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A Short History of Greed and Magic Ponies September 1, 2009

Posted by Dwight Furrow in Dwight Furrow's Posts, Ethics, Political Philosophy, politics.
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Since the beginning of our economic meltdown, economists from George Soros to Richard Posner, to Brad Delong have been offering explanations for how we got here. Nobel Laureate Paul Krugman argued recently that the cause of our financial crisis can be traced all the way back to Ronald Reagan’s repeal of legislation regulating the mortgage industry.

I am not an economist so I don’t have a view on who is correct. But I think Paul Krugman is at least aiming in the right direction.  The sainted Ronald Reagan surely bears some responsibility but in a more profound sense than having short-circuited a regulation. He was a key player in a “moral” revolution responsible for turning greed into a virtue, a revolution that was carried out by many actors, some famous and some obscure.

The ethos of this “moral” revolution was best captured by the Gordon Gekko character (played by Michael Douglas) in the film Wall St:

The point is, ladies and gentleman, that greed — for lack of a better word — is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind.

Economic explanations can only go so far in accounting for the wholesale acceptance of something as implausible as the sentiments mouthed by Gekko. One of the above mentioned economists may have the economics right. But why did virtually an entire culture come to believe that excessive debt, whiz-bang investment instruments, lax regulation, minimal taxes, and magical thinking about market equilibria were sustainable, and why did these beliefs persist despite evidence to the contrary?

Economics tells only part of the story; we need to tell a moral tale as well.

The belief that greed is good is the real toxic asset that underlies the persistence of bad economic policies.  Of course, greed is nothing new to the human condition. All of us are greedy much of the time, and I doubt that human desires had suddenly became more powerful in the generations coming of age since the early 1980’s. What changed? Not religious belief which has been remarkably persistent over the last few decades, suffering only modest declines in recent years. What changed is the loss of moral sensibilities that have traditionally constrained and competed with greed—a sense of responsibility, community, and mutual dependence that encourages us to recognize limitations on our individual aspirations. The problem with the mantra that “greed is good” is not that it promotes excessive desire. The problem is that it makes invisible the tools we have to restrain that excess. Re-conceiving greed as a virtue gives everyone an incentive to write out of existence those human capacities that constrain greed.

Desire inflation is, and should be, an important human motivation. The Gekko character is not wrong in viewing greed as a motive that encourages growth. But it is not a moral virtue.

Who was responsible for this revaluation of values? Ronald Reagan was a particularly glib and careless proponent; but not its source. I would point to three factors:

1. A modern conservative movement willing to abdicate its principles;

2. A liberal movement unable to articulate a credible, alternative political morality;

3. And a public willing to believe in magical ponies. (Costless solutions)

Modern conservatism is especially responsible. Libertarian conservatives had traditionally been opposed to corporate power as well as government power. Following Adam Smith, they recognized that greed can be a positive force only if constrained by robust competition and the moral sensibilities of the public that would weed out the charlatans and rip-offs. But modern libertarians treat government as a protection racket for big business, which now operates with few constraints and no moral commitment.

Classical conservatives have traditionally opposed rapid social change in favor of stable families, traditions, and communities, which along with religious commitment act as solvents for human greed. But during the late 20th and early 21st centuries, they were quite willing to ignore the way corporate capitalism undermines stability and destroys communities. Religion was complicit under the banner of the “prosperity gospel.”

I doubt that the great thinkers in the conservative tradition, Edmund Burke and Adam Smith, would be modern conservatives if alive today.

The result of this abdication of principle was a powerful political movement bent on lining the coffers of multi-national corporations with none of the moral constraints necessary for the long-term prosperity of a society. Compare, for instance, the recently chastened, high-flying Wall St. executives playing fast and loose with everyone’s money with the sober, cautious, trustworthy bankers of the mid-20th Century, acutely aware that when you are using someone else’s money you have a responsibility to invest it wisely.

Meanwhile, liberals chastened by their failures in Viet Nam, their lack of an answer to the economic shocks in the 1970s, and distracted by identity politics, were having trouble finding a message that would resonate with a public that seemed all too willing to believe that serious social and economic problems could be solved by giving in to any impulse.

This is where the sainted Reagan comes into play. He was spectacularly proficient at promising magical ponies. An actor delivering the message that it is morning in America and Eden is at hand if only guv’ment would get out of the way, Reagan promoted the idea that human flourishing is solely a product of individual initiative. The selfish pursuit of one’s interests thus became the measure of a person; problems that needed collective solutions were wished away; the burdens of social responsibility were relieved by the thought that individuals are responsible only for their own fate. Pawning costs and risk onto someone else, especially the public, and ignoring the costs, became the modus operandi of American business.

