The Criminal in the Bank Next Door

Greed,_1924,_06_banchetto.jpgA 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))

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9 Responses

  1. Colin C says:

    “They want money because they are greedy (as are most people) for the things that money can buy: security, stability, free time.”

    I don’t know. Seems to me that folks driving for the big bucks in the short term are NOT seeking security, stability, and free time. If they were, they’d teach (like you) or become a PD or a legal aid attorney (like me).

    In fact, some of the folks you defend in this piece are engaged in high-risk behavior (not secure), seeking quick gains (not stability). I’d guess that many in the finance trenches work long hours at it too (free time?).

    That is, “greed” connotes a LACK of impulse control — high risk behavior for short term gains. And THAT type of greed in finance doesn’t generate (at least as directly, if at all) jobs in the same way that the “capitalist spirit” of the entrepreneur does. Manipulating the market is simply not the same as opening a coffee house or starting a consulting business.

    Perhaps some bets are just too risky. And if the potential impact of placing a bet is so great that it (the impact) cannot be contained by the gambler (or anyone else?), perhaps we shouldn’t let him (the gambler) place the bet at all.

  2. Colin C says:

    Sry, came to a conclusion w/o coming to a conclusion there.

    Because there are types of bets we should disallow, though, doesn’t mean those that have placed those types of bets in the past are criminals. It doesn’t follow that they’re not impudent and unethical either, though.

    Can we / should we punish past behavior that was not proscribed by law? No. I can feel that these folks are money-grubbing, capitalist pigs, but calling them that doesn’t get me anywhere.

    If we’re looking to change future behavior, putting these folks — who retain much power an control — on the defensive is likely a poor starting point. We should, rather, clear the air and sit down for a nice chat.

  3. What in this post are you referring to as “just like health care”?

  4. Bruce Boyden says:

    I took Krugman’s column not to be an attack on financial innovation per se, but rather on letting banks get involved in it. I.e., he wants to bring back Glass-Steagall. The idea being that innovation brings ups and downs, but what you want out of your banks is stability (or “boringness” as he puts it).

  5. dave hoffman says:

    It’s my sense that one of the hurdles in the way of meaningful health care reform is that the folks who work in the system today lobby against change, in part because they are told that they are greedy no goodniks. (i.e., insurance firms.) Maybe it’s a bad analogy.

  6. anonprof says:

    Dave–This seems to mix together several ideas. One is that high finance over the last decade was largely criminal (Rosenberg’s argument, which shows he doesn’t understand what he’s talking about); another that the rewards from it sucked people from more socially beneficial work (Frank’s, which is plausible but unproven); and yet another, that individuals at the pinnacles of high finance were dominated chiefly by greed and desire for yet more money (which seems almost inarguable). And I don’t understand why you think that individuals in high finance really want money so they can get “security, stability, and free time.” Were that the case, they would work hard for a few years and then leave. But a lot of them don’t; the amount of money they need always increases just beyond the amount they have, and so they keep working their 100-hour weeks. At the end of a decade or so, you have individuals who, whatever they may claim, are really motivated just by the quest for more money (and the accompanying “win” more money seems to signify). Does this apply to everyone who worked for a bank? Probably not; but it certainly describes most of their senior executives, and that’s who Yglesias was talking about.

  7. It is, IMO, beyond dispute that one of the hurdles over the past 80 years to American health care reform that numerous stakeholders working within the health care nonsystem (it is not a system, and does not deserve such an appellation) has been persons who lobby against change.

    Starr’s analysis, among countless others, shows this perfectly well. Not all of these obstructors were motivated by greed. Unions opposed the formation of a national health care service because they were not in control of the movement to do so, which I suppose could be characterized as will to power.

    There are two premises in your claim. First, that people working within the nonsystem lobby against change, and second, that they do so in part because of greed. The first claim seems to me to be unquestionably correct, and has been so for decades. The second claim is debatable, but you load the deck by characterizing the motivations as greed.

    Corporations exist at least in part to maximize returns for their shareholders. Many of the most powerful players in health care earn greater returns without downward pricing power that could be exerted by a centralized, powerful purchasing agent. It is no accident that Medicare Part B included an express provision prohibiting any government actor from negotiating prices on pharmaceuticals. Whom do you believe was the principal lobbying force behind that particular provision, which was almost universally decried, but which found its way into law?

