Premises behind the financial crisis

It has been fascinating to note the host of premises and beliefs that lie behind the current financial fiasco, many of which are implicit or simply are not noticed. (When I say fascinating I mean akin to the kind we feel when driving by a horrific traffic accident where you can’t resist looking.) Due to the length of the list I’m not going to comment in detail. It would take a book the size of the bailout bill to address all of them.

Here they are in no particular order of importance.

Economic egalitarianism: the belief that government should ensure equal economic outcomes. (I discussed this idea in an earlier post.)

Psychology trumps economics: that greed is a more fundamental and better explanation than the principles of economics and the impact of government policy on economic decisions. Misses the point that most people and businesses are motivated to improve their condition and that this force is always at work. Why did greed suddenly cause this meltdown? What allowed it to get out of control? Answer: laws that encouraged banks to lower their lending standards, plus the role of Fannie Mae’s management who aggressively marketed their company as a safe investment while cooking the books.

• Question: if banks were driven by pure greed why do they need to be forced to loan more money? Answer: because they also have to protect their bottom line. In order to make a profit they need to ensure that the people to whom they lend money will be able to pay it back. Greed therefore is balanced by prudence.
  
  I have issues with using the term greed which I believe is used as a derogatory, emotion-laden synonym for self-interest and the desire to improve one’s situation. The dictionary definition of greed is “excessive desire for having.” What is considered excessive? Who determines what is excessive?

Punishment of the good for being good: people who did not overextend themselves by buying homes they couldn’t afford and/or didn’t leverage their home’s equity into credit will pay for the sins of those who did.

The best defense is a strong offence (along with denial of responsibility): blame the mess on the 8 years of Bush, on “deregulation,” “greed” without explaining exactly how. Deny the role of your own policies in the fiasco then demand more of the same to “fix” it.

Good intentions (desire to help the people who couldn’t afford homes) absolve you of blame. This includes the management of Fannie Mae who cooked the books to make their business look better than it really was and to maximize their bonuses.

No distinction made between kinds of “greed”: While I dislike how this word is bandied about I’ll use it for the purpose of illustration. As I said above greed is being used as a purposely negative term for self-interest and the desire to improve one’s condition. Having said that there are at least two breeds of greed: (1) the drive to create or produce value (which is what motivates the businesses in the free market), or (2) the greed of obtaining the unearned (Freddie Mac and Fannie Mae senior management plundering tax payers to line their pockets, people buying homes knowing full well they couldn’t make the payments, lawmakers adding pork programs to the bailout bill, and so on.)

Ends justify the means: the “good” intentions of wanting to help people buy homes justify strong arming banks into suspending prudent underwriting standards (e.g., ACORN [to which Obama has ties] fostering activities to intimidate banks, passage and enforcement of the Community Reinvestment Act.)

Ends justifies the means – Part 2: using the bailout plan as an opportunity to shoe horn additional pork into it for unrelated programs and to get the toe in to door for carbon footprint taxes.

Wishes override reality: if banks don’t make loans according to sound underwriting principles let’s encourage them to be more “flexible.” Reality is negotiable!

The role of government is to ensure businesses are serving the community. This is the foundation of arguments for passing the CRA and other laws. However this flies in the face of the greed argument. If businessmen wanted to rape and pillage, I mean maximize profit, you wouldn’t have to force them to loan money. Their profit motive gives them an incentive to “serve” the community. If certain communities aren’t being served that signals the presence of other forces dissuading businessmen from selling their product or service. Implicit in this argument is the belief that customers have a right to demand the services and goods provided by businesses. Of course, this idea underlies arguments for universal health care and whatever other service or good deemed to be too valuable to trust to the market. (Another topic that’s big enough to fill a book.)