Alan Shrugged

What went wrong?

Greed is only part of it. Yes, the people who sold subprime loans to unqualified buyers were concerned about their cut, not about ARMs spiking and home prices falling. Yes, the Wall Street wizards who sliced and diced collateralized debt obligations were greedy for big paydays and living large.

But invoking greed actually explains little, no more than invoking lust or envy or any other human urge. The mystery isn't why people are greedy; it's how greed gets the better of them.

At a private fundraiser in Houston, when he thought there was no risk of being recorded, George W. Bush offered this explanation for our troubles: "There's no question about it, Wall Street got drunk -- that's one of the reasons I asked you to turn off the TV cameras -- it got drunk and now it's got a hangover. The question is how long will it [take to] sober up and not try to do all these fancy financial instruments."

There is no reason to question President Bush's credentials for knowing a drunk when he sees one. But Bush, though he says he can't remember a day from prep school to his 40th birthday when he didn't have a drink, also insists that he has never been an alcoholic. He just drank "too much." When he stopped, he didn't acknowledge that he had a disease; what was wrong, it seems, was just typical youthful irresponsibility and a too-protracted youth.

So Wall Street's problem, in the president's mind, is not a systemic pathology, not an illness that comes on the same chromosome as the profit motive. Instead, it's the behavior of a frat boy on a bender, the reckless phase of a good-time Charlie rather than the symptom of profound disease.

Bros will be bros; greed, like stuff, just happens.

A quite different explanation comes from a man to whom Bush gave the Presidential Medal of Freedom, and who is the intellectual parent of this collapse: Alan Greenspan.

It was Greenspan who set the Fed funds rate at an all-time low of one percent, inflating the housing bubble whose existence he denied, insisting that the unprecedented run-up in housing prices was just local "froth."

It was Greenspan who successfully fought off all efforts to regulate derivatives -- the generic name for the financial instruments that have poisoned the world's economies -- by the Congress and the Commodity Futures Trading Commission, proclaiming instead that the market would regulate itself.

When then-Rep. Bernie Sanders (I-VT) asked Greenspan at a Congressional hearing, "Aren't you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?"

Greenspan answered, "No, I'm not. I believe that the general growth in large institutions has occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically -- I should say, fully -- hedged." In other words, the bigness of our big banks had conquered risk.

So how does the Oracle, the disciple of Ayn Rand, the libertarian champion of unfettered markets, explain the meltdown? In a speech at Georgetown University earlier this month, he attributed it to "lack of trust in the validity of accounting records of banks and other financial institutions" in the past year. Trust! Who knew?

So it's not competitive markets and "Atlas Shrugged"-style enlightened self-interest that makes economies work. It's "reputation and the trust it fosters." Wealth creation, Greenspan says, requires trusting the people with whom we trade. The better your reputation, the more I trust you, the more able I am to take risks and accumulate more capital. When people "let concerns for reputation slip" the way they have in recent years, when counterparties are "not always truthful," lenders are hesitant to lend, and credit freezes up.

But even an apostle of free markets like Ronald Reagan said, though in a different context, "Trust, but verify." For years, credit-rating agencies like Moody's and Standard & Poor's, in the words of Nobel economics laureate Joseph Stiglitz, "performed the alchemy that converted securities from F-rated to A-rated" with no apparent damage to their reputations.

For years, the sterling reputations of Bear Sterns, Lehman Brothers and Merrill Lynch served as a substitute for transparency. For years, federal efforts to monitor the trustworthiness of big banks were fought tooth and nail by the same Alan Greenspan who nevertheless says that trust is everything.

James Madison warned us in Federalist No. 51 that men are not angels. Lincoln, while appealing to "the better angels of our nature," nevertheless acknowledged our darker inclinations.

Anyone who's been anywhere near a big investment bank knows that the gentlemen who run them have more in common with Hollywood buccaneers and Washington barracudas than they do with the Marquess of Queensbury. Maybe on Planet Fountainhead the economy runs on trust, but on this one, reputations aren't warrants of integrity, they're commodities marketed by the branding industry and burnished by the business journalism business.

Bill Moyers, interviewing George Soros a few days ago, asked him whether the global economic system has "become so complex, with such gargantuan forces interlocked with each other, driving it forward, that it doesn't know how to obey Adam Smith's natural laws."

No, said Soros, "I think our ability to govern ourselves doesn't keep pace with our ability to exercise power over nature, control over nature. And we could actually destroy our civilization because of our inability to govern ourselves."

Since 1980, the religion of free market fundamentalism has held the nation in its thrall. By relinquishing responsibility for the rules of the market, we absolved ourselves of accountability for its outcomes. Self-government is what we do to prevent greed from getting the better of us.

It's the use of power to check power, of human nature to check nature, of policy to check luck.

If Wall Street got drunk, it is the cult of the hidden hand that held the bottle.

This is my weekly column in The Jewish Journal of Greater Los Angeles, where you can email me if you'd like.

