Not just a decade of greed

Here’s a prediction about the past: The decade about to end will be popularly branded an era of great greed, a time when our worst instincts got the best of us.

It will be a selective, unhelpful remembrance.

Greed is a convenient target for the failures we saw in the aughties. When banks hand out seven-figure bonuses just before facing collapse, and then return to profitability just a year after a taxpayer bailout, their executives are easy marks for a president railing against “fat cats.”

The sentiment isn’t entirely misplaced, but it is overly simplistic. Our failures ran far deeper than mere greed.

William Isaac, who was chairman of the Federal Deposit Insurance Corporation from 1981 to 1985, puts it this way:

“You don’t see headlines saying, ‘Gravity caused plane crash.’ We understand gravity is there, it’s a force of nature…and our job is not to blame gravity when something goes wrong. We blame the FAA and the airlines or whoever is not training pilots properly.”

Likewise, in the current crisis, “Greed is a force of nature that makes the free-enterprise system work,” Isaac says. “I’m not saying there weren’t bankers who didn’t get out of control and out of hand….But we spend billions each year that is supposed to keep that from happening. And it didn’t work.”

Getting the history of this episode right is important, because Congress is at work “fixing” the problem. Yet Isaac says there’s “precious little in this legislation that would have helped at all.”

The story of this decade’s financial crisis is really the story of Big Government being too closely intertwined with Big Business, and specifically Big Finance. Congress being Congress, government’s role in the crisis is mostly being glossed over.

Perhaps it’s because the list is so daunting. It includes:

  • the buildup of a staggering amount of risk by Fannie Mae and Freddie Mac, which could buy (and therefore encourage the creation of) so many subprime mortgages because of their implicit backing by Uncle Sam, now made explicit;
  • the encouragement, by both the Clinton and Bush administrations, of expanded homeownership without any substantive increases in the number of Americans able to afford to buy homes;
  • pro-cyclical regulations — such as mark-to-market accounting, the ill-conceived capital ratios set by the Basel accords and FDIC premiums that rise just as banks are least able to afford them — which ensured that the crisis in motion stayed in motion;
  • the Federal Reserve’s habit of responding to smaller downturns by flooding the market with dollars, lowering banks’ costs and risks of lending;
  • the inability of regulators, who monitor banks like no other element of our economy, to catch on to how these failures were playing out, any more than they stopped Bernie Madoff;
  • and, once the crisis was under way, the Treasury’s utterly incoherent approaches to Bear Stearns, IndyMac, Washington Mutual, AIG, and Fan and Fred, culminating in the surprising, panic-inducing decision to let Lehman Brothers fail.

“Markets can handle almost anything,” Isaac notes, “except surprises and lack of information.” They got those in spades.

I’m not trying to whitewash bankers’ willing decisions to exploit each of these shortcomings. But take away overly accomodative monetary policy, explicit pressure to lend to ever less creditworthy borrowers — any of these factors — and the banks’ ability to spark a deep recession would have been far weaker.

Pin it all on “greed,” and greed will strike again.

29 comments Add your comment

Democrats are Corrupt, Repukes are Lying Scum

December 28th, 2009
7:32 am

The stealth bailout of Goldman Sachs by Hank Paulson was on object lesson in greed. Treasury Secretary Paulson was a former Goldman Sachs CEO who used his power as treasury secretary to funnel tens of billions of taxpayer dollars to Goldman via the defacto failed AIG. Tax payer money went into the front door at AIG, and immediately out the back door to Goldman to pay off derivative bets that would otherwise have been bad debts by AIG. Goldman had agreed to accept only 40 cents on the dollar from AIG when Hank commanded AIG to use the government money to Goldman 100 cents on the dollar. Check out the comments made by Professor Niall Ferguson of Harvard University this weekend on Bloomberg TV. You can also watch Prof Ferguson’s video presentation on Globalization at http://www.hbs.edu/centennial/businesssummit/globalization/

Wes

December 28th, 2009
7:46 am

Well said Kyle. I’m currently reading “How Capitalism Will Save Us” by Steve Forbes and he delves deeply into the very issues of convenient ignorance and sweeping stereotypes many use to defend their positions.

