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The Root of All Evil

September 24th, 2008 · 18 Comments

I’m bemused at the way we’re perpetually told the fundamental cause of the ongoing meltdown is Wall Street “greed,” as though that somehow counted as an explanation. How, pray, would we describe it if mortgage lenders had rejected many more applications from lower-income folks, on the grounds that they were poor risks? Well, greed, of course. Pretty much whatever they did, they’d be doing because they expected it to maximize their profit; the issue is their judgement, not their motives. Or put another way: The problem isn’t that people were greedy, it’s that they weren’t very good at being greedy.

Update: Let me clarify a little. Look, I’m not denying that in telling the causal story of this meltdown, “greed” will come into it—because greed will come into every causal story you tell about markets.  The point is that invoking a constant is an unhelpful way to account for a specific event. Yes, people running investment banks are greedy. They were greedy five years ago, and ten, and they’ll be greedy in another five or ten. Unless someone wants to speculate that somehow the current crop of folks are all just naturally more avaricious than their predecessors, either as a massive coincidence or for some occult sociological reason, this is not a good candidate for helping us suss out what’s going wrong right now.

Tags: Economics · Markets


       

 

18 responses so far ↓

  • 1 Sam C // Sep 24, 2008 at 10:36 am

    Isn’t the thought something like this? The banking system was set up such that individuals on Wall Street and in the City of London could make huge gains by endangering the stability of that system. Those individuals were offered an opportunity to profit excessively at others’ expense, and they took it. Hence, greed, which is a form of selfishness or pleonexia. If they’d turned down these chances, we might have other reasons for criticism, but we wouldn’t say that greed was the problem, would we?

  • 2 Sam C // Sep 24, 2008 at 11:09 am

    Addendum: I should say that I don’t necessarily buy this explanation; I just think it has more content than you suggest.

  • 3 That Fuzzy Bastard // Sep 24, 2008 at 11:24 am

    It should be noted that what got us so deep into this mess was not, as I understand it, sub-prime mortgages themselves. The problem was the regulations governing the exchange of debt got loosened, along with regulations on the wall between banks investment and banking arms.

    The result was that banks built enormously profitable business out of buying and selling blocks of debt, with nothing really backing it. The debts themselves weren’t good, and the original sellers knew that, but the original sellers were six transactions back. So we ended up in exactly the situation the regulations were designed to prevent—numerous banks sharing the same bad debts. So the whole “Don’t you liberals want poor people to have homes?” argument doesn’t really apply, because had individual banks simply offered sub-prime mortgages and collected or not collected as they were able, we would have a much, much smaller problem on our hands.

  • 4 Micha Ghertner // Sep 24, 2008 at 2:47 pm

    Sam C,

    It seems to me that if the banking system was set up such that individuals on Wall Street and in the City of London could make huge gains by endangering the stability of that system, then the blame should be properly placed on the system and those who set it up that way, and not on the participants who acted as we would expect.

    Greed appears to be a constant, like water running downhill: you don’t blame the water for leaking through the cup – you blame the holes in the cup.

  • 5 mds // Sep 24, 2008 at 2:52 pm

    “The problem isn’t that people were greedy, it’s that they weren’t very good at being greedy.”

    Based on the bonuses handed out at various establishments, including Lehman Brothers, right before the earth-shattering kaboom, I suspect many of the people most responsible for all the comical over-leveraging are extremely good at being greedy. Phil Gramm, the architect of the ban on regulating CDOs, has also been very effective at enriching himself, regardless of the fortunes of UBS. Then Paulsen had to go and spoil it by not being very good at it. If he had asked for rather less than a no-strings $700 billion revolving fund, he might have gotten away with it.

    Also, it’s not simply “lower-income folks” who have had their net property values end up underwater. Quite a lot of the shitpile is composed of jumbo mortgages, which aren’t usually made available to Ma and Pa Kettle. Even by liberals and their “politically correct mandatory lending,” or whatever the latest permutation of the Free Republic talking point is.

  • 6 mds // Sep 24, 2008 at 2:57 pm

    “then the blame should be properly placed on the system and those who set it up that way,”

    I’m pleasantly surprised we agree that Phil Gramm should be held responsible for explicitly forbidding government regulation of CDOs, then, since that was the “system” under which this CDO-driven meltdown took place. Though perhaps we should spare some blame for the SEC for greatly loosening debt-to-capital requirements for the five big investment banks, enabling them to continue leveraging merrily away, right?

  • 7 Micha Ghertner // Sep 24, 2008 at 3:10 pm

    We certainly agree that the system as it was set up didn’t work very well. (It would be difficult to think otherwise at this point.) I doubt we agree very much on which parts of the system were the root of the problem, or what a better system would look like.

  • 8 Sam C // Sep 24, 2008 at 5:08 pm

    Micha – oh, I agree, I think the attempt to find a culprit is mostly a version of the fundamental attribution error. I was just suggesting that the ‘greed’ explanation isn’t as empty as Julian claims, because it does track a way people responded, but didn’t have to respond, to an opportunity provided by their circumstances.

    I don’t quite agree, though, that greed is a constant: as with other vices, both circumstances and character can be such as to encourage or to limit it (how much work character normally does is controversial, of course).

