Collapsing Economy: It’s the Greed, Stupid
When the dot.com bubble burst with the coming of the new millennium, the reasons were pretty obvious – a combination of ridiculously high stock prices, rampant speculation, zillions of dollars in available venture capital and giving the finger to traditional business models that sent many a company and investor on a binge that a drunken sailor would envy.
What’s going on now as the effects of the subprime mortgage and hedge fund disasters ripple through the economy like the venom from a snake bite is not terribly dissimilar from the dot.com kaboom in some respects, but very different in another:
While greed was an element there, greed is the element here and virtually no one in a position of responsibility is fessing up to that.
The consequences of that myopia are beginning to border on the catastrophic.
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24 Responses to “Collapsing Economy: It’s the Greed, Stupid”
[...] Hullabaloo wrote an interesting post today onHere’s a quick excerptCollapsing Economy: It’s the Greed, Stupid March 8th, 2008 by SHAUN MULLEN When the dot.com bubble burst with the coming of the new millennium, the reasons were pretty obvious – a combination of ridiculously high stock prices, rampant speculation, zillions of dollars in available venture capital and giving the finger to traditional business models that sent many a company and investor on a binge that a drunken sailor would envy. What’s going on now as the effects of the subprime mortgage [...]
I remember a time when greed wasn't considered to be a virtue. Must be they changed the definition when I wasn't looking.
Yes, mainly borrowers riding a housing bubble and expecting riches as fast as with the dot-com bubble. Issue clarified.
DLS, issue made murkier. You are completely wrong on this issue.
Then what is the correct view of the issue, please, and since Wharton professor Mullen is happy to repeat some stats but offers no thoughts on solution, perhaps you could fill in the gap?
DLS:
Jim is welcome to answer for himself, but here's a good idea about how to do triage on the mortgage crisis:
http://online.wsj.com/article/SB120485260049218…
Shaun it's funny that you linked that, since I was reading this literally right before I looked at this thread.
In general I think that what is happening is more a product of human nature rather than anything else. The key to moving forward is not trying to stop the decline (which is practically impossible, and even if it “succeeded” it'd mean massive inflation, unaffordable housing for decades and crippling property taxes) but rather making sure that in our land of plenty, people don't have to worry about starving to death or not having shelter. I personally think it's going to get that bad, and I know that DLS called some of the doom mongers chicken littles. To be honest, I read a lot of economic blogs, with many of them written by former top bankers and economists…and right now they are mainly arguing whether we are just going to see the worst recession since the Depression or have another Depression. (Some argue for a repeat of the 70s, but I don't think they have a good argument for how the government is going to inflate away trillions of dollars that are quickly collapsing.)
There are hints of massive changes in societal attitudes. While most people are coming around to view this as a bear cycle, they are still thinking cyclical…but I think there is a good chance it will be a secular bear cycle.
Need a solution?
“For all purposes under the laws of the USA, 'person' shall be defined as a living human being.”
This strips greedy corporations of political power and the protections of the Constitution intended for American citizens. Let's stop pretending corporations are “citizens.” They are not; not loyal to America, not negatively affected by breathing polluted air, don't get cancer from environmental toxins, and they work constantly against the public interest, worker and community rights and the health of the human environment. Their narrow-minded focus on quarterly profits at the expense of all else has led us all to neglect the predictable effects on life, health and economy we are now seeing. The Bill of Rights was clearly not written for companies, and the Founders have written passionately about the danger of giving them power.
Every corporate-written and -driven law and regulation has failed utterly to maintain even financial health, let alone furthering our professed values of passing on a healthy and sustainable life to our children. Let's take corporations out of the driver's seat. They're lousy at it. Short-sighted gluttony is not working for America, or planet Earth.
mikkel:
A way astute analysis and one I wish I had written myself.
What the Paulsons, Bernankes and Bushs — all so deeply in denial and leadership averse — are refusing to address is that there are systemic and societal realities that will have to be changed if the next bear cycle — and there will be one — can be mitigated because you're right that nothing is going to stop this one.
Shaun, I personally think that there is a very small percentage of people that were super greedy (in the normal expression, meaning that they were unethically so) but that there is a cascade effect.
Economists are arguing why bubbles form in the first place, because they aren't rational. There is a new theory that it is based on “information cascading”. In fact, they ran a simple analysis and found that if a group of people each have a 60% chance of deciding the correct decision, but use each other to reaffirm whether their decision is correct or not, then it leads to a 40% chance of the group creating a feedback loop that picks the wrong decision.
