From Thursday night's Democratic candidate's debate:
"Do hedge funds make America any better?"
Hedge funds are largely unregulated investment vehicles in which wealthy heavy hitters pool their money together for the purpose of making complicated bets on just about anything that can be bought or sold -- from the future price of a barrel of crude oil to the possibility of a mortgage bond declining in value. The most notorious hedge fund in history was Long Term Capital Management, which made some really bad bets and had to be bailed out by Wall Street's biggest banks, at the urging of the Clinton administration.
There are two primary ways a candidate for president could handle such a ridiculously open-ended question.
The first would be to say, yes, of course, they make America better -- the state-of-the-art free market allocation of resources represented by hedge funds creates more wealth for society leading to a more prosperous economy for all. The global distribution of risk, as hedge funds all over the world bet on every possible eventuality, provides insurance against any single shock to the system creating massively destabilizing havoc. Because, after all, if someone loses big in a world where every possible bet has been covered, that just means that someone else is winning big, and it all evens out. (Thanks to econoblogger Felix Salmon for helping articulate that last point.)
We'll call that "the Milton Friedman answer" and acknowledge that it is unlikely that a Democratic candidate for president would adopt such a platform.
The second possible response -- we'll call it the Paul Krugman answer -- would be to say that the proliferation of hedge funds has contributed to the growth of income inequality in the United States, as wealth has been concentrated in fewer and fewer hands to an extent nearly unprecedented in American history. Even worse, the basically unregulated nature of hedge funds means that government officials responsible have progressively less information available to them with which to properly monitor the state of the economy. The opaque nature of hedge funds also makes them a safe haven for irresponsible speculative activity: case in point, last year's spike in oil prices, which went far beyond what the economic fundamentals appeared to merit at the time.
A candidate who was on his or her toes could have used this question as an easy opportunity to lambaste the recent Bush administration decision that hedge funds need no additional regulation or supervision as a classic example of the fat-cat friendly policies of a government whose sole purpose is to serve the interests of the wealthiest 1 percent of the population.
The ball was sitting out there, over the plate, waiting to be knocked out of the park.
John Edwards whiffed.
"I think the financial markets are an important component of trying to figure out what it is we need to do about the fact that we have 47 million people without healthcare, 37 million people who wake up in poverty every day. They play an enormous role in how money moves in this country. And I happen to believe that we have a responsibility to the people in this country who wake up every day worried about feeding and clothing their children. And I think those people in New York who work in financial markets understand -- in some ways, at least -- what can be done and can play a significant role in trying to lift people up who are struggling.
The most charitable way of interpreting this answer is to say that it is code for "I promise to tax the hell out of rich hedge fund investors to pay for healthcare." But that's giving Edwards more benefit of the doubt than such weasel words deserve. There is zero content in this answer. Financial markets are important. Sure. What about hedge funds?
Hillary Clinton didn't do a whole lot better, but at least she mentioned the word "regulate."
Well, I think that America is a great place because we have an entrepreneurial economy. We have people who are willing to make stakes and new enterprises and invest their money. And, obviously, one of the other reasons we're a great country is because we've learned over the years how to regulate that, so nobody gets an unfair advantage -- and that we, you know, have a framework within which our free market system operates ... So what we've got to do here is get back to having a Democratic president who will set the rules...
Not exactly rabble-rousing material, but voters could take some heart in the implied intent to actually, you know, govern. For that, we can forgive her for describing hedge fund investors as "entrepreneurs."
Clinton wins on points, but neither candidate did themselves any favors.