On the Uses of Greed and the Current Finacial Mess
How useful is it to think about our reactions to the current financial meltdown in terms of greed? It seems to me that there are two questions here. The first is positive. To what extent can I use greed as a concept to explain the current implosion in the markets?. The second is normative, namely to what extent does greed help us understand how to best deal with the crisis?
First to the positive question. Greed as an explanation posits that we are in this mess because the single-minded pursuit of profit by financial speculators, irregardless of its wider consequences has caused our problems. On this view, the problem is that we have been suffering some sort of a unique spiritual crisis that has come to a head at this moment with dire consequences. The question then becomes cultural. Why did we suddenly become greedy now in such a way as to create this problem?.
Frankly, I’m skeptical. Rather, it seems to me that what we are seeing is a classic bubble caused by sharply rising asset prices. Was the rise in prices fed by greed? No doubt in part, but a better candidate is, I think, the Fed’s loose monetary policy. In effect, we had a huge, government-sponsored intervention in the price mechanism that resulted in a massive misallocation of resources. Now that misallocation is getting unwound. Indeed, if the speculators were greedy, they were also stupid and many who were greediest — those who leveraged themselves the most and for the longest periods — are now the one’s most likely to lose their shirts. My point here is not that investors, brokers, and other players in the financial markets are all saints. There is more than enough greed to go around, I’m sure. Rather, my point is that I think that there are other causal factors that are more important.
What about in terms of our possible regulatory responses? Is greed a useful concept here? Again, I am skeptical. One response would be to somehow make people less greedy. Frankly, I am not sure how public policy can be usefully deployed to work such a spiritual regeneration. Alternatively, we could pass laws to prohibit or punish greedy behavior. This only makes sense, however, if greed turns out to be a major causal factor in the meltdown.
Consider, for example, the problem of no-doc loans, which probably contributed to the subprime mess. This seems a pretty clear example of greed to me. You have mortgage brokers paid on commission who were writing loans on an the basis of insufficient information in order to make fees off of the sale of the loan. Likewise, you had borrowers who got easy money — at least until the ARM kicked in — by in effect lying about their employment and income, lying that was facilitated by the broker. Lots of greed to go around. The financial problem with the no doc loans, however, was not that they were conceived in the original sin of avarice. Rather, the problem was that there was insufficient monitoring of the levels of risk associated with the loan. What we have is a failure of information. To be sure that failure was caused by a set of practices and misaligned incentives that encouraged the greedy to behave in deceptive ways. Yet it seems to me that it was this set of misaligned incentives — coupled with the asset bubble — that is the cause of the problem. The solution is to realign the incentives and avoid creating asset bubbles through unwise monetary policy. Notice, however, that greed doesn’t have much to say one way or another about the policy solutions. We can have lots of debates about how to best align incentives or structure monetary policy to be sure. These are thorny and difficult questions about which reasonable people will disagree. On the other hand, moral outrage about greed will be of limited analytic usefulness.
Don’t get me wrong. I actually like denunciations of greed. I think that sermons on the subject are good for the soul. I’ve taught Sunday school classes in which I exhort kids to learn how to live within their means and make sure that the pursuit of wealth is never at the center of their lives. A life structured around greed is ultimately an impoverished one. On the other hand, as natural and justifiable as our revulsion to greed is, I’m skeptical of how useful it is when thinking about systemic causes and solutions.
(Image source: Wikipedia)