The conclusion is clear to me. Most people think that regulation is bad because it hinders company inventiveness (which a lot of bad regulation does) while others argue it is good because it prevents evil companies from exploiting us. The truth is somewhere in between.
The problem is that it's not just companies that are short sighted in profit motive, but that individuals are as well and collectively show the same problems as corporations (which is ironic considering Greendreams comment). It is tough to make legislation that works because a) it gives a false sense of security and b) as times change, it often becomes obsolete and a drag. On the other hand, having no regulation makes it easy for some unscrupulous (or even spontaneous) event that causes an out of control spiral. Now these spirals depend a lot on available liquidity, which is why almost all bubbles are preceded by extreme availability of cheap money. This latter fact is why some people argue that we should go back to the gold standard and not have a central bank that manipulates liquidity…and while this sounds like a good idea, economists have shown that really it just causes smaller booms and busts (look at the 1800s).
So really, we can either come to embrace the boom and bust cycle, and stop having long term decisions that are based completely whether we are currently in a boom or bust…or try to stop the information cascades. Either one is going to be nearly impossible though. What many people I read argue is that we are now having a reversal of long term liquidity and the near decade of stagnant wages is going to lead to mass risk aversion….so things will swing in the opposite direction over the next decade or so.
Incidentally, I think the worst part in all of this are the bozos in charge of state and local governments (and the people that sold them this stuff. Now that IS where there should be heavy regulation). They have all this money in these highly complex and risky things….money needed to run the basics of the government as well as retirement money. Even worse, I've read that some states are doubling down and buying more real estate related things, or commodities. Well, commodities are in their own ginormous bubble and will probably soon crash, wiping out billions from these funds.
At least this shows why it's a bad idea to have privatized social security.
A guy who can't pay his mortgage will lose his house and his credit rating. He will suffer very serious consequences.
But what about the people who run the companies that make large numbers of bad loans? What consequences will they suffer?
They'll still be paid millions of dollars. They'll still be paid millions of dollars even as their greed undermines the entire global economy.
Where's the moral hazard?
Yeah George, it's tough. Most of the ideas about capitalism being self correcting assume that these guys spend their whole careers with one company and have a vested interest in seeing it not fail…and if it does then they get great penalties. Modern corporatism sees CEOs moving around like sports stars and they get paid like them too, where performance doesn't matter. I have no idea how the shareholders can sit back and lose billions without revolting when a CEO gets tens of millions for failing…or hundreds of millions for building up extreme short term profits that aren't sustainable.
To me it seems like companies need a way to delay compensation or have a right to take it away in case things fail. I'm not sure how the government would be able to determine whether someone has been so negligent that they should be held personally liable and have assets seized or whether they just took a risk and were wrong. But a company could certainly operate under the premise that it doesn't care and give out less compensation or have contracts where the CEO owes backpay if things go wrong.
Greendreams,
If you eliminate corporations, then how do you expect a government than have a multi-trillion dollar budget function. Do you really think that the government that you want could exist while only doing business with mom-and-pop operations.
Also, if you want union contracts (even though unions are corporations), then who do they sing the contract with.
When people rant against corporations it is apparant that they have little understanding of corporations. Do you think that Harvard would be around for hundreds of years if it could not be a corporation.
I agree with Green Dreams— he's not calling for an end to corporations, just to their influence over legislation. There should always be a balance and that balance is out of whack. When the GOP took power they let corporate lobbyists write our policies, and the results have been disasterous for all but the powerful and well-connected.
I also think our country has to stop supply side economics- we don't make anything or produce innovative ideas we just serve as a giant market for other countries that can produce goods much cheaper, as they have lax environmental and labor laws. The products, of course, come into the country without proper inspection and many end up being harmful to consumers.
Americans have the longest life expectancies they have ever had. Screaming dirty environment or unsafe products is just a rehash of standard Democratic boilerplate.
Even proposed federal regulation is published in the FR months before being adopted. All of them allow for public comments. When when the regulations are 100,000 of pages long, no one really reads them and too many people ignore many of them.
As long as people for for corporations, as long as people own stock incorporations, then they will try to affect the government.
