The Other I

November 11, 2008

“Smart is just less dumb”*

Filed under: Just Stuff,Political thoughts,Uncategorized — theotheri @ 5:43 pm
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Yesterday I confessed that I initially supported the Iraq war.  My confession today is a little more contemporary and comes with less rehabilitation:  I don’t think the credit crunch and our current global financial chaos is primarily a result of greed.  I think it was a failure of intelligence.

But first, let us remember that the results of the fancy credit packaging that ultimately led to this mess are not all bad.  This crisis has been more than thirty years in the making.  It began with the globalization of credit when governments removed controls on movements of money in and out of the country.  Suddenly, the options for credit and investment were magnified and big and little investors benefited hugely.  My husband and I purchased our first house with credit provided by this liberalization.  So did millions of others, including people who would otherwise never have been able to even dream of owning their own homes.  Only a minority of those are now facing losing their homes.  Many people are still poor, but the level of poverty in countries like India, Brazil, and China has been reduced at unprecedented rates because of a liberalized credit situation.

Yet there has been a failure too, a catastrophic failure.  “Greed!” cry all of us little guys who have lost more money than we can afford.  But I’ve been asking myself why the brilliantly intelligent people who devised more and more sophisticated methods of packaging credit would kill the golden goose that was making so many of them so fabulously wealthy.  They didn’t.  They thought – and so did most of the world’s banks and governments – that they had figured out a way to reduce the risk of credit.  They failed not because they were greedy, but because they were wrong. 

This is an important distinction, because if we think the solution is primarily to keep greed under control, we will demand that governments treat financial institutions quite differently than if we think it was the result of failing to assess risk adequately and to take sufficient precautions in safeguarding other people’s money, which after all is what credit is about.

The greed hypothesis will clamp down on financial institutions, perhaps even demand that governments take them over to be run “for the good of the people.”   I shutter at the mere thought of governments running our banks.  Financial institutions want to make money;  governments want to stay in power so their motives for short termism will be even greater than the motive of people who want to make money.

The hypothesis that says that banks took risks with other people’s money that were too great will insist on greater transparency and a larger capital base.  It will make regulation and oversight more effective and hopefully more intelligent, but it won’t tell bankers how to run their banks and won’t outlaw risk.

Was there greed in the financial halls and dealing rooms around the world for the last 30 years.  Of course.  Is there still greed?  Of course.   And it’s not limited to only those who make pots of money.  Poor people can be greedy too.  They just use a different rationalization to justify their behavior.  It is a human impulse to gather unto ourselves more than we need.  It’s not just squirrels who prepare for the winter that is coming.

I think the difference between what we call greed and stupidity is often determined by whether the scheme succeeds.  Success is smart, failure is moral punishment for greed.

*A truth stolen unrepentantly from http://beversluis.blogspot.com/.

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