Tuesday, October 14, 2008

Fraud, Greed, and Markets

I'm more than a little sick and tired of earing about the greed on Wall Street, as if this current financial crisis was somehow caused by a significant number of extra greedy individuals who were oh-so much more greedy than their Wall Street predecessors. It's not just that it's the sort of thing that can never really be proven or disproven, it's that invoking greed is an all to easy way of scoring cheap political points while avoiding any discussion of the real complicated issues of financial markets and their relationships to the political world.

Greed shouldn't be turned into a political issue, because greed isn't something that can be regulated away. Sure, the government can step in to limit risk-taking in certain fields, but the dirty little secret is that those who want to make money will find ways to make money. If you regulate X to limit risk, people will try Y. If you then regulate Y, people will try Z. And on and on. The point is- and this is a legal point- that people looking to make money will always be more creative than those looking to make laws to limit the so-called greedy types. It's a simple matter of incentives and human nature.

I've avoided any sweeping moral pronouncements about greed because to be honest, I'm not quite sure what people mean by greed. At what point does wanting to make a lot of money become greed of the inappropriate sort? Is greed defined by dollar amounts, by the actions you take to get more money, or is greed really more about what's in your heart? I'd have a problem looking at specific dollar amounts, mostly because I'm not very convinced that the super rich like Bill Gates or Warren Buffet are primarily motivated by the thought of becoming even richer. A theory of greed that said X amount of money is too much would basically be asking the super rich to remove themselves and their money from the economy, hardly the sort of thing anyone thinks is a good idea. So, on a personal level, I would say greed is about what's in your heart and on a societal level, greed is about how you act and what you do to acquire money.

To return to Wall Street, there seems to be two separate sorts of individuals at issue. First are those who purposely broke to law to make more money and second are those who looked to make more money within the confines of the law. The first group is guilty of fraud and should be punished, but that's a small group that's not really the cause of today's crisis. So if most individuals accused of behaving greedily acted within the confines of the law, beyond the question of whether they were actually greedy in the first place, you're back full circle to the issue of money-making individuals being a step ahead of those who would regulate them. Or in other words, this is the way the market works, short of the government stepping in and doing what they look to be doing now in taking over large sectors of the economy.


Anonymous http://article.nationalreview.com/?q=ZjRjYzE0YmQxNzU4MDJjYWE5MjIzMTMxMmNhZWQ1MTA= said...

Planting Seeds of Disaster
ACORN, Barack Obama, and the Democratic party. By Stanley Kurtz

Trying to post link, don't know how to. Let's see if this works.

5:24 PM  
Anonymous rose said...

You can hate the partisan crap all you want, but the bottom line is the democrat's role in this situation and ACORN's role is not being reported.

google "stanley kurtz planting seeds of disaster" if that link didn't work, which it seems not to have. It's an eye opening piece.

good post on greed btw, well said. it is too bad mccain has jumped on the blame greed bandwagon, when the truth of the matter is so much more damning.

5:29 PM  
Blogger lonely libertarian said...

It's not just the partisan stuff, but this need on both sides for their to be some sort of smoking gun. Other than the claims on the left that this entire mess was caused by the demon known as deregulation, there's a lot of truth in many of the theories posited about why we're in the mess we're in. But the fact of the matter is there is no smoking gun. Obviously the Community Reinvestment Act played a roll here, but so did the Bush Administration's policies of pushing home ownership. Freddie Mac and Fannie Mae are involved here, for their role in buying up these questionable mortgages, but at the same time the multiple market actors themselves deserve a share of the responsibility- the buyers, the mortgage brokers, ect. Also clearly relevant is the Fed's policy of low interest rates, rapidly expanding access to credit markets.

It's pointless to blame the "free market" because there was no truly free market. What we had was market actors working in a politicized and regulated market, with some, but not all, typical market responses dulled, blunted, or actually changed by various government policies. This is a market failure only in the sense that all markets have ups and downs- I'm convinced that we're witnessing the bursting of the housing bubble, the effects of which are so devastating precisely because of government action that expanded that bubble beyond where typical market forces would have carried it.

10:39 AM  
Blogger lonely libertarian said...

The other thing I forgot to add was the fact that it's factually incorrect to pin subprime mortgages on minorities and the poor- the truth is that the subprime market exploded for all income brackets and all sizes of homes. These weren't just poor people who couldn't afford their first starter home, but middle class folk who were reaching too much for that 1/2 million dollar home. Like I was saying, you don't face what we face today without these being a problem spread across multiple levels.

12:54 PM  
Anonymous rose said...

I'm not pinning anything on the poor. I'm pinning it on policy makers that felt home ownership was a right.

