Saturday, September 27, 2008

The financial crisis and corporate greed

Most MSM reporting on the on-going monster financial crisis in the U.S. points to a consensus that it’s entirely a result of the actions of greedy, reckless corporate executives. Anchors and pundits invariably point fingers in that direction. And the left is presenting the crisis as a failure of capitalism in general - backed up Thursday, for example, by a Wall Street protest by unions objecting to the proposed $700 billion taxpayer bailout as a bailout of greedy Wall Street executives.

It’s widely accepted that it’s the government’s responsibility to devise a rescue plan (and given the size of the problem this seems true). So there have been many, many interviews with politicians who, naturally, encourage the view that someone other than government (ie. themselves) is to blame. Both Obama and McCain are pointing fingers at Wall Street greed and calling for more government regulation including, as a sop to the vengeful masses, capping executive salaries. Almost no one asks what government’s role has been in causing the crisis.

One notable exception to this trend has been the Financial Post where Terence Corcoran, Peter Foster and William Watson have been pointing out a few inconvenient truths.

For example, here’s a list of relevant questions and answers from William Watson:

* Who inflated the housing bubble with 1% money in a strong economy? (The Greenspan Fed.)
* Who encouraged all sorts of low-income, high-risk borrowers to acquire mortgages and homes they were doomed to lose? (Government agencies of all stripes.)
* Who created the stock-option mania in big investment companies by capping tax deductions for executive salaries? (Congress, in the early 1990s.)
* Who prolonged the current crisis with continuing destructive ambiguity, still unresolved, about which institutions would be bailed out and which wouldn't be? (Today's regulators and policy-makers.)
Here’s Peter Foster on the calls for more government regulation:

There is almost universal "consensus" (a shudder-worthy concept) that the recent turmoil in U.S. financial markets must be due to insufficient regulation, or at least regulation of the "wrong" kind. So now we must have more and better regulation.
It seems beyond the conceptual abilities of most people that current problems might have been based on too much rather than too little regulation.
They have a blind spot to the role of government programs and policies in promoting the housing bubble, and of facilitating institutions, especially Fannie Mae and Freddy Mac, that were widely perceived as being government backed (and ultimately were).
Wall Street’s recent difficulties have inevitably brought the usual anti-capitalist suspects from their lairs to claim Cassandra status, while in fact merely displaying their deeply embedded prejudices and historical amnesia. Take the CBC. .... Its doleful Washington correspondent, Michael Colton, declared that recent events were an embarrassment for "free enterprise." He then channeled a puzzled public’s lament: "Why can’t American business stand on its own feet?" One might well ask the same question of the CBC.
And here and here Mr. Foster points to lessons from the Great Depression:

...what made the Great Depression great was not its depth but its length, and what made it so long was lousy legislation based on misunderstandings of markets and demonization of capitalists. Similar legislation is now being proposed again.
FDR’s attempts to "correct" markets and counter capitalist greed led to such policy fallacies as believing that more unionization would force up wages and thus kick-start the economy. These and similar interventionist measures proved disastrous and prolonged the slump.
Lord Skidelsky implies that the Great Depression was a failure of laissez-faire capitalism, but as Milton Friedman pointed out, it should be more accurately laid at the door of government monetary manipulation, while the Depression’s depth and length were due to the uncertainty created by interventionist policies.
And on interference with executive compensation:

Attempts to control salaries have had perverse impacts before. There was uproar over executive incomes during the recession of the early 1990s. This led to restrictions that resulted in the flourishing of stock options, which were poorly accounted for, and in turn were blamed for the excesses of the dot-com boom and collapse of Enron and WorldCom.
More here and here from Terence Corcoron.

And there's an instructive thread here, of all places, at Climate Audit.

And finally, Mark Steyn’s observation:

... whenever anything goes wrong in the economy, the fault is always blamed on capitalism, red in tooth and claw. And in this case, both candidates tend to blame greed, untrammeled greed. Well, greed is writ in the human heart and is embedded in our DNA, and has been since the beginning of time. So clearly, greed itself is not the factor...



Halfwise said...

If greed were electricity, the US Congress and Senate would be a powerhouse.

Nevertheless, one has to look in disbelief at a system where mortgage brokers get paid for writing a mortgage not for its performance, and where a bag of bad mortgages can be sold as a "good" credit risk, evidently because they are in a bag. When personal leverage based simply on rising property values underpins the entire economy, a day of reckoning will happen.

Raphael Alexander said...

Of course greed is the culprit, as it always is. Which is fine, perhaps, if the U.S. does not bail out the corporations. To remain true to capitalism, however, the mighty financial institutions must remain where they lay slain. The objection people have is not solely the meltdown and the robber barons who ran away with all that money. It's also the complicity of a government that would seek to restore that kleptocracy.