Comments

[CroatianCritter]

Marty,

Don't fall into the "free market" argument trap like everybody else. In the true "free market," bubbles and inflation do not exist because currency is pegged to a hard asset at a specific value. We created this market system by jumping off the gold standard and giving our economic power to a central bank that has imperfect economists running it. The biggest DEREGULATION we need is the busting up of the various monopolies that hold our economy 'prisoner.' The Republicans were more concerned about tax cuts and business deregulation than they were about monopolies, greed and bubbles. This is their short sightedness when it comes to the economy. Recessions and panic will always exist due to the supply and demand theory but aggravating it into a depression is solely the responsibility of a central band and the Federal Reserve. That is why we need politicians to stay out of economic issues.

[lejman]

love the title...is a fountainhead related to a fundamental??

[MyTake]

Greenspan or Bernanke don't make one move unless authorized by The Bilderberg Group. It is they, and their innner core of international banker's, who caused this crisis for the sole purpose of creating the "World Bank" which will control on banks around the globe. It is called "globalization"!

Oh, and here is Bernanke leaving the most recent Bilderberg meeting.

http://www.youtube.com/watch?v=Uezra0bZh9M

Someone should ask him for a recording of what went on at that 3 day annual Bilderberg meeting where the globalization plans are hatched and authorized?

[mcthfg]

"The mystery isn't why people are greedy; it's how greed gets the better of them."

That's way too nice. Some people are simply greedy, with no other qualities. We call those people Republicans (and a lot of Democrats, within the last 20 years). These people overwhelmingly work on Wall Street, and for corporations that don't actually produce anything. They buy and sell things that they never see. They pretend that their vast wealth was earned by them alone, and that no one was harmed in the making of that wealth.

To quote The Coup - "All the broke motherfuckers gonna start a gang, and when we come we're takin' everythang."

Soro's stuff, too. Because as nice as he may seem, he screwed over people to get his money, too.

[shakker]

Banks operate ENTIRELY on trust - Glad they don't make aircraft or safety equipment for fire departments!

The need to break up corporations into pieces too small to kill the economy has never been so great. Then regulate the hell out of business so that it has to be honest and open the books so that EVERY investor may be sure just what they are doing with the owner's money.

CEO's and board members should be prevented from recommending new board members. Boards should be elected in competitive elections nominated by the shareholders.

Boards that are peas in the pod friends and beholden to the CEO are a big part of this problem.

None of this will happen until the really big crash and depression. This may not be it, maybe we should privatize social security and try again.

[Bobotheclown]

I agree. There are many obvious regulations that when put into effect could work to cure our economy. But knowing how to cure it is not the issue. The question is "who" is actually going to do it? Both political parties are entangled with lobbyists who pay them well NOT to put these regulations into effect. The idea that a crash is going to change things presupposes that the "other" party once in power is going to regulate the economy. But who will pay them to do that? You?

[ElBruce]

Trust would work OK provided that not everybody loses their trust at the same time. Unlike most forms of failure, there's no limiting factor at which one given company gets corrected. Rather, as we've seen, what happens is that the trusted institutions quietly subvert their reputations for cash (merely exchanging one form of capital for another) until somebody realizes that everybody's doing it at the same time, and the whole thing comes crashing down.

The trust of entire markets then becomes the problem. If you can't trust the system, it can't work. I noticed earlier this year that the stock market kept dipping whenever our leaders made financially stupid decisions. Stimulus checks for all, charge it to the deficit? Big dip that day. Talking about more stimulus checks? Another big dip.

Supply-siders might be good at microecon (I kinda doubt it) but it's a stone cold proven fact that they can't do macroeconomics, in much the same way that a young-Earth creationist can't do archaeology.

Great title, by the way.

[MagisterLudi]

Ayn Rand personal narrative is meaningless ( besides being irritatingly pompous).
Here are two meaningful quotes from postmodern perspective:

"Increasingly, the central question is becoming who will have access to the information these machines must have in storage to guarantee that the right decisions are made."

Jean-Francois Lyotard

"Chaos is inherent in all compounded things."
Buddha

" Nothing ever exists entirely alone; everything is in relation to everything else."
Buddha

[Overd0g]

Which two of the three are meaningful?

[MagisterLudi]

1 and 2.....

[GeeBee]

*Two* out of three? How about all of them? There are still people on the radio advertising loans that sound too good to be true. They don't mention the no-doc loan any more. Guess that insanity has gone for good.

[darthdarcy]

The principles of deregulation flew in the face of human nature itself and thus were bound to fail and bring us to ruin no different than Communism which also flew in the face of human nature..!

Remember Bush signed the Commodities and Futures Modernization Act in 2000....

That made the Barbarians the Gate Keepers of America's prosperity and security, this Act written by Enron and submitted at midnight by Phil Gramm one of America's biggest swindlers was like a Trojan horse brought into our castles keep dooming America to a depression, as well as much of the rest of the world..!

