Phony Financial Profits

I thought the most important line in the president's State of the Union speech tuesday was this:   "We will not go back to an economy weakened by outsourcing, bad debt, and phony financial profits," especially that last phrase.   I've heard a little about the strengthening of enforcement he's suggesting, but not much about the "phony financial profits" line, except from WaPo's astonishingly clueless fact checker, Glenn Kessler: "That's a bit of a mystery to me."  

When he created the US stock market and investment system, Alexander Hamilton talked about the value it would create by providing financial support to new businesses.  That's it's sole purpose.  Except for promoting the creation and expansion of other businesses, businesses with real products, finance is nothing but a parasite.  If we truly had an efficient market, finance would do only what's necessary to promote other investment, and any parasitism would be driven out.  But that's not what we have.  We have IPOs with the sole function of allowing investors to maximize profits before the company crashes and dies.  We have robotrading, whose function is to extract a fraction of a cent from trillions of trades, getting in a fraction of a second before the other guy.  We have wild speculation in various commodities markets, way out of line with supply and demand.  And most importantly, we have bubbles, from the tulip craze and various precious metals crazes, to the dot com and housing bubbles.

Every one of these bad things things is driven, entirely, by phony financial profits.  They're real money, but they have phony value--that is to say, the real value in goods and services being traded is much smaller than the amount of money involved.  Phony financial profits drive inflation, they crowd out real investment, they separate money from the people who provided the value, they provide an incentive for fraud, they cause financial panics.
They are a bad thing.  We need financial profits, but only enough to promote business ventures, and no more.  When they become excessive, or "phony" in the president's succinct characterization, the economy blows up.

The key is regulating excesses.  Banking serves an important function all through the economy, so we must keep it strong and safe.   No speculation, very limited levels of leverage.  Finance serves an important function too, but it's inherently speculative.  It can't be allowed to pollute banking, and institutions must be kept small enough that when they fail, as some inevitably will, the consequences to the overall economy will be negligible.  This is the heart of the free market.  (The head of the free market are the entrepreneurs who create the businesses and the body is the workers...)  And purely parasitic behaviors, such as robotrading and fraud, should be stopped.