Anonymous said...

If the government takes all the risk out of the equation then you can not blame people for taking advantage of it. If you can loan out 100% of a properties worth and you can buy a house with zero money down because the government is willing to assume all the risk for you why would you not. It is not so much greed as government stupidity.

Anonymous said...

How can it not be greed when the markets themselves celebrate greed as the primary motivator? The real issue here is that business did a poor job of policing itself now begging for big bad government to step in a do the job for it. This will happen btw. (real conservative)

JR said...

As Steyn observed, as did countless others before him, economic self interest (greed) is a basic, fairly well understood part of human nature. The “problem” is to devise the system that best harnesses self interest for, as the socialists love to say, “the greater good”. Most reasonable people know that the most effective system devised, so far, is free market capitalism under the rule of law.

Greed is a constant factor. Pointing fingers at “greedy capitalists” isn’t very helpful except where it can be shown that fraud or theft took place and then criminal law comes into play.

If you really want to understand “what happened” to precipitate this crisis look carefully at how the rules were changed since the last crisis. What did the law makers do? Corcoran, Foster and Watson provided some good examples. Gary (2) in the Climate Audit comment thread has another:

“I would point out for a start that Chris Dodd, Senator from Connecticut, was a prime player in the causes of this debacle when he helped to pass legislation that promoted making loans to high-risk borrowers. Banks were under legal jeopardy if they didn't make enough of these loans in the interest of "affordable housing."

Seconded by Dave (7):

"Gary (2) has it right …. Chris Dodd is part of the group responsible for this mess, which started with the "Community Reinvestment Act of 1977", which required banks to lend to those with no down paymant and bad credit. If the banks did not have enough of these loans, they were threatened by the government and "Community Organizers" for "discriminating" against poor people. Dodd and other from his party then encouraged Fannie Mae and Freddie Mac to buy these loans to keep the gravy train going, and in turn the managers of Fannie and Freddie made tens of millions of dollars and pass large sums back to the politician's political coffers.

I guess that would be an instance of socialist greed - legally forcing financial institutions to risk other people’s money to help poor people “buy” things they can’t otherwise afford.

Raphael Alexander said...

And yet you cannot absolve the money-lenders who, with full knowledge of the possible risks, tanked these giant financial institutions. The former CEOs of Fannie Mae and Freddie Mac, AIG, and Merrill Lynch, have all walked away with millions of dollars for essentially ruining corporate America.

I don't agree that we can blame this all on socialist greed that attempted to provide affordable housing to the unaffordable. It's been a financially irresponsible maneuver by both the lawmakers and the moneylenders.

You can scarcely blame the people for trying to get a piece of the pie. That is also inherent human "greed", as it were. A person would much rather "risk it all" to try and get a house and equity, rather than pay rent for someone elses mortgage.

This has been a failure of epic proportions and there is plenty of blame to go around, but putting it all on some notion of socialist lawmakers is a rather facile and ultimately fruitless shifting of the blame away from the robber barons who willfully tanked the economy for their own self-interests.

Some of those people must be held to account.

JR said...

Well I kind of doubt that the "robber barons" of Wall Street deliberately ruined their own gravy train. And no it's neither facile nor fruitless to point out that government lawmakers must bear their share of responsibility for their own disastrous lawmaking. And who is going to hold them to account?

Raphael Alexander said...

Deliberately ruined their own gravy train? Maybe not. But if America bails out those companies, then it's certainly win-win for them.

And yes, you've pointed out that government lawmakers should bear responsibility for the meltdown. But what I have said is not forthcoming in your observations is your seeming inability to place any blame, whatsoever, on the corporate blunders that let to this mess.

What I have deemed "facile" in your argument is your intent to blame this all on "socialist lawmakers". A fair and even-handed approach would be to spread the blame around. It sounds as though you are attempting to exculpate the corporations from responsibility. Which is ridiculous.

JR said...

Where exactly did I say it should ALL be blamed on the lawmakers?

The main theme of my post is that nearly every news commentator and politician is blaming it ALL on greedy corporate executives. Most are making no mention at all of lawmakers' roles in creating the mess. Which, as Corcoran et al point out, is ridiculous.

No doubt there are blameworthy corporate executives. Take, for example, the CEOs of Fanny and Freddy who are alleged to have lobbied (colluded with?) the likes of Senator Chris Dodd and fattened his political coffers in exchange for favourable influence and votes on proposed legislation.

There's lots of blame to go around but my guess is that the guilty lawmakers will completely avoid being held accountable. Their corporate pals might too, unfortunately, but one hopes that at least their golden parachutes will be severely limited.

Raphael Alexander said...

Now that's well stated JR.