    Is this greed? Call it what you will; it seems difficult to me to contest that, in regards to health care in the U.S., wealth maximization has and continues to play a large role in impeding meaningful health care reform. One is free, of course, to contend that such a motivation is on balance, good.

    I do not share that view.

  8. A.J. Sutter says:

    This post makes you sound as if you’ve drunk the Kool-Aid, Dave.

    1. I think it’s debatable whether all, or even most, financial industry folks, esp. the type who want to make $10M and retire, are capitalists in the classical sense. If they’re hedge fund types or other traders, they’re speculating on changes in value, not using the money as a factor of production. I suspect they’re using this as an ideological term, or simply as a Gordon-Gecko-ish slogan for justifying greed. Some VCs might qualify as capitalists, but VC funding is less than 1% of the financial trade.

    2. “It’s wrong to stigmatize bankers for not seeing bad outcomes when they really didn’t see those outcomes coming” — it’s not a question of whether they saw them or not, but whether they were negligent or, more likely, reckless not to see them. I personally knew finance people who who could see as early as 2005 that bad outcomes were heading our way from this stuff (and who persuaded their institutions to stay away from it). Moreover, the flaws in the risk models had been pointed out by folks like Benoit Mandelbrot since the 1960s. See also Janet Tavakoli’s books for a description of how bankers should have known what they were getting into.

    3. Your assumption that “preference maximization” is universal is unjustified. If you need books rather than real life to convince you of that, then for starters you could consult J.S. Mill as well as the literature on reciprocity and the donative economy; you can also move on to some of the technical critics of neoclassical economics like Mirowski and Stanley Wong.

  9. Frank says:

    What about the political consequences of Wall Street power? Simon Johnson’s article “The Quiet Coup” describes how many of the leaders of this industry used their money to buy outsized influence over policy:

    http://www.theatlantic.com/doc/200905/imf-advice

    It’s a self-reinforcing cycle; more money = more power, and more power = more money.

    You’ve stated that “no one could see it coming,” but really the story is more like “people who saw it coming and wanted regulation got stomped on by people with a lot more influence.” Brooksley Born, Dean Baker, Frank Partnoy, Bob Kuttner, and many others were begging for more regulation of these things for quite some time. The Larry Summers and Bob Rubins of the world stopped them. And I have little doubt that the $5 million Summers earned in his 1-day-a-week job at a hedge fund influences his current views…and perhaps even his past effort to “install the co-founder of Taconic in the job of running the TARP bailouts.” (see http://www.commondreams.org/view/2009/04/12)

    But I will agree with you obliquely, Dave–I believe that a broader critique of extreme inequality is necessary, not just rage at Wall Street. David Leonhardt outlines a constructive response:

    http://www.nytimes.com/2009/04/12/magazine/12wwln-lede-t.html?scp=4&sq=leonhardt&st=Search

    “The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change is especially striking, because there is so much more income at the top of the distribution now than there was in the past. Today a tax rate for the very top earners would apply to a far larger portion of the nation’s income than it would have years ago.”

    Unless a person has cured cancer or developed some analogously fantastic advance for humankind, I don’t think they deserve to keep even 20% of that 40 millionth dollar….especially when it’s so likely that it will be used to lobby for policies that will just reinforce its “earner’s” power.

    PS: Here is Born’s story:

    http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html

    “Born has emerged as a sort of modern-day Cassandra. Some people believe the debacle could have been averted or muted had Greenspan and others followed her advice.”

    It wasn’t just Greenspan’s powers of persuasion that worked here. It was the money behind people like Rubin and the DLC that made free market fundamentalism a foundation of financial policy at the Clinton White House.

    Finally, can anyone explain to me what this type of finance industry activity does for the economy:

    http://nymag.com/news/businessfinance/53617/

    “It’s not just day traders who are approaching the market with a short time-horizon these days. Investment bankers and hedge-fund managers who might have once based their trades on extensive research and elaborate models are finding that their models don’t work in this chaotic environment. Some who otherwise would have shunned this kind of day-trading are finding it profitable to chase the minute-by-minute momentum.”

    Slow money is a much better alternative:

    http://www.slowmoneyalliance.org/

    and the more money that goes to Wall Street, the less attractive patient capital designed to solve difficult social problems will be.