i guess you’ll have to unpack what you mean by free leverage? index flows might, as a second order effect, make it easier for firms to borrow, as they appear more solvent than they otherwise might. firms can take advantage of high valuations via obfuscated issuance, eg options compensation, mergers.

but i think you mean something else, in which case you’ll have to explain it for me. /fin

sure. but first there’s the choice between spending and saving. to a first approximation, what we collectively save goes nowhere. buying a stock or an index doesn’t cause buying factories or anything like that. 1/

whether a CD or an index fund, you’re just deferring consumption. the index fund overpays and undermines what might once have been institutions of meaningful capital allocation. the CD does neither (as long as we don’t set risk-free rates too high). /fin

there is always the risk that policy stabilization breaks — that incompetence or political constraint “nukes” the stock market. i’m not sure that’s a risk we want to compensate. 1/

index investing reduces compensation to active investors because the whole sector is a copycat. 2/

a small price increase in Stock A causes indexes to be under invested, causes them to buy more, accelerating the price shift, reducing the opportunity for the investors who brought information to market to exploit it. /fin

the answer would be to impose limits to the complexity and scale of investment funds, and to portfolio diversification. if you want safety, buy savings bonds. if you want returns, invest wisely or bear losses. 1/

it will always be the case, for any form of fund with free entry, eventually funds of that form will not outperform the market after fees. as @tylercowen.bsky.social might say, solve for the equilibrium. /fin

the only meaningful sense in which index fund investors “provide capital” is bearing risk. liquidity is not a scarce resource under elastic fiat currency. 1/

you can argue that index investors are compensating for bearing undiversifiable macro risk, and that’s a contribution. it’s the best case you can make for the practice from a social, rather than private, perspective! 2/

except upspiraling valuations and obvious policy stabilization undo that case. if policy (to stabilize employment, they of course will say) targets continuing appreciation and ensures downswings are short, then funds holders aren’t making that contribution. 3/

and when we made indexing a recommended best practice, when we advised sympathetic ordinary professionals to rely upon a practice that also made less sympathetic, less ordinary wealthy people even richer, we created a political coalition that would predictably work to stabilize an upward path. 4/

leaving indexers making the opposite of any contribution. stabilization of capital markets undermines their allocative purpose, income to shareholders has to be offset by disinflationary policy elsewhere. 5/

nonshareholders pay both the expanding profit margins, and, less directly, for the spiraling higher multiples. /fin

there’s lots you can do be said for social arrangements under which baseline ordinary living doesn’t require personal savings. nevertheless, even if, people do want to arrange the timing of their consumption in ways that deviate from their timing of income. 1/

it might well be that “real” credit-risk-free interest rates should be zero or negative much of the time. sometimes, because of a big social project (think war bonds, but for something good), we may wish to pay up a bit for people willing to defer consumption. 2/

but “paying up a bit” would look nothing like the returns index funds “investors” have enjoyed. /fin

they pay a lot less, they don’t pretend to be “natural”, “market”, returns, they don’t interfere with institutions whose role ought to be actual capital allocation. 1/

arguably they’ve paid too much, but we as a polity can make what choices we want about what compensation should be (probably negative during recessions!) for merely deferring consumption. /fin

no. i’m trying to oppose conspiracies involving state action to transfer wealth from everyone else to the already wealthy in exchange for no public benefit. it has nothing at all to do with capitalism.

there are forms of investing that require little involvement. they are called savings accounts, CDs, treasuries. they pay more probably than they shld. earning double digit percentages year after year stabilized by state action for no economic service is being on the “happier” side of exploitation.

plus, the practice has destroyed capital markets as effective allocators of scarce economic resources. i get while people like them, and as i’ve emphasized don’t judge. this isn’t a matter of personal morality.

but capital markets, like every kind of market, require careful attention to arrangements if they are going to serve socially beneficial functions rather than be vehicles of exploitation. index funds are part of how they have devolved into the latter.

