It comes down to greed.
That’s what the economic turmoil is all about for many people. Too many of us were greedy, and now everyone is paying the price.
Luckily this belief is wrong, because if it were right we’d be up the creek. Greed, however defined, presumably has always been and will always be with us in an unvarying amount. Schemes to change human nature have all failed dismally. Better to assume it won’t change any time soon. So if having a sound economy depended on eliminating or diminishing greed, we’d have trouble.
I see people blaming greed for our problems everywhere. Bob Woodward, the famous journalist, was on “Larry King Live” the other night, laughing derisively at the idea that cutting taxes would help revive the economy. How could that help, he asked, when the cause of the debacle is “greed”? Cutting taxes just feeds greeds, he implied. Dee Dee Myers, former President Bill Clinton’s one-time press secretary, nodded in approval.
Closer to home, I got into a debate with a religion professor who was sure that the housing bubble and recession were market, not government, failures. Why was he so sure, considering that he professed no knowledge of economics? Because people are greedy, he said. Of course the market failed. How could it not when greed is its foundation?
This line of thinking is worth exploring because it’s more common than we might suspect. I will avoid the semantic issue. I suspect many people use the word as a synonym for self-interest: To be greedy is to be “selfish.” If so, Ayn Rand had it right–as long as self-interest is held to be morally corrupt, the market order will be suspect.
For the sake of discussion, however, let’s take the least flattering definition and go from there. This approach has the advantage of showing how mistaken the interventionist is without getting him to reconsider his definition of greed. (For the record, the word has no objective referent. It only applies to others, never oneself. The best I can make out, A is greedy when he wants more of something than B thinks he should want. B, on the other hand, wants just the right amount.)
It shouldn’t take much consideration to see that greed will have different effects in different institutional settings, that is, different political-economic-legal systems. The problem is that most people don’t think about institutions. Being part of the landscape, they escape notice. But they are crucial.
An institutional setting in which people know they will bear the negative consequences of their own actions can be expected generally to elicit conduct markedly different from one in which those consequences can be passed on to others without their consent, namely, through taxpayer bailouts and the like. Everyone sees this in concrete terms at the individual level. The religion professor recognized it in when I presented these two scenarios:
Scenario A: He goes to Las Vegas knowing that the winnings are his and the losses are his.
Scenario B: He goes to Las Vegas knowing that the winnings are his, but the losses will be covered by someone else.
I asked him if his behavior would differ in the two scenarios? Of course, he replied. But he refused to extend the principle to the political-economic context.
More Not Less
Greedy people by definition want more not less. So they will be as concerned to hold on to what they have as they will be to increase their wealth. Risky investment is a way to get more but also a way to end up with less. Greed, therefore, will tend to restrain recklessness if people know their profits and losses belong to them. The corollary is that the restraints on recklessness will be weakened to the extent that people expect the losses to be absorbed by others. Market discipline is the key.
For large financial institutions in the United States, Scenario B is far closer to reality than Scenario A. As Gerald P. O’Driscoll Jr.writes, “Deposit insurance, access to the Fed’s lending, and the implicit (now explicit) government guarantee for banks ‘too big to fail’ all constituted a system of financial corporatism.” What these interventions have in common is the potential to shift losses forcibly from those who should be responsible for them to someone else—making reckless behavior and losses more likely than they would be. That’s the definition of moral hazard.
Greed is an easy target. But blaming greed gets us nowhere. As Lawrence White says, it’s like blaming gravity for a plane crash. It certainly doesn’t suggest any sensible policy response. The religion professor said we need more regulation. But if people are greedy, how do more regulators promise to improve matters? They are people too.
If we can’t trust people with freedom, how can we trust them with power?