When people eat and drink too much, most of us blame the consumer.  Businesses don’t force anyone to become obese alcoholics; they’re just responding to consumer demand.  If people started spending their money more wisely, business would uncomplainingly cater to their new choices.

Of course, you could blame both consumers and sellers.  If sellers were more puritanical, supply would fall, prices would rise, and consumers would respond with wiser choices.  But however you turn the problem, consumers clearly bear a large share of the blame.

This point immediately came to mind when Paul Krugman wrote:

Wall Street’s Masters of the Universe realize, deep down, how morally
indefensible their position is. They’re not John Galt; they’re not even
Steve Jobs. They’re people who got rich by peddling complex financial
schemes that, far from delivering clear benefits to the American
people, helped push us into a crisis whose aftereffects continue to
blight the lives of tens of millions of their fellow citizens.

Paul makes a valid point here.  Many, perhaps most, of Wall Street’s products are junk.  I couldn’t sell them with a clean conscience.  So why do “complex financial schemes” – and not-so-complex schemes like the typical actively managed fund – survive and prosper?  Because of consumers! 

Consumers of financial products could simply buy and hold an internationally diversified index fund.  That’s what I do.  Whenever anyone asks me my “expert opinion,” I tell them to do the same.  Unfortunately, most consumers of financial products fail to exercise common-sense skepticism.  They credulously fall for pompous personality cults.  They buy into get-rich-quick schemes.  And above all else, they refuse to admit their own ignorance – that they have near-zero ability to pick good investments or good investment managers.

Of course, consumer demand isn’t the only problem on Wall Street.  Many “complex financial schemes” are about regulatory arbitrage – finding perverse incentives and enthusiastically responding to them.  And the perversest incentive of all is “Heads you win, tails you get a bailout.” 

There’s no reason to excuse businesses for their role in these evils.  But once again, there’s plenty of blame to go around.  Politicians, yes.  Regulators, yes.  But above all, voters.  They, too, fail to exercise common-sense skepticism.  They, too, credulously fall for pompous personality cults.  They, too, buy into get-rich-quick schemes.  And above all else, voters refuse to admit their own ignorance – that they have near-zero ability to pick good policies or good policymakers.

To repeat, there is plenty of blame to go around.  But if I could reform only one set of malefactors, I’d choose voters without hesitation.  You don’t need to imagine a libertarian electorate.  You just need to imagine an electorate that greets any bailout or subsidy proposal with a knee-jerk, “Prove the benefits exceed the costs” – and humorlessly punishes leaders who spend without such proof.  If politicians faced such an electorate, they’d have a strong incentive to keep regulators in line and ignore rent-seeking businesses.  And without bailouts and subsidies, regulatory arbitrage isn’t very enticing.

In this world, there’d still be plenty of businesses selling crummy investments to credulous consumers of financial products.  But consumers’ shortage of skepticism would be no one’s problem but their own.