The Criminal in the Bank Next Door
A few bloggers and columnists are seeking to make finance an illegitimate form of wealth creation, largely by demonizing people who work at banks.
Yglesias: “I was saying that whatever one thought should be done with large financial institutions as a policy matter, surely we could agree that the executives at these institutions are primarily bad people. . . These are people primarily motivated in life by greed”
Bob Frank: “The problem with high pay in the financial industry isn’t just that it tempts people to do illegal or unethical things. It also sucks a lot of talent out of other occupations in which it would do vastly more good. (I explain this point in some detail in the attached file.) ”
Rosenberg: “This is the great truth that cannot be spoken: what we’re seeing here is massive elite criminality. And it, of course, the natural result of 30+ years of virtualy unfettered elite rule . . . Because calling a banker a criminal makes you a Commie, right? Even if it’s true.”
Krugman: “But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption. “
There’s something to agree with in many of these comments. It’s true that structured finance made tons of people lots of money, and apparently ordinarily rested on empty financial innovation. It’s also true that at least some people knew the tune, and were looking to exit before the music stopped and left them without a chair to sit in. And finally it’s true that we’re all going to be taxed heavily to unwind these structured transactions, and it seems likely that Goldman and its smaller cousins will benefit enormously as a result.
But I’d be more careful than some to make hindsight calls about risk and knowledge, and I don’t understand why financial executives are attacked for their greed. You don’t see folks attacking Warren Buffett. Why not? Because he has now given away his immense fortune? Or Sergey Brin. Why, because his company says it doesn’t want to be evil? Most entrepreneurs are greedy: that’s what motivates them to take risks and thus create jobs. What seems to taint financial executives (in Yglesias’ eyes) is that such executives are motivated “primarily” by greed. But this confuses being greedy (which is universal, if greedy means maximizing your preferences) with being a wealth maximizer (which may not be). I’ve several friends in finance, and a term I hear from them often is “capitalist,” as in “I’m a capitalist. I want to make 10M and then retire. That’s how capitalists roll.” (I kid. They never say the last part.) But while such folks may define success in terms of making a certain amount of money, they don’t want money as its own end. They want money because they are greedy (as are most people) for the things that money can buy: security, stability, free time. That strikes me as basically normal, though it isn’t a path I’m interesting in pursuing. I’d rather trade money for security, stability and free time today. Which is why I teach, instead of trying to win the pie eating contest.
Moreover, I think that policy makers should be hesitant to conclude that simply because bets turned out badly that the individuals making them held a fraudulent intent. The kinds of risk that the structured products were designed to spread are just the kinds of risk that the kinds of people who engage in finance are psychologically likely to see as small. They believed that they were fully protected from the risks that they believed to be small. (Indeed, it’s worth re-reading Nocera’s entire article on why bankers ignored risk in light of what we know about individuals’ varying perceptions of risk.) It’s wrong to stigmatize bankers for not seeing bad outcomes when they really didn’t see those outcomes coming. Just on a practical level, there are hundreds of thousands of people in the country whose livelihoods depend on finance. Making them all feel like criminals will (no doubt) increase resistance to meaningful reform. Just like health care.
(Image Source: screenshot from the movie Greed (1924))