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Wall Street's "Stupidity" Defense

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With conservatism's political fortunes lower than the share price of AIG, David Brooks of the New York Times has taken on the task of rebuilding the foundations of Republican ideology. In a recent column he discoursed on whether the root cause of our financial calamity was Greed or Stupidity. Worried that the Greed story might end with calls to "smash the oligarchy" or at least "restructure the financial sector," Brooks opts for Stupidity.

The Stupidity narrative links to the importance Tories traditionally give to the assumption of human fallibility. Bankers were simply over their head, says Brooks. They "got too big to manage. Instruments [the economists' formulas that rationalized the inverse pyramids of debt] got too complex to understand. Too many people were good at math but ignorant of history." Inasmuch as bureaucrats are just as ignorant and prone to hubris as bankers, Brooks tells us the answer lies not in the big government of Franklin Roosevelt, but in the trust-busting of his older cousin, Teddy. We should return to less complicated days, Brooks concludes - "when savings banks, insurance companies, brokerages and investment banks lived separate lives."

Exactly how one puts the toothpaste of global electronic finance back into the tube of 1950s America is an interesting question - in which Brooks has little interest. His goal here is not policy. It is to defend and restore the damaged moral authority of the nation's economic elite.

In its simplest form, the Greed story is a straw man. Avarice is part of human nature and it is unlikely that more of it spontaneously appeared in the hearts of bankers and brokers a couple of decades ago when the credit bubble started to inflate. As none other than Alan Greenspan noted after the collapse of the boom. ''It is not that humans have become any greedier than in generations past. It is that the avenues to express greed had grown so enormously.''

Shameless, of course. Greenspan was a major engineer of the de-regulation that opened up these new superhighways of grasping materialism, with conservative pundits like David Brooks cheering him on. Small wonder that Brooks would rather divert the charge against the financial elite to Stupidity.

Unfortunately for Brooks, there is by now a sizeable literature describing how bankers, brokers and hedgefunders got rich during the boom. After reading books like Michael Lewis's Liar's Poker , Frank Putnoy's FIASCO and William Cohan's House of Cards, -- all of which exposed a culture deep in lies, deceit and fraud -- it is hard to argue that the guys and girls pulling down seven, eight and nine figure incomes year after year did not know what they were doing.

Sure, when computerized mathematical models were first introduced to the hedge fund business they were hailed, stupidly, as a miraculous cure for risk. But after Long Term Capital Management crashed and burned in the late 90s and the Fed rescued its billionaires and Nobel Prize winners from the flames, virtually everyone in the business knew that
the value of these models was not so much in guiding better investments but in promoting higher sales. It might have taken a genius to design the programs, but it didn't take long for lesser I.Q'd corporate peddlers of Collateralized Debt Obligations to figure out that modest changes in the data they clicked into the computer would get a subprime deal a Triple A rating. Nor for the top managers to understand that their own bonuses depended on not asking their staffs too many questions. Nor for the crony-filled boards of directors to conclude that their fees had something to do with the CEO bonuses they approved.

It's disingenuous to call these people stupid. Few if any believed the boom could last forever, although obviously they would have preferred that the game go on longer. And some did lose part of their loot when the whistles finally blew. But the former masters of the universe at Merrill Lynch, Bear Stearns, AIG, et al are still doing a lot better than the rest of us. Jimmy Cayne, the ex-CEO of Bear Stearns who went AOL to bridge tournaments while his firm was in meltdown, says he lost a billion dollars. But, according to author Cohan, Cayne assured his anxious wife that they'd be able to get by on the $400 million they had left. How many Americans would not want to take the Cayne family's place in the pecking order of wealth?

Innocent because of Ignorance is the moral plea bargain of choice among the rich and powerful. "I wasn't good enough to tell you what was going to happen," shrugged Cayne after the crash. But before the crash he had seen the signals of a faltering market and refused to protect the company by bringing in more capital; it would have lowered the returns on equity upon which his bonus was calculated.

Greenspan, echoing Brooks, absolves himself on the grounds that he was, after all, only human. "We are not smart enough as people," he sighed to a Congressional committee. "We just cannot see events that far in advance." He neglected to mention that he had told the Federal Reserve's Open Market Committee in 2002 that there was "eye-catching" evidence of a housing price bubble, while at the same time assuring Congress and the public that it was not so.

This is not the behavior of stupid men. It is the behavior of scoundrels, whose high perch at the summit of the governing class gave them license - and impunity -- to abuse the nation. Cleaning up this system will take a lot more than a return to Teddy Roosevelt's anti-trust nostrums, which were always more bark than bite. Actually "Smash the oligarchs" is not a bad place to start.

Back to the drawing board, David.