by Damozel | At The New York Times, George Mason economics professor Tyler Cowen discusses the trends that led to the current trainwreck. Nothing he discusses would startle anyone who has been paying attention for the past couple of months as the crisis unfolds.
But though I am your average ignorant layperson when it comes to economics as science, I feel amply qualified to be annoyed by the following:
How did the world’s financial system get into such a mess? It’s tempting to blame specific politicians, decisions and laws (or the lack thereof), and leave it at that....
One prophet of today’s crisis was Fischer Black, the late financial economist who developed the Black-Scholes formula for options pricing with the Nobel economics laureate Myron S. Scholes. Mr. Black died more than a decade ago and his work on macroeconomics has not received much attention recently. But in his 1991 book, “Business Cycles and Equilibrium,” and his 1995 work, “Exploring General Equilibrium,” he argued that major business downturns could be caused by a combination of excess risk-taking and simple bad luck.
Most business-cycle analysts have very detailed scenarios for how things go wrong, but Mr. Black’s revolutionary idea was simply that we are not as shielded from a sudden dose of bad luck as we might like to think....
The real problem is not some particular villain but rather the very fact that we cannot help but put the evaluation of risk into all-too-human hands. (NYT)
This doesn't seem to bother Cowen as much as it does the ignorant layperson. "You’ll note that greed doesn’t play an independent role in this explanation because greed, like gravity, is pretty much always there," he says airly and parenthetically, in passing.
Really? I know plenty of people whose natural desire to get more good things for themselves is tempered by a sense of responsibility for the consequences. In fact, I know many people who would argue that greed, unlike gravity, is a human failing that civilized people can be taught to resist.
The ignorant layperson can certainly accuse the key players who brought about the crisis of unreflective greed, breach of fiduciary duty, reckless indifference to the effects of their individual actions, and a general breakdown in any sense of personal responsibility for those effects.
Yves Smith, in the course of discussing the UK's deregulation disaster and what it has wrought, notes:
I have to quibble a bit with Cowen on the greed issue, since a cottage industry sprang up in the 1990s to justify outsized pay to CEOs and certain types of knowledge workers, so that compensation that would once have been deemed as outrageous came to be seen as normal.
Put it another way: when a former Goldman Sachs co-chairman, John Whitehead, lambasts Wall Street pay levels and calls for Goldman to cut compensation, you know there is something wrong. (Naked Capitalism)
Quite a few of our financiers and their apologists and enablers seem to have forgotten some time during the Reagan/Thatcher era that "enlightened self-interest" is by definition the opposite of unreflecting greed.
At Mauled Again, tax attorney Jim Maule writes:
[S]omeone needs to step up and make it clear that a free market isn't a license to shift the consequences of bad decisions onto the unwitting and the unwilling. Recently I read a comment, and unfortunately I cannot find it, that equated greed with the seeking of profits. It's one thing to seek income and assets in order to meet what one needs to survive, to be comfortable, and to support one's dependents. It's a totally different thing to seek income and assets orders of magnitude beyone what is needed for survival and comfort. In today's economy, no one needs to own billions of dollars of assets or to earn tens of millions of dollars per year. Seeking these sorts of profits and accumulations of wealth is a matter of addiction, of thirst for power, or both. A person can eat only so much, can wear only so much, can drive only one vehicle at a time, and has only one body in need of health care. So what does one do with the excess income and wealth? One buys votes. One controls society through off-shore entities. One tries to arrange for one's children and grandchildren to live lavishly without needing to work. Are these behaviors good for society? I propose that the answer is no, because the efforts made to attain these options have imposed a huge price on society, and we're only beginning to see the extent of the damage that has been done.
A TaxingMatter comments that Maule's argument is "a necessary antidote to the "greed is good" concept that has driven much of our behavior--and the financial institutions' excesses of speculation and risktaking--over the last few years. It is also an important cautionary note for those who want to ensure that our democracy is not further weakened by the continuing consolidation of wealth and the power that accompanies it."
But say we decide not to scapegoat individuals. I'd certainly like to see some of the overpaid executives who drained excessive wealth from their companies forced to disgorge---fair is fair---but say we let them go on their merry way with all their plunder intact.
Can we at least agree that we need to take responsibility for coming up with rules that will in future prevent the unethical from justifying plunder of the wealth of the unwitting? If greed is as inevitable as gravity, can't we at least set some clear limits on how far it can go before its pursuits qualify as cheating subject to deterrents with some sharp teeth in them?
Cowen makes the point, graspable even by the ignorant layperson, that the economic meltdown isn't simply a problem of an excessively materialistic and consumption-driven American culture; financial systems all over the world have proved equally vulnerable and unstable.
But didn't we invent and refine the game? Aren't we responsible for encouraging other global players to play by our rule that the best rules were minimal ones?
I may not be an economist, but this is one thing I know: in history and in fiction, games without clear rules (including penalties for reckless overreaching) eventually devolve into Lord of the Flies-style competitions, complete with heads on sticks.
To judge by this piece at Naked Capitalism, the UK took the free the free market precept even further than we did. Whether our players liked it or not, they were stuck with some Depression-era rules that restricted their ability to gamble as recklessly as they might have liked. Not so the UK. Yves Smith writes:
John Hempton illustrates a case of how seemingly hoary US regulations worked well, and by contrast, the UK's blind embrace of deregulation has done lasting damage to London as a financial center.
The case study is the Lehman bankruptcy. In both the US and the UK, the firm had hedge funds as customers. Hedge funds often take margin loans against their holdings. A broker has a customer sign an agreement giving the broker broad authority to loan ("repledge") those securities. The broker needs to do that to fund the loan.
Here is where the fun bit comes in. The US has pretty tough rules on the use of these securities, while the UK had none, and it is becoming clear that Lehman abused its latitude in the UK, and the damage is considerable.
Hempton discusses how deregulation in the UK---unprotected by the laws in place here--- has destroyed London's financial sector. The piece is well worth reading, even for the ignorant layperson.
Without rules, every game ends in the people who were least inhibited by ethical considerations from walking away with all the prizes and with all the get-out-of-jail free cards. If they only did what everyone did, only much more so, there's no remedy against them and no help for the ignorant laypersons who weren't holding the cards or doling out the money.
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