The Greed Fallacy: You can’t explain a change with a constant

[marmar]

from Dollars & Sense:



The Greed Fallacy
You can’t explain a change with a constant.
By Arthur MacEwan


Various people explain the current financial crisis as a result of “greed.” There is, however, no indication of a change in the degree or extent of greed on Wall Street (or anywhere else) in the last several years. Greed is a constant. If greed were the cause of the financial crisis, we would be in financial crisis pretty much all the time.

But the financial markets have not been in perpetual crisis. Nothing close to the current crisis has taken place since 1929. Yes, there was 1987 and the savings-and-loan debacle of that era. The current crisis is already more dramatic—and threatens to get a good deal worse. This crisis emerged over the last decade and appeared full-blown only at the beginning of 2008 (though, if you were looking, it was moving up on the horizon a year or two earlier). The current mess, therefore, is a change, a departure from the normal course of financial markets. So something has to have changed to have brought it about. The constant of greed cannot be the explanation.

So what changed? The answer is relatively simple: the extent of regulation changed.

As a formal matter, the change in regulation is most clearly marked by the Gramm-Leach-Bliley Act of 1999, passed by the Republican-dominated Congress and signed into law by Bill Clinton. This 1999 act in large part repealed the Glass-Steagall Act of 1933, which had imposed various regulations on the financial industry after the debacle of 1929. Among other things, Glass-Steagall prohibited a firm from being engaged in different sorts of financial services. One firm could not be both an investment bank (organizing the funding of firms’ investment activities) and a commercial bank (handling the checking and savings accounts of individuals and firms and making loans); nor could it be one of these types of banks and an insurance firm.

However, the replacement of Glass-Steagall by Gramm-Leach-Bliley was only the formal part of the change that took place in recent decades. Informally, the relation between the government and the financial sector has increasingly become one of reduced regulation. In particular, as the financial sector evolved new forms of operation—hedge funds and private equity funds, for example—there was no attempt on the part of Washington to develop regulations for these activities. Also, even where regulations existed, the regulators became increasing lax in enforcement. ......(more)

The complete piece is at: http://www.dollarsandsense.org/archives/2008/0908macewan2.html

[Eric J in MN]

1. "Shocked, shocked by greed" - Boston Globe editorial

http://www.boston.com/bostonglobe/editorial_opinion/editorials/articles/2008/09/18/shocked_shocked_by_greed/?p1=Well_MostPop_Emailed7

On Tuesday, (John McCain) denounced the "excess, greed, and corruption of Wall Street."

But unless it's backed up by rules that keep those excesses in check, McCain's indignation is only so much empty rhetoric. In recent days, he has suddenly come to favor "strong and effective regulation," but over the years he has shown an aversion to tough rules. In the 1990s, he supported legislation that erased major Depression-era controls on the financial sector.

Greed on Wall Street is like vanity in Hollywood, or ambition in Washington - an occupational hazard that won't be cured anytime soon. Anyway, a healthy economy doesn't require saints. It does require transparency in markets; in other words, people need to understand what it is they're buying and selling.

McCain is calling for a commission to investigate how the current turmoil occurred. Sounds great, except that the answer to that question is already depressingly clear. During the real estate boom of the first half of this decade, people with bad credit took out unsustainable mortgages. Investment firms bought those loans and then sliced them up and sold them off as investment-worthy securities. And at every turn, the potential downsides of these financial instruments grew murkier and murkier.

Government could have played a constructive role by making it easier for borrowers to understand their mortgages and by requiring financial institutions to maintain more capital. Democratic candidate Barack Obama has called for these and other helpful steps. While McCain has focused on the conduct of individual executives, Obama has shown a greater inclination to set up systems that minimize abuses.

[kenny blankenship]

2. I agree that the mainspring of this catastrophe has been the rollback of govt oversight & authority

but we must not banish the word GREED from our discussions of the unfolding tragedy of "free markets."

Greed is a monster. When it is untethered, ignored, written off as a "constant" in human affairs, or even worse, actually praised as the indispensable engine of social progress, the monster grows. It becomes more powerful as a motive in those most able to pursue it, more than I think most people are able to imagine, and with it also grows arrogance, defiance of legitimate social authority, and contempt for the common good. When greed is allowed to flourish it soon construes its de facto impunity as some kind of a moral right, and eventually sets about encoding its privileges and immunities into actual black letter law and favorable, but fanciful, interpretations of law. Do not turn your back on this beast. If it gets loose you will have little chance to bring it under control again until it has spent itself in destroying most of your world.