Wednesday, October 19, 2005

Column on Financial Paternalism

Paternalism at Yale and The Times

Tibor R. Machan

This, folks, really takes the cake for me: David F. Swensen, chief
investment officer at Yale University, has penned an Op Ed for The New
York Times, in defense of rank financial paternalism. As he puts it, ?what
began as a reasonable opportunity for sophisticated investors has become a
killing ground for naïve trend-followers, with scandals and frauds
prompting predictable calls for increased regulation of hedge funds. But
if Congress and the Securities and Exchange Commission really want to
protect individual investors, they should prohibit unsophisticated players
from participating in hedge funds.?

It doesn?t surprise me a bit that this Op Ed appeared in The New York
Times, that venerable member of the fourth estate that has become an
unrestrained cheerleader for paternalism on nearly every front of human
social life. It is rather typical: an organ promoting a political agenda
of egalitarianism?let?s treat everyone with equal respect?then turns right
around and asserts shameless elitism. I, the amateur, should be barred
from the hedge fund markets. You the expert, get a pass.

Let?s just assume that what Swensen says about this issue is true. Here
are some more of his thoughts: ?Less informed investors rely on an
intermediary (often a fund that invests in a variety of hedge funds) to
make fund choices. Again, the principle of adverse selection applies. The
best fund managers avoid these ?funds of funds,? which operate with
shorter time horizons, in favor of a direct relationship with big
long-term investors. Of course, the funds of funds add more fees to the
already overburdened hedge fund investor, further reducing chances for

And, of course, there is more of this. But none of it addresses one of
the vital issues: how some governmental body is going to differentiate
between sophisticated and unsophisticated investors, what tests will be
given and, most importantly, how dare they meddle in all this in the first
place. Nor does it address an even more vital topic: How dare anyone
propose banning anyone else from doing something entirely peaceful?
Perhaps, however, it?s no wonder this sophistication comes from one of the
Ivy League universities. Those are places that foster one of the most
outrageous inequalities in the country as they refuse to voluntarily share
their enormous endowments with less fortunate colleges and universities
(even as their professors and other spokespeople preach egalitarianism and
paternalism left and right).

If I were a joshing sort of guy, say a P. J. O?Rourke or a Dave Barry, I
might propose that ?if Congress and the Securities and Exchange Commission
really want to protect [us,] they should prohibit unsophisticated players
from? writing Op Ed pieces of the sort that Mr. Swensen penned for The New
York Times. How might one be able to tell the difference between a
sophisticated and an unsophisticated pundit? The first thing I would
consider is whether he or she is championing paternalistic government

Since America has flatly rejected the monarchical system of
government?wherein the king or queen is ?the keeper of the realm? and
supposedly has God-given powers of making sure all the subjects carry on
properly in their lives?Mr. Swensen?s advice about how to deal with
unsophisticated investors clearly lacks sophistication, that is,
sufficient learnedness. His ideas are obsolete; they belong in the
pre-Revolutionary era, not in a society that is supposed to treat us as
sovereign citizens instead of subservient subjects. Alas, my type of humor
is different. I don?t do well at being ironic and I am afraid to offer a
reductio ad absurdum so as to make my point lest some of these
unsophisticated blokes take me seriously and abolish the First Amendment
to the US Constitution.

If, however, the First Amendment?s philosophy is sound and anyone may say
anything at all, anywhere he or she can find a forum, never mind how
unsophisticated the person is, then so is the free market philosophy which
proposes that no one?not Congress, not the SEC, not anyone?ought to have
the legal power to ban people from investing as they choose. Just as the
philosophy of the First Amendment presupposes that free men and women are
capable of obtaining good advice on matters they read in The New York
Times, should they be so unsophisticated as to need such advice, a free
market presupposes that free men and women will be able to find good
advice about how to invest their resources prudently.

There is really no difference between the two philosophies?that of the
First Amendment and that of the free market. They both rest on the idea
that adult men and women are normally capable of protecting themselves
from bad ideas about any subject whatsoever.

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