A blog by Barry Edelson

Our Bankers, Ourselves


Who Dares to Cast the First Stone?

It would seem merely to be stating the obvious that a good banker ought to be a sober and cautious custodian of other people's money. The realization that the behavior of so many of the nation's bankers has instead been thoughtless and reckless is a shock to the system that we have yet to absorb. Politicians and economists have indeed identified the "trust factor", but they are in fact grossly underestimating the problem. It isn't simply that banks are afraid to lend money because they trust neither the creditworthiness of their customers nor the balance sheets of other banks. The deeper problem is that banks, as an institution, are seen as having betrayed the very definition of what they are supposed to be.

We can console ourselves, if we like, in the belief that the current calamity resulted from a failure of regulation. However, even under the general revolt against regulation that characterized the recent speculative era, banks remained among the most heavily regulated entities on the planet. We harbor an old-fashioned notion that the pin-striped bank manager of yore didn't need government regulations by which to set his moral compass. We were fooling ourselves, of course. There may have been a few bankers of upstanding character who treated their customers' money as carefully as their own (indeed, there may be a few of them still walking the Earth), but, by and large, it was an old-fashioned combination of self-interest and the heavy hand of the law that kept most bankers, like most other mortals, on the straight and narrow.

In any event, our dismay and disgust at the behavior of bankers, while justified, is somewhat misplaced. They were no more guilty than the rest of us for acting as though the real estate bubble would expand forever without bursting. The spectacular explosion of the housing market that has spattered the entire economy with its poisonous debris was merely the latest in a long and sad history of speculative bubbles. In the midst of them, "conventional wisdom" would have it that this time things are different. In the boom/bust of the last decade, it was the advent of the Internet and its legions of youthful groupies that was supposed to have changed everything. When the "new economy" turned out to look and behave remarkably like the old one, investors returned, ironically, to that stalwart of economies past: property. This time, we were supposed to believe that because real estate prices never fall, there could be no down side to putting all of our eggs in that particular basket. No one bothered to ask the Japanese, any one of whom could have shattered that argument in a few choice sentences, but never mind. Prosperity hides a multitude of sins, and there is no doubt that the real estate boom brought untold prosperity to untold millions. At least for a while.

When I now hear that house prices are falling, I can only think: falling from where? My wife and I bought a new home a little more than six years ago. As recently as last summer, its market value was at least double what we paid for it. Now, with prices "collapsing", it is still worth a great deal more than we paid for it. Similarly, when on the news they remind us daily that stock prices have now fallen to the levels they were in the dark ages of 1997 or some such year, I once again have to shake my head and ask: and what was so bad about stock prices in 1997? At the time, we all thought the country was doing just great, thank you very much. Did Microsoft or Google or any other of the star companies of recent times really double or triple their value in a few years? Well, the classical argument is that something is worth whatever people are willing to pay for it. But as we now know, the problem with this last little period of wealth creation was that people weren't actually paying for it. Governments, corporations, banks and home buyers alike were all living on debt while treating their "assets" like money in the bank. And worse, much of this borrowing was done with other people's money.

As far as classical economic arguments go, the government is now being urged by a certain corner of the political spectrum (the one that was soundly trounced in the last election, as it happens) that we should return to what was once known as the "classical model" of economics. This was the same model employed by the Hoover administration, whose insistence on balancing the federal budget and taking no direct action despite widespread bank failures, corporate bankruptcies, mass unemployment, hunger and destitution is viewed as among the most egregious economic blunders in the history of mankind. The classical model had predicted that if prices fell far enough, people would start buying again and economic growth would ensue. But it never happened, and many died. Strict adherence to an economic theory in the face of actual human catastrophe was the economic equivalent of performing medical experiments on live people.

Or so popular history would have us believe. After the classical model was largely discredited, the Keynesian model — which holds that the government must step in and provide capital where the private sector is unable or unwilling to do so, the path now being taken by the Obama administration — was embraced by Franklin Roosevelt in the 1930s and held sway for several decades thereafter. Its success, however, was never conceded by a particular brand of conservatives, for whom the inflationary decade of the 1970s offered proof positive that Keynes' theory didn't work and that the New Deal was the worst thing ever to happen to the American economy. This argument, of course, was not merely economic but cultural, and under their hero Ronald Reagan they sought to scrap government intervention on behalf of the poor and middle class and instead showered largesse in the form of tax cuts on the very sort of malefactors of great wealth (so named by FDR's cousin Teddy) who had been blamed for the Great Depression, and whose nominal descendants are now being dragged through the mud for their putative role in instigating the collapse of the world economy. Despite the massive shift of wealth from the middle and lower classes towards the rich, who have grown comparatively much wealthier in the ensuing three decades since the Reagan ascension, many of today's conservatives are no more convinced that Reaganism trickle-down experiment was a failure than they and their forebears were willing to acknowledge that FDR's policies didn't actually destroy the country.

While no one will go so far as to rehabilitate the memory of Herbert Hoover (when have you heard a Republican refer to "The Party of Hoover"?), why blame him for doing what he was advised to do? If the American economy slides into a lost decade, and drags the rest of the world down with it, Obama stands a good chance of being remembered poorly by history, too. We forget that before 1929 Hoover was considered an exceptionally capable man. His organization of hunger relief in Europe in the aftermath of World War I was unprecedented and enormously successful, and it set the standard for large-scale relief efforts ever since. And who remembers him for that? He is reduced to a caricature, a symbol of incompetence and an enduring punch-line, all because he followed the advice of his economic advisors. Just as the current White House incumbent, also a brilliant man, is doing.

So before you gather a mob to tar and feather your local banker, consider the bigger picture. When the erstwhile Federal Reserve chairman, Alan Greenspan, an Ayn Rand disciple of capitalism on whose very word the entire world of finance once twisted and turned, now admits that his absolute conviction in the effectiveness of free markets may have been misplaced, how can we blame these much smaller fish merely for their faith in the national religion of commerce? Are we going to imprison every investment banker, mortgage securitizer, bond rater, home builder and real estate broker who made the simple mistake of believing that lining one's own pockets is the way the economy is supposed to work? And what about the home "buyers" who put no money down and later just walked away from their unaffordable houses? Are they criminals, too, or just latter-day seekers of the American dream? If Greenspan didn't know (or admit) that the entire edifice was a house of cards, how were the rest of us supposed to know?

In any event, it's only money. To the species that invented slavery, nuclear weapons and genocide, what's a little larceny?

March 2, 2009

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