What went wrong?
Greed is only part of it. Yes, the people who sold subprime loans to unqualified buyers were concerned about their cut, not about ARMs spiking and home prices falling. Yes, the Wall Street wizards who sliced and diced collateralized debt obligations were greedy for big paydays and living large.
But invoking greed actually explains little, no more than invoking lust or envy or any other human urge. The mystery isn’t why people are greedy; it’s how greed gets the better of them.
At a private fundraiser in Houston, when he thought there was no risk of being recorded, George W. Bush offered this explanation for our troubles: “There’s no question about it, Wall Street got drunk—that’s one of the reasons I asked you to turn off the TV cameras—it got drunk and now it’s got a hangover. The question is how long will it [take to] sober up and not try to do all these fancy financial instruments.”
There is no reason to question President Bush’s credentials for knowing a drunk when he sees one. But Bush, though he says he can’t remember a day from prep school to his 40th birthday when he didn’t have a drink, also insists that he has never been an alcoholic. He just drank “too much.” When he stopped, he didn’t acknowledge that he had a disease; what was wrong, it seems, was just typical youthful irresponsibility and a too-protracted youth.
So Wall Street’s problem, in the president’s mind, is not a systemic pathology, not an illness that comes on the same chromosome as the profit motive. Instead, it’s the behavior of a frat boy on a bender, the reckless phase of a good-time Charlie rather than the symptom of profound disease.
Bros will be bros; greed, like stuff, just happens.
A quite different explanation comes from a man to whom Bush gave the Presidential Medal of Freedom, and who is the intellectual parent of this collapse: “>speech at Georgetown University earlier this month, he attributed it to “lack of trust in the validity of accounting records of banks and other financial institutions” in the past year. Trust! Who knew?
So it’s not competitive markets and “Atlas Shrugged”-style enlightened self-interest that makes economies work. It’s “reputation and the trust it fosters.” Wealth creation, Greenspan says, requires trusting the people with whom we trade. The better your reputation, the more I trust you, the more able I am to take risks and accumulate more capital. When people “let concerns for reputation slip” the way they have in recent years, when counterparties are “not always truthful,” lenders are hesitant to lend, and credit freezes up.
But even an apostle of free markets like Ronald Reagan said, though in a different context, “Trust, but verify.” For years, credit-rating agencies like“>words of Nobel economics laureate Joseph Stiglitz, “performed the alchemy that converted securities from F-rated to A-rated” with no apparent damage to their reputations.
For years, the sterling reputations of Bear Sterns, Lehman Brothers and Merrill Lynch served as a substitute for transparency. For years, federal efforts to monitor the trustworthiness of big banks were fought tooth and nail by the same Alan Greenspan who nevertheless says that trust is everything.
James Madison warned us in Federalist No. 51 that men are not angels. Lincoln, while appealing to “the better angels of our nature,” nevertheless acknowledged our darker inclinations.
Anyone who’s been anywhere near a big investment bank knows that the gentlemen who run them have more in common with Hollywood buccaneers and Washington barracudas than they do with the Marquess of Queensbury. Maybe on Planet Fountainhead the economy runs on trust, but on this one, reputations aren’t warrants of integrity, they’re commodities marketed by the branding industry and burnished by the business journalism business.