The government-led path we’re on is extremely scary. Never has government intervention been at a higher mark than it is today (besides maybe during Great Depression). I do not even have to go into history to prove my point…although it completely supports it. Just look at current countries that do not promote a fully democratic capitalistic society…Venezuela, Netherlands, N Korea, China until just recently. When government steps in to try and manage things, innovation and the interest to offer things people desire in greater quantities, wanes. What do those countries give us??? Certainly not the Ipod, alternative energy sources, electric cars, groundbreaking medical technologies designed to help 3rd world countries…all the things left-leaning “big government” people love to talk about.

Keep preaching the good word…

MrLiberty

December 28th, 2009
8:12 am

Hitler was an evil man, but without the power of government behind him, he would just have been another angry person with little or no power. Greed, much like anger, exists all the time. This was a good article, but still failed to point to the ultimate root cause of all the problems – the existence of the Federal Reserve and a fiat currency. Yes, you mentioned the Fed and its loose monetary policy, but fundamentally, the ability to print money at will without any regard for its impact, is implicit in the exisitence of a fiat currency and the existence of a central bank. You complaint about the monetary policy, but monetary policy is all that the Fed has in its bag of tricks. It only knows inflation. And lets also not forget that it was Bush who pushed for the massive bubble following 9-11. Yes, since the president appoints the Fed chairman, it is clear to everyone where the pressure comes from for Fed policy.

Every “greedy” move by every player in our society (beginning with Bush’s greedy need to expand government following 9-11 was all enabled only by the presence of the Federal Reserve and its unstoppable printing presses. Get rid of the fake money and the power to control the economy that comes with it, and virtually every problem mentioned would disappear.

End the Fed.

Chris Broe

December 28th, 2009
8:33 am

I think Kyle is trying to say he wishes the government would stop using Fiat money to jack up Cadillac healthcare plans and bail out Chevy.

jconservative

December 28th, 2009
8:43 am

Actually Kyle is correct on the lack of regulating at the federal level.

In part, Congress passed sufficient legislation to regulate; the problem, was that Congress did not properly fund the regulators. The Madoff case is a prime example, evidence in front of their eyes but no experienced eyes to see the evidence.

Redneck Convert (R--and proud of it)

December 28th, 2009
8:49 am

Well, Wingfield is exackly Right. And besides, we wouldn’t of had all the bank robberys in Atlanta if the banks didn’t keep all that money there.

It’s all the guvmint’s fault. If you put a big plate of great food out there, some hungry guy’s going to walk up and steal it and it will be your fault, not his. The same thing goes for all the money the guvmint let banks and stockbrokers and money houses have. You put it out there and somebody’s going to pocket it and it will be the guvmint’s fault.

I like the way this Wingfield thinks. Like a good Conservative. Have a good day everybody.

Truth-Be-Told

December 28th, 2009
8:51 am

Generic journalist who write daily columns are just people with opinions. They are not experts in any areas except leading people around by the nose who can’t think for themselves whether they are on the left or right.

Democrats are Corrupt, Repukes are Lying Scum

December 28th, 2009
8:56 am

MrLiberty – Evil always exists, but does not always recognize itself as such. The danger comes with power, concentrated power, power which currently exists in Washington DC, and in the Pro Israel Lobby’s ability to control Washington. We are about to see Evil in action, in an American attack on Iran, solely due to Jewish paranoia.

Scott in Woodstock

December 28th, 2009
8:59 am

Good article, but I think that the source of the current problems is something not mentioned: Americans living beyond their means. As a nation, we generaly don’t endorse or advocate frugality. To the contrary, luxury and excess is celebrated, even when it’s paid for by credit. We need to get back to the mindset of “don’t buy it if you can’t pay for it”.

I think the current challenges are going to be a cold, hard slap of reality to a lot of Amercians. I sure hope so.

Ragnar Danneskjöld

December 28th, 2009
9:21 am

Well-argued. Only the ignorant and the arrogant believe “more powerful overlords” would produce better results than free people making free decisions.

The Austrian Brotherhood

December 28th, 2009
9:30 am

Real CHANGE is coming – and it’s gonna be a real struggle for the American Idol Watchers.

But some folks will be more prepared than the Network News Watchers, like Lew Rockwell for instance.

Johnny DangerDawg

December 28th, 2009
9:33 am

Good article. Thank, Kyle.

