"Greed is good!" Michael Douglas, playing Gordon Gecko, intones in the movie Wall Street, as he tries to get shareholders to vote him control of a company that he intends to tear to shreds and sell for parts. Though director Oliver Stone painted Gecko as evil incarnate, back in the Reagan-Thatcher days of 1987, this portrait went against the grain. In those days, the only good regulation was no regulation; government interference only impeded the efficiency and inventiveness of the market.
"Greed is bad!" So say most of us today as we vent our populist rage at the 8 or 9-figure compensation of financial moguls who have nearly brought the world economy to ruin. "Regulate them," we demand. "Eliminate bonuses." "Limit executive compensation." If we can't reduce greed, we can at least restrain it, with sterner and more serious regulations. And if we think that high-IQ financiers and their lawyers will find ways around any regulations, we can at least change incentives so that when the financiers serve their greed, they serve their companies, their shareholders, and the larger society as well.
I have no confidence that either sterner regulations or smarter incentives will solve the problems we face, because they are pointed at the wrong target. Just as Gordon Gecko was wrong to suggest that greed is good, we angry victims are wrong to suggest that greed is bad. For the most part, greed is irrelevant. Greed isn't why all the bad stuff happened, and restraining it won't prevent bad stuff from happening again. What difference would it make if a CEO became less greedy and settled for $50 million a year instead of $100 million? Or $10 million? Or even $2 million. In all likelihood, it would make no difference at all.
The real problem goes deeper, I believe. What is the "job" of an investment banker? What are the banker's goals? The banker's job is to make money. The banker's goal is to make money. That's it. The idea that banking involves finding ways to write mortgages so that customers can afford to buy houses, or make loans so that customers can start or expand businesses, or give advice that will secure middle-aged people an adequate nest egg when they retire--those days are gone. What do bankers do? They make money. By any means possible. Not incidental to this shift in what bankers do, I believe, is the growth of the "proprietary account," in which banks do deals for themselves rather than for clients. Ask yourself this: whether a banker is very greedy, only a little greedy, or not greedy at all, what will a banker do if his job is to "make money." As long as making money is the sole job of bankers, we can count on recurrences of what we're going through now. Sure, with tough regulations, we'll stop the excesses of mortgage-baked securities and credit-default swaps. And then we can all sit around and guess what form the next financial excesses will take.
No, if we want to stop the roller coaster, it won't be enough to create regulations that prevent what bankers shouldn't be doing. We will have to sit down and figure out what bankers should be doing as well. Of course, we need to regulate financial industries better, and we need to eliminate perverse incentives. But what is left out of this mix of carrots and sticks is attention to character: to the commitment and knowledge to aim at the right thing. Carrots and sticks don't teach character; they substitute for it. And we can't demand that people aim at the right thing, and teach them how to do it, until we know what the right thing is.
If bankers were reminded that there is a point to what they do, in addition to making money, regulation would be ever so much easier, and incentives would be less important. If bankers could be reminded that what they do has, and is meant to have, a significant effect on the lives of others -- that banking, like virtually every form of work, has an essential moral component -- then making money, by any means possible, might stop being the only thing that guides bankers' conduct. Greedy bankers would still be bankers, and being a banker would entail a set of responsibilities to others that banking, as currently practiced, does not.
In December, at a press conference, then president-elect Obama observed of leaders of financial institutions that "they must ask, not just is it profitable, but is it right." Just so. But how can they begin to answer that question -- what does "right" even mean -- if the bankers' only job is to make money?
