Sometimes I worry that it’s presumptuous of me to even comment on the financial crisis, not to mention try to explain it and recommend solutions. I have no technical grasp of this stuff, and my own personal finances are about as unsophisticated as any 30 year-old’s could be. I rent a small apartment, I have zero investments (though I had investments, mutual funds and even an RRSP, for years), and as of last month I also have zero debt.
Partly this is because I just am not a money person. It’s not that I’m bad with money, it’s that I’m indifferent about it. My attitude towards money is like my attitude towards the weather: it’s good when it’s good but I’d rather do much more than just bask in it — things that don’t require it to be good, because it simply isn’t always within our control (as this crisis demonstrates).
Or maybe it’s because I’m actually a closeted control freak, sublimating my need to be in control by standing on the sidelines trying to figure out the underlying secrets of the game, waiting for an opportunity to jump into the action when I can command it, rather than having to take hits and learn the hard way. (Ya, actually, I think this is more accurate.)
I’ve tried to understand finance since I was a kid. I never quite ‘got it.’ Maybe because I had neither the means or the desire to learn by doing, which is really the only way to learn anything well. By the time I was 20 I was really just interested in finance as part of a larger commercial and economic picture — which is to say, not very interested at all.
… finance is plumbing. I’m not suggesting that finance and plumbing aren’t important and respectable professions, I’m simply pointing out that finance isn’t the purpose of business or the driver of economies. Business and economics are driven by resources, wants, and needs. Finance has an essential role measuring and regulating (yes, “regulating”) commercial transactions and processes — an absolutely essential, deeply important role – but it shouldn’t dominate our conceptions of business and economics.
Enterprise and trade can exist without finance. People would still want and need things, people would still make things, people would still trade and sell things without financial intermediaries. On the other hand, if we hypothetically eliminated human creativity, drive, and material desire, financing wouldn’t exist. Finance evolved last — last in, first out.
Professionals will complain about such comments. “You don’t understand. These issues are very technical and complex…” But then how much do they understand about the whole situation, how much do they understand abuot my amateur assessments of the whole situation?
By appealing to expert knowledge, a person making such an appeal is almost certainly arguing that they’re also unqualified to comment. Nobody is an expert in all of the aspects of finance and economics at work in this crisis. There’s always going to be someone who knows more than you about something, and anybody trying to assess the situation as a whole is going to be criticized by experts protecting their turf.
This is as good a place as any to start identifying causes. Cause A: high levels of sophisticated expertise that professionals were either unable or unwilling to traslate. ”Leave us alone to handle this and we’ll leave you alone to handle that.”
Everybody was happy as long as this continued to produce quantifiable results… Cause B: Clear information is more compelling than unclear information, even when clarity comes at the expense of substance. In other words, the problem was “quantity over quality.”
This is simply a fact of doing business. Organizations require hard, objective information and quantifiable results to function effectively. Yes, I enjoy working by intuition and qualitative feels, and I strongly believe that this can be a very effective way of working and thinking – but not in organizations and systems that involve more than a dozen people and are expected to exist for more than a few years.
Objective accountability is an absolute must. It’s unfortunate that it tends to come at the expense of qualitative substance but it doesn’t do any good to sit around feeling sorry about the fact. Instead we need to look at how qualitative information is abused and how it can be used more generatively.
First we need to stop and think about ‘greed’ for a moment. I’ve heard and read comments to the effect of, “This is all caused by greedy bankers and capitalists… we need to cap executive compensation and curb incentives… the Paulson plan is all about handing out money to his pals…” That’s just bullshit.
First let’s accept the fact that keeping financial institutions afloat would benefit everybody, not just the executives and agents (who are people and workers too) who would receive more direct and obvious benefits. Megan McArdle had some good posts yesterday making this argument. I especially liked this:
I suspect there’s an awful lot of anthropomorphizing the economy going on here. What happens to an economy when its credit system implodes is not that it cancels the cable subscription and takes a second job waiting tables on weekends. What happens is that everyone stops making so much stuff, because no one else wants to buy their stuff. Everyone’s living standard falls, especially those who are shoved into the double-digit unemployment figures caused by the dislocation.
If we’re going to accuse Wall Street of greed, let’s not forget people whose intentions may have been just as greedy but lacked the means and luck to perform as well: “ordinary” homeowners and investors who let themelves be fooled into deals on too-good-to-be-true promises of easy money without fully appreciating the risks involved.
I make this point not to incriminate “ordinary people” but to show that “greed” isn’t so much about, well, greed, as it is about bad information…
But before getting into that, here’s Cause C: Manipulative and deceptive sales and marketing practices at the retail level that feed consumers and borrowers with the idea they have more money than they really think, or the naive notion that markets will always go up and houses increase in value.
(In Cash Nexus, Niall Ferguson, the world’s most reputed historian of finance, cited a statistic claiming that if you discount inflation and renovations, home values stay the same over time.)
Marketers certainly weren’t just being malicious. “Ordinary people” were asking for it. Consumers seemed to be more than willing to play along and allow themselves to be misled. “Ordinary people” were greedy for big houses, they were greedy for new cars, they were greedy for shopping sprees and shoes and iPhones and Vegas and fun and false security and early retirement. It became our cultural attitude.
But again, this isn’t merely stupidity or greed. “Ordinary people” went ahead with bad real estate deals and investments because, according to the information available, the benefits outweighed the risks – to such a degree that it would have been stupid not to deal. It would have been just dumb to turn down clear opportunities for gains because of unclear (or non-existent) information about possible (and seemingly impossible) risks and losses.
To a degree, there were factors of avarice and greed operating in the parties that sold customers on these deals, but only a matter of degree, not of kind. Most of the real people selling these deals were acting on similar information profiles (lot’s of clear upside, downside is minimal and vague), and likewise for people at every level on the org chart.
Certainly the lenders arranging and pushing these deals would not have intended that at some point home buyers wouldn’t be able to afford them. That’s absolutely ludicrous.
Now if there had been some clear information about risks and long-term, wider-reaching costs, then people at all levels of this system (from “ordinary people” all the way to the chairmen of the big five investment banks, not to mention government administrators and legislators) would have had something to work with.
Better information would have given people the means to take responsibility for making better decisions and preventing massive failures, the means to make even more money in the long run — yes, even the means to excercise ”greed,” if that’s what you want.
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