Speculation Nation

Stuart Banner attempts to draw the fine line between investment and gambling in his forthcoming Speculation. Among other things, his book is a history of America’s double-mindedness about speculative investing. Visitors to the early US regularly made comments like this from German journalist Francis Grund: “An American merchant is an enthusiast who seems to delight in enterprise in proportion as it is connected with danger.”

Lincoln hated speculators, and risky investing was blamed for economic crashes long before 2008. Banner summarizes the reactions to a financial crisis: “The crisis was caused by over-speculation; the victims included small investors lured by unscrupulous speculators with promises of high returns; and the federal government should have intervened before prices rose too high.”

Then the punch line: “these particular samples are reactions to the financial crisis of 1792, from Alexander Hamilton, Thomas Jefferson, and a correspondent to John Adams, respectively.”

Speculation has its uses. Banner compares it to insurance: They make money by taking on risks others wish to shed. Sometimes speculators make markets more liquid, which makes markets more useful for people wishing to buy or sell. Sometimes speculators make markets more stable by selling when prices are high and buying when they are low. These benefits of speculation counsel in favor of not regulating speculators too strictly.”

Yet, “speculators sometimes bankrupt themselves, and sometimes their financial distress hurts others, including their families and their creditors. . . . Speculation can even imperil the entire financial system. These dangers counsel in favor of strict regulation. This is the dilemma. The more we give speculators free rein, the greater the risk that speculators will bring harm to others. But the more we constrain speculators, the smaller the benefits of speculation.”

Always, we’d like the benefits without the risks, and legal and political responses fluctuate with the fortunes of the market: “New restrictions are virtually always imposed after market downturns, while existing restrictions tend to be relaxed, at least in practice, while the market is on the rise.”