[MagisterLudi]

Bill Moyers, interviewing George Soros, asked whether the global economic system has "become so complex, with such gargantuan forces interlocked with each other, driving it forward, that it doesn't know how to obey Adam Smith's natural laws."
___________
It is an insightful question because touches upon the realization that economic system is global, functions on different scale and can no longer be controlled by static set of laws.
It is an misleading because it implies that the current downturn should (or shouldn't) viewed in terms of deligitimized classical economic narrative.

Today, ANY aspect of our civilization can be quickly digitized and made into an exchangeable commodity. Indeed, information about information itself is often turned into commodified...information.
To be traded with speed of light anywhere on the globe!
Yes, it is greed. It is a greed of a dynamic system seeking stability. But system(s) currently produces a lot of noise and distortion. In order to control this system, a considerable amount of know-how is required. Politician and opinion makers are not even approaching the event horizon on this.

All politicians entering national stage should be required a series of seminars in information theory and chaos theory. With a dose of J.F. Lyotard's "Toward the Postmodern" and McLuhan's insights.

"Knowledge is and will be produced in order to be sold; it is and will be consumed in order to be valorized in a new production: in both cases, the goal is exchange."
Jean-Francois Lyotard

[munki]

To be regulated is one thing... to have arm length... check and balance system... risk management is another... system could perhaps be reviewed and overhauled...

compliance, audit and risk management - independence to monitoring and reporting... thank you.

[bandithappy]

How do you influence the market by making decision for the fed AND believe in the hidden hand of the market?

Where did Greenspan hide his hidden hand when he wasn't at work?

[TheloniousThinks]

There is nothing wrong with markets. Just as there is nothing wrong with football. But both need to be regulated. Without refferees enforcing the rules, sooner or later football players will start using brass knuckles, and then knives, and clubs and what you will get is a bloody mess of dead players. Maybe that is not what we as a people want. We, as a people decide what we want through democratic institutions (that means government. we govern ourselves in this country. remember "of the people, by the people, for the people"?). The Republicans have been saying for 30 years that Government regulation is the problem. Republican McCain and Republican Greenspan have been effectively deregulating Wall Street to the point that they basically slashed each other up with machetes (derivitives and other worthless paper or toxic assets, however you want to call it) and so now we have no banking sector so hacked to pieces that it cannot provide the necessary services that our citizens and enterpeneurs need to keep us out of The Second Great Depression.
It is time to nationalize all the insolvent banks, throw out their managers and confiscate the millions that they pocketed while driving their industry beyond the point of collapse. Do not believe anything any Republican tells you. Their disinformation and misinformation about the economy is just as worthless as their boasting "There is no doubt that Sadam Hussein has weapons of mass destruction"

http://theloniousthinks.blogspot.com/

[Overd0g]

Newsflash: the markets do have rules, and always have.

[robizio]

And suppose those rules do not apply to the biggest players? Investment banks are NOT regulated the same way commerical banks are. OH, and the most effective rules put in place after the last time this kind of thing happened, FDR's New Deal??--have been torn down brick by brick by the free-marketeers.

Suppose you want to prevent traffic fatalities. You could make a rule to make cars less safe, thus providing incentives for drivers to be more careful. What, something wrong with the logic there? Simply HAVING rules is not sufficient to prevent undesirable outcomes. The rules must be simple, easy to follow, make sense, AND most importantly, be enforced by independent parties.

[Indieguy]

Who ever said that the age of the robber barons was dead. They're still with us, they've just gone high-tech with their derivatives and other complex computer driven bets.

BTW: Whatever happened to the market curbs that were initiated during the dot.com busts? Were they deregulated?

[bomont]

I am a lawyer by profession. I have been so for some thirty (30) years. And yes, my friends, "All the world's a stage..."

To my wonderment, there has been little, if any, discussion about the U.S. legal profession and the role it played in this whole matter. One would think that in a society that cannot make a decision or take a crap without consulting a lawyer that we should be directing some serious attention toward this noble calling and its members.

Could the legal profession have played the role of the "bar tender" in this story?

[KillTheMessenger]

From my experience with the corporate world I can only conclude that, yes, they always ask their lawyer, and no, they never listen to what he/she has to say.

In any case... a profession that bills in six minute intervals and lives one endless "I told you so" moment is not that bad, is it?

:-)

[Indieguy]

What Master of the Universe doesn't have a gaggle of attorneys to help them find loopholes in Federal Regulations. The credo of free marketeers: for every regulation there is a way to get around it.

[Overd0g]

Much better to be finding cracks in the legal code than to be bribing politicians in a heavily regulated economy.

[nellie]

Excellent article. Thank you, Mr. Kaplan. You've pulled together the elements that I usually see discussed in isolation. Your phrase "the cult of the hidden hand" captures the free-market worship, but just as important, the unscrupulous and undisclosed manipulations.

[Overd0g]

Caveat emptor.