Of course, the trial lawyers, the teachers unions, the other public service unions, and other NGO are probably better of having regulations and court rulng go in their favor. Yet, I will faint if I ever hear or read a progressive who wants to rein in the power of the trial lawyers.
And last, as long as there is public debt, there is a safe alternative for investment. Private corporations and business have to earn a better return that public debt. Why can't people understand that corporations and business have to make a profit over the long term. Looked what happened the big automotive companies when they forgot that they had to make a profit in the long term.
If you eliminate corporations, then how do you expect a government than have a multi-trillion dollar budget function. Do you really think that the government that you want could exist while only doing business with mom-and-pop operations.
SD, I'm not calling for an end to corporations at all! I like them, have incorporated over a half dozen myself, have invested in many, etc. But there is no advantage for humans in giving them political power, letting them bribe politicians, write the bills, hide from the enforcers or treat their commercial speech as free speech. Long live the corporation! Now, Get the f**k out of government decision-making.
Our idea, in revolting against the corrupt British government and its cozy relationship with the East India Corp, was this:
“government of the people, by the people and for the people.” Remember?
Greed itself is not the problem, but unfettered greed w/o thinking of the consequences. The free market's greatest myth is that unfettered greed will create an invisible hand of governance- i.e- the mob will find a way. It ended in 1929, but it's still a good myth, sociologically, if not in reality.
GreenDreams: I could be wrong, but east India was a government chatered corp, not a private one, right- ala Hudson's Bay. I think that government chartered rather than private corps might be the way to go for the really big things- such as, say scrapping Nasa and chartering a government corp for private space tracel.
What think you?
The Boston Tea Party was a protest against a corrupt government helping a greedy corporation screw them. From Thom Hartmann's excellent book “Unequal Protection” :
The primary purpose of the Tea Act was to increase the profitability of the East India Company to its stockholders (which included the King and the wealthy elite that kept him secure in power), and to help the Company drive its colonial small-business competitors out of business. Because the Company no longer had to pay high taxes to England and held a monopoly on the tea it sold in the American colonies, it was able to lower its tea prices to undercut the prices of the local importers and the mom-and-pop tea merchants and tea houses in every town in America.
This infuriated the independence-minded American colonists, who were wholly unappreciative of their colonies being used as a profit center for the world’s largest multinational corporation, The East India Company. They resented their small businesses still having to pay the higher, pre-Tea Act taxes without having any say or vote in the matter. (Thus, the cry of “no taxation without representation!”) Even in the official British version of the history, the 1773 Tea Act was a “legislative maneuver by the British ministry of Lord North to make English tea marketable in America” with a goal of helping the East India Company quickly “sell 17 million pounds of tea stored in England…”
I was incorrect in saying that DLS was completely wrong. I initially read him as laying all blame at the feet of the borrowers. He was claiming that it was mostly their fault, though, which is still wildly inaccurate.
It's very simple. If the mortgage bankers had been doing their job properly those awful borrowers would not have been able to get mortgages. Here is a brief primer on predatory lending from the Wharton School of Business. The process of reselling and securitization of loans caused the people at the beginning of the process to be willing to cut corners and in some cases be the initiators of fraud by misrepresenting the financial situations of the borrowers since it meant that they had no risk in making the loan because they'd have made their commission before any problems could come to light. In addition they misrepresent the nature of the loans and take advantage of the inability of many people to understand the fine print of their agreements. Here is a piece from April of 2007 by MSNBC. So no, DLS, the problem is not mostly the fault of the borrowers but at least equally the fault of the financial institutions involved and quite likely more their fault than the majority of the borrowers.
i actually feel that BOTH the borrowers and the bankers were to blame for the huge mess. But its just deregulation at its finest, bringing down the entire economy. Makes me long for the good ol' days when the Feds had to bail out the S&L's!
There is some mischief by the lenders, obviously. Otherwise they wouldn't be subjected not merely to barking by Congress but investigation for possible criminal conduct, which they are. The problem is that all too often the anti-business, anti-capitalist political agenda is supplied, as we see all too likely here, in place of what is really happening, combined with the modern attitude that one's own personal behavior should be unlimited and responsibility- as well as risk-free.
The last thing we want would be Naderite federal corporate charters, followed by installation of government officials on boards of directorship, forcing political rather than business goals on business in the name of “social responsibility.” This is just flower-power fascism.
And of course there is no pro-business, pro-capitalist, anti-consumer political agenda. Oh, no. Never.