The greed canard

Posted by Marc Hodak on September 21, 2008 under Scandal | 2 Comments to Read

I have to admit I’m desperately searching for a good explanation about what went wrong this past month. The problem is complex, and the root(s) of it are, I’m guessing, rather subtler than most people think. But there is one explanation–the most common one out there–that I’m certain is useless: greed.

Blaming the financial crisis on greed is like blaming a raging fire on oxygen. Greed is a pervasive aspect of humanity, visible on both sides of every trade, at every level of society, except perhaps for the guy sleeping in a box near a steaming grate, although I bet he would hungrily grab a better box or squat a warmer grate if he could find it.

I also don’t buy the idea of mass stupidity, complacency, or irrationality. The more likely explanation is perfectly sensible, rational behavior of thousands or millions of people under perverse incentives. The most fruitful line of inquiry is likely to be: What were the incentives? How did they arise? Who did they affect? Why did they manifest the way they did now?

Or, we can shortcut rational inquiry and go for the cheap morality tale and the inevitable witch hunt that follows.

  • Ian Random said,

    There are a couple of things I’m looking at for the current mess. First I’m interested in the main sellers of loans and CDO’s to the distressed firms. I suspect that the firms were sold lower quality loans as higher quality. I heard a rumor that Fannie Mae was upgrading lenders, something about they answer to HUD and not the SEC. The last allegation I came across was something about loading up on subprime loans satisfies the anti-redlining laws. Anway, that’s my current line of informal research.

  • MHodak said,

    I (and probably a lot of others) will be very interested in what research turns up. These firms are going to be investigated to death. Well, it’s too late for Lehman, and one could only hope that it might be true for Fannie and Freddie, but Congress will likely blame it on the people and not the system they created, then move right along.

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