones Daily newsletter. Support our nonprofit reporting. Subscribe to our print magazine.

The basic argument in favor of financial engineering is that it allocates risk more effectively and thereby increases capital formation.  Which is good.  Or would be, anyway, if that’s what happened.  Via Ezra, however, Adam Posen and Marc Hinterschweiger take a look at the growth of credit derivatives over the past decade and conclude that it didn’t:

Clearly, growth in new financial products has outpaced fixed capital formation both globally and in the United States by a large margin. This has been especially true since 2006, when investment stagnated, but derivatives continued to grow at a rapid rate. There only seems to be a weak link, if any, between the growth of the newest complex — and now proven dangerous if not toxic — financial products and real corporate investment.

I would just add one other observation to this: the latest and greatest conservative argument for repealing the estate tax is that it would promote capital formation.  Without an estate tax, rich people will be motivated to earn more money instead of frivolously spending it, and heirs will get nice big chunks of capital to invest in America.  As usual with right-wing economic theorizing, it’s sort of vaguely plausible sounding, and the conservatives pushing it have some nice charts along with a bunch of equations filled with Greek letters to back them up.  But then, so did the Wall Street rocket scientists, didn’t they?  In the event, though, that turned out to be a self-serving argument.  Even trillions of dollars in derivatives didn’t have a noticeable effect.

So then, what are the odds that a change in the estate tax amounting to a few billion dollars will have a serious effect on capital formation either?  Slim.  And what are the odds that this is just another self-serving argument?  That’s an exercise for the reader.

REAL QUICK, REAL URGENT

Minority rule, corruption, disinformation, attacks on those who dare tell the truth: There is a direct line from what's happening in Russia and Ukraine to what's happening here at home. And that's what MoJo's Monika Bauerlein writes about in "Their Fight Is Our Fight" to unpack the information war we find ourselves in and share a few examples to show why the power of independent, reader-supported journalism is such a threat to authoritarians.

Corrupt leaders the world over can (and will) try to shut down the truth, but when the truth has millions of people on its side, you can't keep it down for good. And there's no more powerful or urgent argument for your support of Mother Jones' journalism right now than that. We need to raise about $450,000 to hit our online fundraising budget in these next few months, so please read more from Monika and pitch in if you can.

payment methods

REAL QUICK, REAL URGENT

Minority rule, corruption, disinformation, attacks on those who dare tell the truth: There is a direct line from what's happening in Russia and Ukraine to what's happening here at home. And that's what MoJo's Monika Bauerlein writes about in "Their Fight Is Our Fight" to unpack the information war we find ourselves in and share a few examples to show why the power of independent, reader-supported journalism is such a threat to authoritarians.

Corrupt leaders the world over can (and will) try to shut down the truth, but when the truth has millions of people on its side, you can't keep it down for good. And there's no more powerful or urgent argument for your support of Mother Jones' journalism right now than that. We need to raise about $450,000 to hit our online fundraising budget in these next few months, so please read more from Monika and pitch in if you can.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate