MINK column: Human pride, more than greed, has spawned financial disaster
It’s tempting to see our deepening economic crisis through the prism of the culture of greed that flourished under the let-markets-run-wild ideology of the outgoing Bush administration.
To be sure, any administration that lets private companies rip off the military in wartime and exploit the environment in the name of environmentalism deserves at least a special citation for chutzpah. But George W. Bush is by no means unique among modern U.S. presidents in embracing a greed-is-good approach to financial oversight and regulation.
It was, after all, former Federal Reserve Chairman Alan Greenspan (a Ronald Reagan appointee), former Treasury Secretary Robert E. Rubin (a Bill Clinton appointee) and former Securities and Exchange Commission Chairman Arthur Levitt Jr. (another Clinton appointee) who banded together in 1998 to shut down attempts to regulate the explosive trafficking in derivative investments.
And it was Clinton himself in 1999 who signed into law the Gramm-Leach-Bliley Act, tearing down protective barriers that had kept commercial banks separate from investment banks, insurance companies and securities brokerages. The move created wondrous new possibilities for financial mischief and conflicts of interest on a massive scale.
True, the Bush administration brought with it a deep contempt for government, a certain deregulatory fanatacism and, of course, spectacular incompetence, but its faith in greed was nothing new.
Greed being what it is, I suspect that serious prosecutors will discover that smooth-talking (alleged) financial con man Bernie Madoff was only one of scads of hustlers in recent years who took advantage of lax enforcement and money lust to find easy pickings among true innocents and look-the-other-way victims.
All that said, I still wouldn’t put the deadly sin of greed at the center of our economic crisis; I’d pick pride.
Last week, a brilliant three-part investigative report in the Washington Post deconstructed the fall of American International Group. The once-respected, old-line, multi-billion-dollar international insurance conglomerate failed in September and nearly triggered a world financial collapse before the U.S. Treasury intervened and took over the company.
At the center of AIG’s fall from grace was its Financial Products unit. It was created in 1987 by three very smart, young Wall Street traders and math whizzes who came to AIG with an idea: They believed they had devised a way to use computers to track simultaneously a wide range of changing variables in elaborately constructed financial deals and precisely identify and offset shifting risks.
In other words: They’d figured out how to reduce risk to virtually zero. They’d discovered the new Sure Thing.
Maybe it was, at least for awhile. By the time the trio left AIG in 1993 — long before any problems were apparent — the operation they’d created out of thin air was pumping hundreds of millions of dollars into AIG and the pockets of its executives, including the three young innovators.
But as one the men, Randy Rackson, recently told the Washington Post, “The excitement of it wasn’t the money. The money was the scorecard. The drive behind it was creating something new.”
Something new, however, isn’t always something good or even something better. In the current issue of Vanity Fair, Joseph E. Stiglitz, the Nobel-Prize-winning economics professor at Columbia University, describes the losing struggle he waged against other Clinton administration economic advisers over the danger of derivatives.
“For all the risk,” he wrote, “the deregulators in charge of the financial system . . . decided to do nothing, worried that any action might interfere with ‘innovation’ in the financial system. But innovation, like ‘change,’ has no inherent value. It can be bad . . . as well as good.”
The increasing complexity of the deals concocted by AIG, Bear Stearns, Citigroup and countless other competitors and imitators put greater and greater distance between the financial products being bought and sold and the real things on which they supposedly were based: residences, commercial land and buildings, bonds used to finance business expansion and public infrastructure projects, student loans and so on. When the long, twisted chains of payments-due started to break after real estate prices started falling, it became impossible to tell which pieces of the deals still held value and why. Essentially, everything had to be regarded as worthless.
It’s fair, I suppose, to blame the alleged geniuses of the financial industry, government and academia for not realizing how interdependent the latest “innovations” really were: how even private financial deals were connected to the worldwide public financial system, how failure in what was believed to be a small fragment of a deal could resonate through those connections and crack the foundations of gigantic institutions. In other words, for failing to understand just how risky what they were doing really was.
But that is the essence of pride. The innovators believed they had discovered how to eliminate all practical risk. They thought they had used the power of mathematics and computer processing to take everything into account — past, present and future — allowing them to control the way variables affect wildly complex financial deals. They thought they had outsmarted the system, history and human nature.
In the afterword to his latest book, “The Ascent of Money,” historian Niall Ferguson hails the positive impact that evolving financial systems have had on society. “From ancient Mesopotamia to present-day China,” he writes, “the ascent of money has been one of the driving forces behind human progress . . . as vital as the advance of science or the spread of law in mankind’s escape from the drudgery of subsistence agriculture and the misery of the Malthusian trap.”
But he also warns, citing some of the great economists of history, of the danger of mistaking knowable risks, which can be estimated based on historical data, for matters that can not be anticipated at all. More than 70 years ago, Ferguson notes, John Maynard Keynes addressed the issue of what he called “uncertainty” in his “General Theory of Employment, Interest and Money”:
“I do not mean merely to distinguish,” Ferguson quotes Keynes, “what is known for certain from what is only probable. . . . The expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain or . . . the rate of interest 20 years hence. . . . About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.”
The human quality that has brought the world financial system to its knees — and brought with it the potential for untold hardships for millions of men, women and children — is pride: the belief that we had discovered the secret of knowing the unknowable.
Eric Mink was the commentary editor and an oped columnist for the Post-Dispatch from 2003 until January 2009. Before that, he was television critic at the New York Daily News and at the Post-Dispatch. During the 1980s and '90s, he also was a morning show regular on the various St. Louis radio stations that employed J.C. Corcoran. Mink was born in St. Louis in the previous century and hopes subsequent generations aren't too ticked off about it. He is proud to be a member of the University City High School Hall of Fame and makes no apologies for being what is known in the pet trade as "a cat person." 
Maybe if minko were appointed economy czar none of this would have happened. I mean who knows more about the economy and derivative investments than a former entertainment writer. Not sure about the rest of you, but I’m solidly behind the financial genius of minko.
Absence of risk is a mythical as perpetual motion. Risk is a part of every economic system. It is implicit in capitalism where capital is always at some risk. I am reading the excellent new novel “Sashenka” By Simon Monterfiore, about Stalist Russia, which vividly shows that risk in a communist system can be as subtle as laughing at the wrong joke. I am also following the Daily Beast’s accounts of Alexandra Penney, the artist and Madoff victim now known as the “Manhatten Bag Lady”. How ironic that she and most of Madoff’s victims thought they were investing in something that was if not risk free, then certainly of very low risk. I was very lucky in my working life and doubly lucky that I had a chance to interact almost daily with the MBA Masters of the Universe on Wall Street. I was the CEO of my company and when I would meet with them, they would tell me about my company. As you all know, I am not the smartest guy in the world, but I was like the teacher with the answers to the test. I knew and they thought they knew and they were very convincing. When I sold my company and my financial advisers told me I needed a certain portion of my money in a higher risk category, they suggested I invest with the hedge funds run by my friends, the Masters of the Universe. I told my broker that I’d seen these guys and while they all attended Ivy League schools and were making more money than dirt, it just didn’t make any sense to me. Every year until recently, the brokers would make the same case, telling me how much I was missing. This year, my broker told me I was her best performing portfolio (and I was still down 15%). I am all for minimizing risk. But, anyone who thinks they can defeat the risk, deserves to become a bag lady.
Mr. Mink - As a result of a column of yours a while back, I’m in the midst of reading (actually, re-reading) Atlas Shrugged. Others who have read it will clearly hear the voice of James Taggart in this column.
It is true that innovation, in the financial world as anywhere else, is not inherently valuable. But useless innovations, in a free market, are allowed to fail. The suggestion that government can, by means of regulation, prevent useless innovations is absurd. Whether we’re talking about bundles of subprime loans or the latest Britney Spears album, our market system allows us the privilege of squandering our hard earned money on useless and worthless things.
The responsibility for failure here should be placed upon those who bought the worthless bundles of loans. Obviously, somebody wasn’t doing their job. And the banks which allowed this to happen should be permitted to fail. By propping up these failed investors, we’re keeping the same dunderheads around to create the next financial collapse. That’s a bad idea at any price.
By imposing strict regulations on the financial industry, we won’t prevent the next crisis, because the industry will find ways to get around any regulations. Remember how campaign finance laws were going to reduce the money in politics? No, we’ll pass regulations to avoid the crisis which has already happened, and those regulations will simply guide the industry in its conduct to create the next crisis.
Failure is as much a part of capitalism as death is a part of life. The ultimate in pride is to presume one is able to infallibly avoid either of them.
Greed and capitalism is what helped make this country great. Since greed will ALWAYS be around, we’ll need to continue to find ways to police it.
Mike…
Your post fails to address any of the issues the column discusses. All you have offered is snide, sarcastic personal insults. I make no claims to be all-knowing or czarist about anything. All I do is write a personal opinion column that I hope people will find interesting enough to spend some of their time reading.
And since you seem one of those people, for which I’m grateful, you might consider taking a cue from Nick Kasoff, jjk and logicprevails above. Although their views on many issues differ considerably from mine, they’ve focused on the issues at hand and my discussion of them in this column and have written interesting, thoughtful perspectives worth reading.
Eric
Investing is the same as gambling. You win you loose. I’d love to be able to go to the casino loose all my money then go over to City Hall and ask them to bail me out. What incentive do I have to pay attention to my investments when I can loose? The issue here is not greed it the fact the Govt. gave these guys 700 Billion and they plan to give more.
Mr. Mink,
I will give you some credit for something we do not see too often here, you actually contributed a response to your own blog. To respond and engage in the follow up discussion is good.
Mike did take a pretty good jab at you, but he has a valid point. You are an entertainment writer, not an economist. That does not make your opinions invalid, it just points out that you are writing this not as an expert, but as an interested observer with a unique viewpoint.
Please clarify your comment about Bush’s spectacular incompetence. How does it compare with Clinton’s incompetence?
While I find your observations interesting, I cannot completely agree with your conclusions. Certainly the people that came up with this innovation were extremely proud of their accomplishments, but it was the greed of those implementing their system that caused them to overlook the risk of the system. The politicians that allowed Fannie Mae and Freddy Mac to be run without market control or oversight were driven by greed of power. The people that made the investments and took out the mortgages they could not afford were also driven by greed.
Nick is right. Those that made the mistakes of being driven by greed need to feel the consequences of their choices in order to learn. AIG will not learn. Fannie Mae and Freddy Mac will not learn. They are bailed out and can continue on without the consequences. Who is picking up their tab? You and me.
There’s a difference between pride and pompous arrogance, Eric. It’s hard to get more pompous and arrogant than banking executives that plunder hundreds of millions in salary and fringe while the nation’s economy crumbles right along with their banks not to mention the Wall street nasties that helped.
‘There’s a difference between pride and pompous arrogance, Eric.”
– Jom
I don’t think we have much of a disagreement, Jom. There’s the good kind of pride — defined as self-respect or satisfaction with a job well done — and the pride that’s one of the seven deadly sins, which is precisely the kind of arrogance that leads very smart, ambitious people to believe they’ve outwitted everyone and everything.
THINK–
I’ve just found that the “you’re this, therefore you have no standing to talk about that” argument is a smokescreen. When I wrote about television — which I have not done for going on six years — some people who didn’t like what I wrote complained I’d never worked in TV so what I wrote had no credibility. Now that I write an oped column, some people who don’t like what I write (by no means all) complain that I’m not an economist or a politician or a soldier or whatever, so what I write has no credibility.
It seems to me that what matters is the content of what I write — whether it’s interesting or makes a decent case for a point of view or, if not, why not. Generally speaking, nobody here knows anything about the background of anyone else, except mine. But we take a look at the content of what people say, we think about it, we evaluate it and maybe we comment about it. We can have fun doing it and be respectful of each other in the process or we can just take potshots at each other, which in my view is just a waste of time.
And as to the content of your comment, you sound like my brother, who called yesterday to say that he thought the column was well-written and completely accurate in its facts — and he completely disagreed with my conclusion.
The column took note of some relevant Clinton failings, but come on, the guy hasn’t been president for 8 years. As to the Bush administration and incompetence, I honestly think this one’s almost universally accepted to the point of having become a cliche. The atrocious federal response to Katrina (which is not mitigated by the fact that the mayor and governor also screwed up) and the lethal incompetence in the management of the Iraq war should suffice as examples.
I have known Eric for about 30 years. I disagree with him on a lot of things, but not everything. I think anyone who actually knows him would agree he has a high level of intellect and a natural curiosity about a lot of things. I think it is unfair to believe that someone should only be allowed to express an opinion in their chosen area of endeavor. As you know, I’ve got an opinion on just about everything and I’ve been out of work for over six years. .