Sunday, September 21, 2008

It's not greed

Lots of soul searching in the Sunday papers about the current crisis in the world's markets. In particular there is a lot of railing against 'greed' as the prime cause of everyone's woes. Well, that allows journalists to get on their moral high horses and to preach to a willing congregation of readers who, let's face it, never liked bankers anyway. The problem is that is rubbish. Greed is a fairly basic human trait and has featured in at least some aspects of business since time immemorial. Or are we really saying that particular vice was invented at the same time as short selling? Assigning the present difficulties to greed is lazy journalism and lazy politics and there has been plenty of both.

The actual problem is not greed, it is complexity, and it is complexity that people mistakenly thought could be managed by computers. Modern IT systems can manipulate data by the terabyte and in a mass of the most complex algorithms, far beyond the scope of general understanding, to the point where only a few backroom experts really know what is going on. Now that is fine for some things, not everyone needs to understand exactly how that reactor core is kept stable or that satellite is kept on station. People do need to understand products in a market though, if they are going to make intelligent decisons about them, and this is where it all went wrong. Financial instruments were packaged and securitised and hedged against in a multiplicity of ways so that there was no intuitive understanding, even by the people who traded in them. It didn't matter though, because the underlying asset values, primarily domestic and commerical property, kept going up in value. Understanding risk is not important when in the short term there isn't any. We all know what happened next: asset values started to fall, because they are cyclic and they always do eventually. Then understanding risk was suddenly very important, and no-one did. The rest, as they say, is history.

It wasn't greed, it was plain old stupidity, the same old stupidity that comes periodically from people trying to adapt to a changing world. And adapt we must, learning the lessons, making the changes and so on. We have had a colossal failure of banking and banking regulation, because for this to have happened very large numbers of people must have nodded and smiled and looked the other way when some of them were actually paid to ask very hard questions instead. That has to change, but it must be remembered that the reaction to the last broadly similar convulsion of the financial sector in 1929 was so wrong-headed that it led to the Great Depresson, fascism, World War Two and the Cold War. We need decent leadership and a regulatory framework that does not crush the market's ability to create wealth, because if economic growth goes into prolonged reverse then the political downsides are too awful to contemplate. So, let's hear less moralistic sound-bites about greed eh? This is just a little too serious for posturing to be the only response.

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