Saturday, November 1, 2008

Greed?

A while ago when it became obvious that we are in serious economic trouble, the President and other leaders said “the economy has some problems but its fundamentals are sound.” Today they tell us that we facing recession, perhaps depression. The fundamentals are no longer sound but it is all due to the greed of individuals. The system as a whole is sound. The capitalist system, the free market do not bear any blame for the present economic crisis. It is the greed of individuals.

When they said that the economy is sound-- that was propaganda. Now they tell us that the economic system is sound. There were just some bad apples that were carried away by greed. Shall we believe them this time, or is this more propaganda?

Imagine that you own a bank. That does not mean that the bank's money is yours; you only run the bank. The bank's money belongs to the depositors or to stock holders who invested their money in your bank. You have been a banker for a long time. You believe that it is your obligation to be conservative in your investment and in the loans you make because the money you handle is, after all, not yours. It has been entrusted to you.

So when you hear about other banks giving mortgages to people with a poor credit record and insufficient income to pay for them, or if other banks make serious profit investing in financial papers that you do not completely understand and you are sure that the other banks don't either, you refuse to participate. Yes, the high profits are tempting, but you are committed to being cautious.

But one day you get a phone call from a major stock holder. He wants to complain. Your local competitor—the bank across the street from you, in fact—is making a lot more money than your bank. They have discovered a goldmine; they are investing in mortgages given to people who are poor credit risks. The competing bank also invested, and reaped significant profits, from all kinds of new fangled investment instruments. You regard both of those unsafe, in the long run, and have therefore stayed away from them. Your profit rate, due to your cautious way of investing money, is significantly lower than that of most other banks around.

Your stockholder is not only complaining about the lower rate of profit and therefore the lower dividends paid to stockholders, but he wants you to change. If you refuse, he suggests, he will try to get the board of directors to fire you, in order to hire a more aggressive banker who is willing to take more risks and earn more money for the stock holders. In short your job is on the line. If you want to keep it, you need to change your ways. Caution may be all very well in the long run, but your stockholders want more money now.

What should you do? Will you give up your job or make riskier investments? If you do the latter it is not because you are greedy, but because the competition in the banking industry forces you to do what everyone else does. If you want to remain in your job, you need to meet the stockholders' demands and give up your cautious ways.

(Today when the government has bought a portion of your bank because the risky investment you made, along with all the other bankers, went bad your bank is in serious trouble. Now you can think to yourself that you were right all along, but your bank is in trouble anyway because you yielded to the pressures of the stockholders.)

Our economic system is a competitive one. Any business must follow the practices of all competitors or go bankrupt. If you competitors in a service industry pay minimum wage to their employees, you must do the same otherwise you will be unable to compete in price. If your competitors in a manufacturing industry send their manufacturing off shore, to China, where wages are a fraction of what they are here, you too must move your manufacturing to a low wage area and take the jobs from working people at home. If you run a bank you need to be as profitable as all the other ones even if that means making investments which you regard—rightly so it turns out now—too risky.

But, you say, maybe it was not the bankers, or the mortgage companies, the hedge fund managers or other large scale investors who were greedy, but the stockholders who were calling for higher profits. But is that not precisely what they are supposed to do? People like the President talk endlessly about the great system we have where individual enterprise creates a good life for everyone. But what is “individual enterprise” but another name for trying to make as much money as possible? And what's the difference between trying to make as much money as you can and greed? The greedy never has enough. The greedy always want more. So do the capitalist entrepreneurs who want to make as much money as they can.

When the pundits tell us that it is greed that has brought us this economic crisis, they want us to think that the economic system is sound, and it is just some “bad apples” who are very different from us. But anyone who runs a business in our capitalist system must try to make as much money as she or he can. It is not individuals who are poorly brought up or other wise morally defective who are greedy, it is anyone who is in the uisiness world and wants to remain in it. Greed is not a deviation; it is built into the system.

If greed is the problem, it is a systematic feature that will be with us as long as we think about business as we do today, as the way to make as much money as possible.