My understanding, correct me if I'm wrong, but the CRA was not really enforced until ACORN started aggressively going after lenders in the early 90's, leading Bill Clinton to expand the CRA in 1995.

Look, LL, many different variables conspired to create the housing bubble and ensuing subprime meltdown and you touched on many of them and many have nothing to do with any particular political party. Low interest rates for example were obviously a huge reason home prices ballooned and combined with lax lending standards...that's a recipe for a bubble.

But among all of these variables there is something that certainly is a "smoking gun". Congressmen who worked on powerful committees who were charged with protecting the financial system, who received massive contributions from Fannie and Freddie as they continued to defend these institutions all the way up to the collapse.

They ignored the warnings of many many financial experts and blocked all attempts at reform by their peers and the administration while their pockets were getting lined by these GSEs.

I believe that conflict of interest affected their judgment. It is only one part of the picture, but you can't deny the possibility that Frank, Dodd and co. were essentially bought.

8:21 PM  
Anonymous rose said...

Government creates a duopoly that they implicitly back...

Government gives special regulatory privileges to this duopoly...

Duopolies are headed by politically connected democrats whose salaries are performance based...

Management floods powerful legislators, mostly democrats with money...

Legislators protect the duopoly from all attempts to reign them in.

Duopoly is at the center of a financial meltdown.


8:30 PM  
Blogger lonely libertarian said...

I think the Barney Frank's and Chris Dodd's of the world have a lot more to answer for than most. I heard on the news today that Dodd was calling for an investigation of the Fed for their policy of lowering interest rates, which seems to me to be even worse than the pot calling the kettle black.

The failings of Fannie and Freddie do play a big role and is probably the area where the most blame can be assigned. At this point however, I think the pointing of fingers and the tendency to drift into partisanship is counterproductive. For my money, preserving markets and preserving people's trust in markets is far more important than blame.

3:26 PM  
Anonymous rose said...

Trust? The congressman who are most responsible for getting us into this mess are in charge of getting us out.

Fingers need to get pointed so that we get each and every incumbent in congress who played a role in blocking every attempt to reform Fannie and Freddie for the last decade, out. When they go up for re-election their constituents need to know how vital a role they played in this mess.

The media has done an atrocious job truth-seeking through this mess. When you see clips played by fox news from 2006 of Barney Frank and Chris Dodd ANGRILY going to bat for Fannie and Freddie (seriously damning clips) you can't help but wonder how it is they aren't being played non-stop.

So LL, how can you preserve trust in the markets when we know that many of the responsible players are still in power and will have a lot of say not only in how things are playing out right now...but more say then ever once the government has equity stakes in these banks.

3:53 PM  
Blogger lonely libertarian said...

You're right and I basically agree with you.

I guess the point I'm trying to make is I don't want this to become an issue of a few bad eggs when institutions themselves are severely in need of reform (or elimination).

4:00 PM  
Anonymous rose said...

Really, what is our "exit strategy" here??

I keep hoping to hear that the government will be completely out of the business of owning mortgages and bank equity by 2013 or something. But I haven't heard it. I mean this should be a temporary thing; carry this mortgage and equity assets until they reach fair value and sell them off sporadically and completely be out.

But do you really believe Obama, Pelosi, Reid, Frank and Dodd will let that happen? Nah, they'll find a way to use "oversight" as an excuse to stay more involved. And you've seen the way CNN, MSNBC and co. have neglected to investigate these guys and ACORN and everybody else during this election cycle.

McCain was disappointing again last nite. Romney could've absolutely tore apart some of Obama's economic notions that McCain simply couldn't.

4:01 PM  
Blogger lonely libertarian said...

I literally just caught Dodd on the radio, claiming Freddie and Frannie were only minor players, all while pointing his finger everywhere else.

In blogging, I'm trying to actually discuss issues. But if Dodd wants to get down and dirty, I hope the Republicans roast him .. in a bad way.

4:03 PM  
Blogger lonely libertarian said...

I saw Romney afterward on one of the news channels and thought the same thing - It's a shame he's not the Republican candidate.

With Romney small government types would be working hard for the reasons not to like him, rather than with McCain, searching in vain for reasons to like the guy.

4:06 PM  
Anonymous rose said...

Go on youtube and search frank or dodd and fannie freddie. You have video and video of these guys in 2005 and 2006 directly blocking reform. It's their own words, its video of them, you can't spin that.

And like I've been saying, the more you learn about this the more you see that this truly was a partisan thing. In 2005 when the administration initiated a reform package, the banking committee voted on party lines, all republicans voting for, all democrats voting against. And again in 2006, the legislation co-sponsored by McCain was crushed by dems.

The more you put this under a microscope, the more you find out that this really was a lot more partisan than you're led to believe.

4:35 PM  

Post a Comment

<< Home