Greed is Good

Following on my ethics of finance theme, the Goldman Sachs profits and the Lloyds bid to get out of the UK toxic asset insurance scheme there has been much discussion of just what is going on.

This side of the pond first. In response to the Lloyds move, Simon Jenkins wrote a blistering piece in the Guardian.

What did we expect? Bankers are not Mother Theresa. Over the past year taxpayers have given them half a trillion pounds in cash, loans, shares, lucre, dosh, quantitative easing, whatever, with not a string or condition attached. We knew, or at least some of us did, what they would do next.

They would not give the money back. They would certainly not lend it to collapsing manufacturers or high street retailers, whom the government had refused to help. Instead they would pay off the gambling debts they had run up from money previously entrusted to them by the public as depositors. They would spend the rest on bonuses, houses, Porsches, yachts, brothels (says the Guardian), Cotswolds farms, commodity shares, bonuses, bonuses and yet more bonuses. After a while, you just cannot get rid of the bloody stuff.

As Jenkins says, ‘So who is the bigger fool, the bankers or the rest of us?’ And what did the ‘biggest peacetime fiscal expansion’, nearly all handed over to the bankers, get us?

Ministers certainly pleaded. Brown said last October that “the heart of the problem of averting recession” lay in ensuring that bank lending to the private sector was sustained. The objective was clear. Not a week passed without Alistair Darling insisting, cajoling, begging, threatening and stamping his foot.

The requirement of both Keynesianism and monetarism, that demand somehow be stimulated in a recession, was denied by a chancellor who deflated as ruthlessly as had Thatcher in 1980-81. By the end of this summer, the Bank of England reported “net flow of lending to businesses” falling faster than ever since records began, indeed by £15bn in July alone. Taxpayers’ money was being locked up in bank balance sheets. When Britain should have been spending, it was forced to save.

Meanwhile, Calvin Trillin’s article, Wall Street Smarts, argued that the crisis was caused by a generation of top-drawer graduates determined to get filthy rich arriving in a management culture dominated by dull bottom-drawer graduates. It is short and gripping. Whatever about the causal speculations, Krugman testifies that underlying social change is real enough.

Yglesias and others have pondered other destabilising effects around regulation. From Does Finance Need More Lazy, Self-Satisfied WASPs?

Part of the way the well-regulated Canadian banking system works is that it’s essentially a closed cartel. In part that makes it easier for regulators to monitor. But it probably also means that it attracts lazy, self-satisfied types to go work in it. Which, in turn, makes their antics easier to keep track of. And I would say the problem isn’t so much that “meritocracy can lead to excesses” as it is that bankers’ excesses wind up getting paid for by taxpayers. Silicon Valley has a lot of hard-charging meritocrats and a lot of excesses, but when Pets.com crashes and burns that’s not my problem.

Yglesias explained in an earlier post just how the smarts at Goldman are using the treasury as a backstop for their siphoning activities. After Kevin Drum, Yglesias notes that the recent profitable splurge is all coming from trading.

But what if they lose? For all we know, they’re actually making really unsound bets. Imagine putting $1 down on a lottery where there are 100,000 possible outcomes. In 99,999 of those outcomes, you win $3. But if that 100th ball comes out, you lose $1 billion. That’s a terrible bet. But you could still put a nice long winning streak together making that bet. You could earn a lot of money. Now you’d never do it with your own money on the line. But suppose you could do it with your company’s money, and then pay yourself an annual bonus based on the profits, and know all along that if you ever wind up with the bad outcome that Uncle Sam is going to bail you out.

Glenn Greenwald meanwhile has been looking at the way Goldman Sachs has penetrated its regulators, the latest provocation being the appointment of a Goldman executive to be the first chief operating officer of the Securities and Exchange Commission’s enforcement division. Greenwald maps out in detail the ties between the company and the various agencies that are supposed to be regulating it. This fills out the above picture of dull management and regulators being outsmarted by a new generation determined to get rich rather than build rockets. This is looking like corruption. Not criminally corrupt, but corrupt.

Back in April, after Krugman noted the influx of smarts into Wall Street, Ygesias wondered whether our ethical judgements hadn’t become corrupted.