Davo

December 28th, 2009
9:43 am

Valid, but well-trodden points, Kyle. Your ‘daunting’ list excludes any mention of military spending and I’m left to wonder why that is. Are you of the mind that any spending on ‘national defense’ should be left off the table when it comes to economic policy? Is this a sacred-cow that we all should just leave alone?

For myself, I would have included at the very top of your list the bullet point,
“Reckless foreign policy of war and intervention which benefits none and saps every element from the American people.”

ugaaccountant

December 28th, 2009
9:56 am

This is the kind of analysis newspapers should be printing as front page news! The way we can move forward as a society from here and get back on track is for banks to quit lending so much money to borrowers without the ability to repay. As Scott in Woodstock says,”don’t buy it if you can’t pay for it”.

A house is not an inaliable right. A 50 inch tv, also not an inaliable right. If your want a home loan, you should have to have a hefty down payment and a stable work history making plenty of money to easily afford the monthly payments.

And adjustable rate mortgages should be illegal, plain and simple. They are a timebomb destined to bankrupt many people when interest rates go back up.

Churchill's MOM

December 28th, 2009
10:08 am

Wingboy, good to see you acting like a conservative..

When are you going to write about our next Governor? Karen Handel?

DannyX

December 28th, 2009
10:08 am

“Venezuela, Netherlands, N Korea, China until just recently. When government steps in to try and manage things, innovation and the interest to offer things people desire in greater quantities, wanes. What do those countries give us??? Certainly not the Ipod, alternative energy sources, electric cars, groundbreaking medical technologies designed to help 3rd world countries…all the things left-leaning “big government” people love to talk about.”

Are you serious Wes? Your “Ipod, alternative energy sources, electric cars, groundbreaking medical technologies” ARE coming from liberal US states with governments that support the development of new technologies.

Do you think that good ole fashioned American ingenuity is producing all our advances? Most of our medical breakthroughs are produced with the help of government. The government run university system in “socialist” California is responsible too. So are the universities up north, you know the liberal states like Massachusetts.

In the American south, that’s a different story. The “keep government out of my life” crowd here in south contribute very little to this economic engine.

Take away our public supported government run university system, then taken away the federal grants that support most research in this country and we have nothing. Nothing but the South Carolina and now Georgia models.

Its the liberal “socialist” states in this country that are developing all the products that are keeping us in the game. With lots of government aid.

Just what does Georgia give us? South Carolina? Alabama? Mississippi? Check out North Carolina! All them government universities are paying off big for that state right now, big time.

Jake

December 28th, 2009
10:30 am

Instead of giving Nobel Peace prizes to warmongering Presidents we should be giving Nobel economics prizes to anyone who can create an economic system that is based on stability rather than endless growth. Will we ever return to the peace and prosperity of the Clinton era?

BS Aplenty

December 28th, 2009
10:42 am

Greed is a part, an ineffable part, of human nature. Capitalists recognize it and use it for the betterment of all. Meanwhile the socialists wail about greed & wealth, beat their significantly undersized breasts (not even an A-cup action) and try to change human behavior with government intervention. Doesn’t work. Like trying to stuff a C-cup into a training bra. It’s just the wrong solution and results in more misery.

Capitalism is wealth creation. Socialism is wealth transfer.

Jess

December 28th, 2009
11:11 am

Very good article. I do think that the people who did not pay their loans have gotten off easy in this fiasco however. Instead, they have been painted as victims, rather than part of the problem. Sure the financial world took advantage of the government throwing money at them, but in the end, had the majority of borrowers paid their bills, the collapse would not have happened.

We have been led to believe that somehow people were forced to take loans they knew they could not repay. If they knew this, they should not have taken the loan… period. Personel responsibility in this country has been replaced by institutional finger pointing.

DannyX

December 28th, 2009
11:38 am

Only in the South!!!

Greed is good! Ignore the Bible and Jesus and embrace greed as GOOD!!!

Sex? Sex is bad. Real bad, read your Bible.

Yep a good God fearing southern Christian conservative will stick their nose in issues of sexual behavior with “government intervention.”

Greed? The Bible is full of examples of the destructive nature of greed.

You brave warriors, get ‘em! Good job with your government intervention on Sunday alcohol sales too!

Hillbilly Deluxe

December 28th, 2009
11:38 am

This decade doesn’t end until December 31, 2010, unless you count to 10 by going 0-9 rather than 1-10. Just sayin’.