  • 9 Kevin B. O'Reilly // Sep 24, 2008 at 11:06 pm

    I think John McCain’s made it perfectly clear that if Wall Street investment bankers had simply been between 13.5% to 18.7% less greedy over the last 6.5 years, this whole mess would have been avoided.

    Duh!

  • 10 Micha Ghertner // Sep 26, 2008 at 1:19 am

    Sam,

    The greed explanation does indeed track the way many people responded, but didn’t have to respond. But from a system wide perspective, this still seems pretty empty; there will always be smart greedy people. As long as a system consistently offers people the opportunity to profit excessively at others’ expense, I expect people to take this opportunity. If some kind hearted people turn down these opportunities, less morally virtuous people will be there to take their place. The solution does not lie in pointing the finger at the immoral, but in structuring a system where the immoral do not profit excessively at others’ expense.

    I take pursuit self-interest not as a virtue or a vice, but as a given; surely this can be modulated through character, but the less work society has to do through moral suasion, and the more that is done by wisely structured systems of material incentives, the better.

  • 11 roger // Sep 27, 2008 at 6:36 pm

    An excellent point. There’s no reason to think the average banker is greeder than the average Vietnamese peasant. The average banker just has scope for that greed. Greed moralizes a political problem, which is the unchecked power of the wealthy. Because they have the enormous resources to throw into the rentseeking enterprise of guarding their wealth and expanding their power, they will, of course, use it. Expropriate those resources and they won’t. A true free enterprise system would, of course, use expropriative levels of taxation to cull excess wealth, which can only be used to the detriment of the entire system. Thus, it cures the problem that those successful in the system have a self interest in skewing the system to perpetuate their success, by any means necessary.

  • 12 Craig // Sep 29, 2008 at 2:50 am

    But is greed really a human constant?
    If by greed, the critics of markets mean an irrational, overweening desire for gain, then competitive markets weed this kind of behaviour out over time.
    You are unlikely to stay in business for long if you can’t acknowledge real risks because all you can see are big dollar signs.

  • 13 anonymous_lib // Sep 30, 2008 at 3:28 pm

    I don’t think it would be called “greed” when banks reject unqualified lower-income folks from loans (limiting this to the discussion of ability to pay only). Not making bad business decisions is not greed. Greed is when you decide to make those bad decisions simply because you’ll get all the benefit and none of the risk (because of selling off the loan).

    Nice try, though. Maybe unfettered capitalism doesn’t create a particularly stable environment after all, huh? I don’t mind minor libertarian leanings, but to act like greed isn’t an element here is kind of naive.

  • 14 Micha Ghertner // Sep 30, 2008 at 4:56 pm

    anonymous_lib,

    Maybe unfettered capitalism doesn’t create a particularly stable environment after all, huh?

    Maybe not, but it sure would be interesting to find out. The current system of highly fettered corporatism clearly doesn’t seem to work very well, so maybe it’s time to try a separation of economy and state.

    I don’t mind minor libertarian leanings, but to act like greed isn’t an element here is kind of naive.

    You have misunderstood Julian’s original post. The question is not if greed is “an element”, for of course it always is. The question is if greed is an explanatory element; that is, if greed can work as an explanation distinguishing this situation from others. It cannot. Since greed is always in the background of human behavior, some other explanatory factor must be used to distinguish the causes of this crisis from cases of non-crisis. People didn’t suddenly become more greedy overnight; something else must be at work here.

  • 15 Jon H // Sep 30, 2008 at 9:53 pm

    “had rejected many more applications from lower-income folks, on the grounds that they were poor risks? ”

    It had nothing to do with poor folks. The game was to generate as many mortgages as possible, as quickly as possible, and rapidly bundle them and pass them on to the giant institutional investors. Short term profit, pass the risk on to other people.

    The mortgages were cheap to drive volume, not to serve the needs of poor folks.

    Shows like “Flip That House” didn’t arise due to demand from poor folks.

    You’re smarter than that.

  • 16 Jon H // Sep 30, 2008 at 9:57 pm

    “. People didn’t suddenly become more greedy overnight; something else must be at work here.”

    The global pool of money doubled rapidly in this decade, due largely to improved economies in the developed world, oil, etc. Money managers wanted safe investments that gave a decent return. Mortgage backed securities were promotes as a safe investment with a good return. There was huge huge huge demand. American bankers and the real estate industry served that demand by generating millions of garbage mortgages.

  • 17 Jon H // Sep 30, 2008 at 9:59 pm

    Julian,

    Greed is what made the bankers knowingly lie to their risk-management software systems. Greed is what made rating agencies slap AAA ratings on garbage, rather than standing up to the customers requesting this and turning down the fees. Greed is what made bankers give half million dollar mortgages to people who couldn’t get that kind of money from people who break legs.

  • 18 Barry // Oct 1, 2008 at 11:05 am

    12 Craig // Sep 29, 2008 at 2:50 am

    “But is greed really a human constant?
    If by greed, the critics of markets mean an irrational, overweening desire for gain, then competitive markets weed this kind of behaviour out over time.
    You are unlikely to stay in business for long if you can’t acknowledge real risks because all you can see are big dollar signs.”

    However, one *can8 remain in business long enough to cause very, very big problem. What the elites did was to run the system into the ground, because they didn’t want to stop, because it got them very large piles of money.

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