These are people primarily motivated in life by greed. Not just by a desire to make some scratch, mind you. These aren’t immigrants who walked through the desert from Mexico in order to earn more money by washing dishes in a San Diego hotel. They’re not 24 year-olds looking for a hefty salary in order to pay off student loans. They’re multi-millionaires who want to earn millions more. It’s possible, of course, that Vikram Pandit really does find being a bank executive to be intrinsically interesting. But a good person, who’s primary passion was the life of a bank executive, would be donating the bulk of his massive compensation package to charity. But that’s not what Pandit’s doing. Rather he, like virtually all executives at major firms, is living a life that’s primarily oriented around an ethic of greed.

I think this is so right, yet this kind of clarity is actually relatively rare. On being confronted with this disorder the response is usually either a jealous resentment that the bankers have got something the rest of us haven’t, often issuing in lurid judgements of their depravity and demands for retribution, or a rush to defend the principal that ‘greed is good’.

This looks like a collective ethical failure, and the problem needs to be fixed at source.

It is not a new idea that neo-liberal ideology is most firmly entrenched in the same places that Darwinism is, generally in the Anglosphere and the very same counties that have been in the vanguard of industrial development (see, for example Oliver James, Despite ourselves, we are all Gordon Gekkos now). Marilynne Robinson’s The Death of Adam: Essays on Modern Thought opens with a long essay on Darwinism that catches they systemic problem facing us with her usual power and precision. I will quite the first and last paragraphs, and a couple of snatches in between.  These in themselves are powerful but the whole essay is well worth reading.

American culture has entered a period in which atavism looks to us for all the world like progress. The stripping away of humane constraints to liberate “natural” forces, such as capital flow or the (sio-disant) free market, has acquired such heady momentum that no one evens pauses to wonder whether such forces are indeed “natural.” The use of the word implies a tendentious distinction. Billions of dollars can vanish into the ether under the fingers of a bad young man with a dark stare, yet economics is to be regarded as if it were as lawful and ineluctable as gravity. If the arcane, rootless, disruptive phenomenon we call global economics is natural, then surely anything else is, too. [...]

The idea of progress implies a judgement of value. we are to believe the world will be a better if people are forced into severe and continuous competition. [...]

Darwinism is harsh and crude in its practical consequences, in a degree that sets it apart from all other respectable scientific hypotheses; not coincidentally, it has its origins in polemics against the poor, and against the irksome burden of extending charity to them — a burden laid on the back of Europe by Christianity. [...]

This is not the worst of it. Now that the mystery of motive is solved — there are only self-seeking and aggression, and the illusions that conceal them from us — there is no place left for the soul, or even the self. Moral behavior has little real meaning, and inwardness, in the traditional sense, is not necessary or possible. We use analysts and therapists to discover the content of our experience. Equivalent trauma is assumed to produce more or less equivalent manifestations in every case, so there is little use for the mind, the orderer and reconciler, the artist of the interior world. Whatever it has made will only be pulled apart. The old mystery of subjectivity is dispelled; individuality is a pointless complication of a very straightforward organic life. Our hypertrophic brain, that prodigal indulgence, that house of many mansions, with its stores, and competences, and all its deep terrors and very deep pleasures, which was so long believed to be the essence of our lives, and a claim on one another’s sympathy and courtesy and attention, is going the way of every part of collective life that was addressed to it — religion, art, dignity, graciousness. Philosophy, ethics, politics, properly so called. It is a thing that bears reflecting upon, how much was destroyed, when modern thought declared the death of Adam.

Update

After Bowley Yglesias has a neat summary of the current round of bank recapitalisation.

The Obama administration felt that nationalizing and recapitalizing banks directly would require congress to appropriate far more money than was possible. After all, if you think “bailouts” are unpopular now, just ask what it would look like if Obama wanted hundreds of billions more. Instead, they’ve used regulatory forebearance and other techniques to put banks in a position to recapitalize themselves through trading profits. And that’s what we’re seeing here. It’s an ugly, ugly business. They’re basically gambling on the taxpayers’ dime and operating with an implicit taxpayer guarantee to cover their losses if they blow up.

Update the Second

Frank Rich makes some sharp historical comparisons.

AT the dawn of the progressive era early in the last century, muckrakers attacked the first billionaire, John D. Rockefeller, for creating capitalism’s most ruthless monster. “The Octopus” was their nickname for Standard Oil, the trust that controlled nearly 90 percent of American oil. [..]

What we also know is that if Teddy Roosevelt palled around with John D. Rockefeller as today’s political class does with Wall Street’s titans and lobbyists, the tentacles of the original octopus would still be coiled tightly around America’s neck.

Check it out.