Kyle Wingfield

December 28th, 2009
12:09 pm

Responding to a few comments:

jconservative: Funding may be an issue — there weren’t experienced eyes around in part because once a regulator has that experience the private sector will pay more for it than the government will — but I take the view that we’ll never solve the problem by hiring more regulators or paying them more to stick around. We have to re-introduce real risk, rather than weakening risk as was done by most of the government measures I outlined.

Davo: I don’t think military spending caused the housing bubble, the financial crisis or the current recession. Do you?

Jake: The problem with pursuing “stability” over growth is that we don’t operate a closed economy; we have to compete with too many people in too many other parts of the world for whom the status quo isn’t so appealing. The prosperity of the 1990s was due to growth, not stability (although a lot of that growth, i.e. the tech bubble, was no more stable than the growth of the housing market in the 1990s and 2000s). The peace of the 1990s (which assumes that Somalia, Bosnia, Kosovo, Rwanda, Congo, Darfur, the Palestinian intifada, etc. didn’t happen) was an illusion, a vacation from history for which we have paid dearly in this decade.

Kyle Wingfield

December 28th, 2009
12:12 pm

Hillbilly Deluxe: I’d agree with you if we were talking about the first decade of the 21st century. (The way that 2000 was the final year of the 20th century.) But I don’t group 2010 with the 2000s anymore than 2000 with the 1990s, 1990 with the 1980s, and so on. 2000-2009 total 10 years, hence a decade.

And yes, this is a purely pedantic point on my part…

Hillbilly Deluxe

December 28th, 2009
12:29 pm

Well if you want to get really pedantic, culturally, the 60’s lasted from when JFK was killed until Nixon resigned.

;-)

lmno

December 28th, 2009
1:03 pm

Greed, along with Lust, Gluttony, Extraavagance, Pride, Envy, sloth, and the other long ago listed “Deadly Sins” are precisely what keeps the human race from ever building a truly great society.

An earlier poster mentioned the Bible. I think of the communist society described in Acts 2 and 3 set up by the disciples of Jesus often. Every follower sold everything they had, gave it to the commune, and anyone who had need was given to freely.

That is a truly great society. If everyone worked hard, took only what they needed, and cared for one another as themselves, then a communist government could exist.

However, when people are freely given what they need without regard to work, they become slothful.

On the other hand, if a society is built upon keeping what you have and not distributing based on needs, then jealousy, greed, and especially Pride cause the breakdown of the society.

Humans are inherently flawed. Only when we learn to truly forget the concept of self and embrace the importance of others can we move forward, and that is an impossibility.

So, we build societies with a pendulum. We swing between individualism and collectivism in order to last. When we become too individualistic and greed and pride begin to decay our society, then we swing towards collectivism in order to save the society. Once we are too far collectivists and sloth begins to decay the society, we swing back.

Its not perfect, but its the best hope we’ve got.

Rightwing Troll

December 28th, 2009
1:07 pm

“Just what does Georgia give us? South Carolina? Alabama? Mississippi? Check out North Carolina!”

Rightwing Troll

December 28th, 2009
1:09 pm

Football. That’s what they give us. And believe you me, THAT’S big bizzness…

Kyle Wingfield

December 28th, 2009
1:28 pm

lmno: The free-market economist and columnist Walter Williams once described the conditions under which collectivism works:

“I support and practice many types of socialist programs including income redistribution, welfare payments, disability support, free health care, and social safety nets. But I only practice socialism IN MY OWN FAMILY; and socialism like this only works when you know the names of the people involved. In any situation when you personally can’t name everybody involved, then the market is superior to socialism.”

An account of Williams’ comment is here: http://mjperry.blogspot.com/2007/09/socialism-works-but-only-if-you-know.html

lmno

December 28th, 2009
1:53 pm

Kyle, I am familiar with that thought. Its evil, as is the human being. The idea that people put their own wants in front of other’s needs is evil. However, thats what humans are, evil. So, as I wrote, you need to have people fighting from both sides in order to “balance” things out. You have to have your “Flaming liberal who wants to take my hard earned money and give it to lazy-do-nothing free loaders” and you have to have your “Selfish, greedy, conservatives who don’t care about anything other than themselves” in order for the society to swing back and forth between the two sides.