So, what caused the current financial crisis? No, not the specific events but rather the underlying cause, the cultural fault. David Brooks believes there are two competing schools of thought. Itâ€™s the greed theory vs. the stupidity theory.
Brooks begins with the greed theory:
[T]he U.S. financial crisis is a bigger version of the crises that have afflicted emerging-market nations for decades. An oligarchy takes control of the nation. The oligarchs get carried away and build an empire on mountains of debt. The whole thing comes crashing down. [The] remedy is clear. Smash the oligarchy. Nationalize the banks. Sell them off in medium-size pieces. Revise antitrust laws so they canâ€™t get back together. Find ways to limit executive compensation. Permanently reduce the size and power of Wall Street.
Next, the stupidity theory:
[O]verconfident bankers didnâ€™t know what they were doing. They thought they had these sophisticated tools to reduce risk. But when big events â€” like the rise of China â€” fundamentally altered the world economy, their tools were worse than useless.
The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize whatâ€™s left of functioning markets.
One of my guiding principles is never blame on malice what can be blamed on stupidity. Obviously, greed played a significant role in the crisis, but Iâ€™ve never thought it was a form of coordinated greed so much as it was a lot of individual greed that blinded most of those in the financial industry to the massive flaws in the system. Simply put, greed led to stupidity which led to the crisis.
I know itâ€™s satisfying to blame everything on the greedy elites — populist anger is the in thing. But hereâ€™s the problem: you canâ€™t eradicate greed. Lots of people will always act out of self interest, no matter the system and no matter if theyâ€™re in the public or private spheres. We canâ€™t say â€œthe system caused greed, letâ€™s jettison the system and create a new oneâ€ because every system is susceptible to greed. What we can say is that the system, as it exists now, propagates stupidity, so letâ€™s reform the system.
Both the greed theory and the stupidity theory lead to the conclusion that change is necessary. But how we change is predicated on where we see the faults. In the long run, I think weâ€™re better off trying to increase smart decision making than we are trying to create a system impervious to greed.
This entry was posted on Friday, April 3rd, 2009 and is filed under Culture, Economy, recession, Wall Street. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.