the stock market should not be for mass participation by uninformed savers. it should be open to all, of course, but most people should save in savings accounts, CDs, treasuries. 1/

the role of the regulatory state should be to keep markets sober, ie aggregate valuations predictably within conventional ranges. that’s what distinguishes it from crypto markets, tokens untethered from any meaningful referent, a game of price alone. 2/

stocks shouldn’t 10x until it’s very cleat earnings will, and firms should be regulated means 10x profit comes from an increase in Q produced rather than P charged. 3/

under these conditions, stock speculating is, like the textbooks say, socially productive information work, and those who wish to contribute can and should. absent these conditions, like now, it is more like crypto, but state sponsored. /fin

* stocks shouldn’t 10x until it’s very CLEAR earnings will, and firms should be regulated SUCH THAT 10x profit comes from an increase in Q produced rather than P charged. 3/ grrr…

the issue is fundamentally diversification. the only free lunch economists deign to recognize is not a free lunch at all from a social perspective, although it sure is from an investor perspective. it’s a transfer. 1/

if investors hold widely divergent, not-so-diversified-to-just-be-the-market, portfolios, then the mass affluent do not mindlessly habitually throw their wealth into equities, creating a mass equivalent of Trumpcoin by which to pay them off. 2/

noninformational, low risk savers live in Treasuries and CDs, which are harder to run patronage through. 3/

plus, to the degree investors are in equities, if “the market” is not investable, there is less of an easy target for the state to stimulate in order to payoff equity investors. 4/

outcomes diverge, policy that affects the market creates losers as well as winners, so it’s a noisier, less effective, circuit, political support to patronage to political support. 5/

i don’t want to overstate this: interest rate policy can help both Coke and Pepsi stock. 6/

but since less of the mass affluent’s public’s money would be in shares at all, and outcomes would diverge a lot more so much of the public is always on a losing side, it would be a much less tempting target to buy off the most enfranchised elements of the public. 7/

note the distinction here is not between active and passive — as you suggest, actively managed highly diversified funds could deliver the same political economic situation, giving everyone market returns plus tiny divergences, and just skim off higher fees for their trouble. 8/

the issue is diversified vs informationally committed investment positions. do you win no matter what — as long “the economy” as politicians and financiers define and sustain it, which isn’t how most of us experience it, goes “up”? 9/

or do you win only if you are right about some real-economic enterprise, if you actually contribute information work to the capital allocation process in directions that have proven fruitful? /fin

then perhaps you (not you personally, the collective similarly situated you) should be in CDs or Treasuries and be grateful that somehow you usually earn a positive real return while others do the hard work of recreating aggregate wealth every goddamn day. 1/

your outsize equity returns for nothing are other people’s costs, one way or another. equity returns are only worth paying to people who in one form or another contribute to the wealth generation process. 2/

i want to be very clear i’m not criticizing you or anyone personally for using index funds. if the financial-system-state-nexus creates an extraction racket, individuals may have to participate or get left behind, and we all do what we have to do live in this world. 3/

but it wld be a better world if we hadn’t invented an escalator by which people who come into a bit of money can leave an underclass behind, contributing no discernment or discrimination, nothing at all we couldn’t otherwise more cheaply provide, just because they could and did join the racket. /fin

one case against index funds is the one you are alluding to: index fundies are freeloaders. let’s flip yr question, what are the passive investors “specializing” in? what service do they provide that complements what active traders do? they reduce compensation of active traders, what do they add? 1/

but that’s not the most serious case against index funds in my view. in increasing order of seriousness there is also the way diversified ownership changes principal and manager incentives… 2/

and most seriously, the political economy of ubiquitous passive ownership, which turns the stock market from a sharp-incentive information processor to an instrument to be stimulated and stabilized for macro (if you want to be nice about it) or patronage (less nice) purposes. /fin

we are rich in GDP but poor in fact in large part because we revised the build environment such that we all suffer a huge real liability in the form of transportation costs payable if we want to meaningfully participate in society. 1/

and even if we pay it, we don’t enjoy the buzz of busy streets. only traffic. /fin