Over the weekend, David Nicklaus wrote a revealing article on the economy in the St. Louis Times.
I wrote in this series about the symbiotic relationship between big government and big business. While David does not mark greed as the cause of this crisis he does point out that greed is a fundamental requirement for our markets to operate.
My least favorite piece of mythology, heard on both sides of the political aisle, is the charge that this crisis was caused by greed.
This one is actually true, after a fashion. Without greedy bankers and house buyers and investors, we wouldn’t have had a housing bubble. We also wouldn’t have an economy, because the capitalist system is based on greed. The market will always need self-interested human beings.
Building on that honest statement concerning the foundation of our economic system, David is able to give a reasonable assessment of our current economic crisis.
If we can’t blame this crisis on deregulation or derivatives or speculators or greed, then what are the real bogeymen? I’ll offer two: excess liquidity and crony capitalism.
What we’re living through is the bursting of a bubble. In response to the 9/11 terrorist attacks, the Federal Reserve kept interest rates unusually low throughout 2002, 2003 and 2004. It was essentially injecting money into the banking system to keep the economy’s gears moving, even though the economy emerged from recession in November 2001.
Much of that excess liquidity, we now know, went into house mortgages. In part, the rapid increase in house prices was classic, myopic bubble behavior. House prices hadn’t fallen in more than a generation, so people began to believe that they could only go up.
The housing market also had some key players who weren’t subject to normal market discipline.
The hotbed of crony capitalism was in Washington, where Fannie Mae and Freddie Mac hired legions of lobbyists to ensure that they could take on a lot of debt, expand like crazy and pass the real risk on to taxpayers. If these giant companies had been regulated like private banks, today’s mortgage mess would be much less severe.
The crony system operated on Wall Street, too. The masters of the universe who created the subprime mortgage market were compensated for volume, with no consideration for the risk they were creating. Boards of directors signed off on this pay, and then watched their companies be destroyed.
The boards need to be made more accountable, either by allowing shareholders to vote on pay packages or by making it easier for them to throw out directors.
In short, what we need isn’t less greed or more regulation but a purer form of capitalism. If we can root out cronyism wherever it exists, the free market may yet stand a chance.