Grit is Good

PARIS – The United States is widely recognized as possessing the deepest, most liquid, and most efficient capital markets in the world. America’s financial system supports efficient capital allocation, economic development, and job creation.

These and similar phrases have been common currency among American legislators, regulators, and financial firms for decades. Even in the wake of the financial crisis that erupted in 2008, they trip off the word processors of a hundred submissions challenging the so-called Volcker rule (which would bar banks from making proprietary investments). The casual reader nods and moves along.

But there are signs that these assumptions are now being challenged. Prior to the crisis, regulatory authorities focused mainly on removing barriers to trading, and generally favored measures that made markets more complete by fostering faster, cheaper trading of a wider variety of financial claims. That is no longer the case. On the contrary, nowadays many are questioning the assumption that greater market efficiency is always and everywhere a public good.

Might such ease and efficiency not also fuel market instability, and serve the interests of intermediaries rather than their clients? Phrases like “sand in the machine” and “grit in the oyster,” which were pejorative in the prelapsarian days of 2006, are now used to support regulatory or fiscal changes that may slow down trading and reduce its volume.