Maybe the next time someone calls Barack Obama a socialist, the president shouldn't issue a denial. He might instead urge his accuser to read the hearing transcript of this week's congressional testimony from the Goldman Sachs guys in their beautiful suits.
Capitalism has not taken a hit like this since Mr. Potter made his appearance as the evil banker in It's a Wonderful Life. No leftist polemicist could come up with as damning a description of contemporary capitalism as the contents of an e-mail that Goldman's Fabrice "Fabulous Fab" Tourre sent to his girlfriend. "Well," he wrote, "what if we created a 'thing', which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?"
Perhaps Fab once read the Karl Marx who wrote: "The more abstract money is, the less natural its relationship to other commodities."
If money is an abstraction, the investment industry's creative inventions are abstractions of abstractions of abstractions. Banks no longer just give people loans to buy houses. Now Wall Street's geniuses—and they are ingenious—trade bizarre financial products in which the original loan is packaged with thousands of others and buried under piles of equations and economic gibberish.
Goldman may face SEC charges, but it's the entirety of our deregulated financial system that's on trial. In this new order, the inventiveness of our entrepreneurs goes not only into creating products that actually enhance our lives (from refrigerators to laptops to iPods) but also into fashioning "absolutely conceptual and highly theoretical" financial products whose main function is to enrich a very small number of well-placed people.
The ever-more-complex financial instruments are defended on the grounds that they make life better for everybody. Tourre offered this justification in another of his revealing e-mails: "Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the U.S. consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ;)" Then he added: "amazing how good I am in convincing myself!!!"
Tourre's unconventionally punctuated observations go to the heart of the debate we need to have: How many of the arguments offered on behalf of these exotic transactions are nothing more than rationalizations for the capacity they give a few investment bankers to get very, very rich? Does it make sense to have investment houses playing the role of "market makers" peddling financial junk with one hand that they then bet against with the other? Let's assume for the sake of argument that this is perfectly legal. The real question is: Why should it be?
I'm prepared to believe that some of these financial innovations do real work for the real economy. Yes, it's good that farmers can use the futures markets to lock in prices, and the secondary mortgage markets may well free up capital. But Wall Street has gone way beyond the original purposes of such devices and created a world unto itself in which the gains are reserved for privileged insiders and the losses are borne by everybody else.
At one point during the hearings, Sen. Carl Levin played the Jimmy Stewart good-banker role from It's a Wonderful Life by describing capitalism as it's supposed to be. Levin noted that Wall Street "has been seen as an engine of growth, betting on America's successes and not its failures." Well, that's what Wall Street proclaims in its advertisements for itself. But when defending themselves against legal charges, Wall Streeters retreat to honesty by saying that everybody knows they are really there to make money and that it's naive to hold them accountable for the social impact of what they do.
It is, indeed, naive to expect Wall Street to act as charitably as the Salvation Army, and you have to respect Fabulous Fab's brutal candor about this. Which brings us back to socialism. Marx's predictions about the inevitable collapse of capitalism have been wrong so far because the system has worked reasonably well thanks to the rules and redistributive programs established after the Great Crash.
The lesson is that the surest way to save capitalism is to regulate it in the public interest. The surest way to create socialists is for everyone to experience the economic consequences of counting only on the goodness in the hearts of Mr. Potter and Fabrice Tourre.
E. J. Dionne Jr. is a syndicated columnist, professor of government at Georgetown University, and a senior fellow at the Brookings Institution. His most recent book is Our Divided Political Heart: The Battle for the American Idea in an Age of Discontent (Bloomsbury Press).