The struggle this English major goes through to understand the current financial mess received some help Sunday when the New York Times published this excellent piece from Michael Lewis and David Einhorn. The two-part explanation of how the economic world has changed and what should be done about it rang true with our pro-regulatory thinking. In the first section we read this regarding “greed” as the cause of the whole mess:
The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.
That’s right, greed is a shared trait (see Thorstein Veblen’s classic The Theory of the Leisure Class for his view on the “barbaric “ roots of our need to accumulate). Nor can we blame the crisis on a few greedy people or on greed itself. In December, we interviewed Redlands University economics professor Lorenzo Garbo, who leads a class entitled “On Greed: Western and Eastern Enlightenment.” He told us something quite similar about the pervasiveness of greed and its role in the current crisis:
“I think everybody has been following her/his self interest, including the public. In its own myopic way, the public has been taking advantage of whatever greed was happening at every level of the financial markets.”
If everybody is capable of greed, it isn’t going away. Instead, let’s watch for it, put rules in effect that make it difficult to pursue at the unknowing expense of others and punish it when it takes illegal turns. Garbo sees a silver-lining—maybe–if we learn from our mistakes:
“Now we can gain a new understanding of how the system works and protections can be put in place to avoid a reoccurrence of the same situation. I have a positive attitude towards what can come out of it, even though we need to watch out, because greed and delusion have not ceased to be fundamental human traits.”
Lewis and Einhorn aren’t so optimistic, based on what’s happened so far:
And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.
Say what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.
Is that what we want, a bail-out that please no one except a handful of financiers? Lewis and Einhorn make several suggestions as to preventing this debacle from happening again, most having to do with the cozy relationship between Wall Street regulators and Wall Street financiers. Read both articles. You won’t be happy with the way things are going.—Cabbage Rabbit