Of course, blaming Reagan doesn’t explain why the public greeted this message with such enthusiasm. But the seeds of self-indulgence had been sprouting for years. From the flappers of the 1920’s to the armies of shopper-warrior housewives in the 40’s and 50’s to the sex, drugs, and rock ‘n roll of the 60’s, the pursuit of personal pleasure came to define American culture. Subtract a social conscience from such a hedonistic cultural stew and it is inevitable that adrenalin junkies pulling the levers of power will ruin things for everyone.

So here we are. This history is important because if we are to solve our problems we need to avoid making the same mistakes. The Obama administration is in the midst of developing new regulations to govern our banking system. But those new regulations will be ineffective without fundamental moral change.

The effectiveness of regulatory reform is dependent on details of very complex legislation. But these details will be subject to the congressional sausage machine and once implemented will be picked over by very expensive lawyers trying to find ways around the regulations. Furthermore, it is difficult in the long run to get government regulators to limit the activities of the rich and powerful, especially when the regulations limit economic growth that creates jobs and pays for pension plans.

Government itself can’t do the job as long as the wham-bam-thank you-ma’am culture of greed exists. A vastly different cultural model of responsibility that is serious about corporate governance for the public good must take hold.

What are the prospects for such a moral transformation?

Conservatism is now even less principled than in the past, preoccupied as it is with racial and identity politics that crowd out any concern for good governance. Democrats occasionally have a coherent moral message about responsibility and mutual connectedness expressed in Obama’s speeches, but whether they have the discipline to produce focused change is anyone’s guess.

But more importantly, the big question is whether the public will give up their belief in magic ponies.

The current debate over health care reform doesn’t give one reason to be hopeful. The public seems to want reform, i.e. more and better health insurance coverage, but without the cost containment measures (the public option, medical effectiveness boards, higher taxes etc.) that would enable that reform.

Is there any reason to think global warming legislation will escape a similar fate, especially after the right-wing demagogues have their say? Measures to tackle global warming may well falter on the public’s unwillingness to incur additional costs on the use of carbon-based fuels.

Here are the sentiments of one Obama voter planning to vote Republican in the upcoming Virginia Governor’s race:

Her clients, a young couple who had brought their 2-week-old baby, were finalizing a short sale on a townhouse that they were anxious to unload, even if it meant ruining their credit, because they had maxed out their credit cards trying to make the payments.

For Cleland, it was another example — one of many this day — of the broken promises of a president who she thought would be different. Obama pledged to change a Washington culture that favored corporations and the connected and instead lift families such as the one sitting next to Cleland out of their economic funk. Rather, she said, Obama has backed billions of dollars to banks that continue to “act like they’re broke” and started the country down a path that Cleland said she thinks will lead to more grief for the middle class.

He’s just not as advertised,” she said. “Nothing’s changed for the common guy. I feel like I’ve been punked.”

Snap fingers. Recession disappear. Everybody happy. Forever.

The next few months should tell us whether it is still magic ponies all the way down.

X-posted at Reviving the Left.

book-section-book-cover2 Dwight Furrow is the author of Reviving the Left: The Need to Restore Liberal Values in America. For political commentary by Dwight Furrow visit: www.revivingliberalism.com


Geithner’s Plan: Getting the Values Right March 22, 2009

Posted by Dwight Furrow in Current Events, Dwight Furrow's Posts, Ethics.
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Treasury Secretary Tim Geithner’s plan to rescue the banking system is due to be released today. Details of the plan have been leaking all weekend, and it should come as no surprise that there is no consensus among economists (or at least the one’s I read) on whether it is a good plan or not.

Paul Krugman called the plan “an awful mess”

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives… For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

But Brad Delong is more smitten:

So why do I have a positive and Paul a negative view of the Geithner Plan? I see three reasons:

1. The half empty-half full factor: I see the Geithner Plan as a positive step from where we are. Paul sees it as an embarrassingly inadequate bandaid.

2. Politics: I think Obama has to demonstrate that he has exhausted all other options before he has a prayer of getting Voinovich to vote to close debate on a bank nationalization bill. Paul thinks that the longer Obama delays proposing bank nationalization the lower it’s chances become.

3. I think the private-sector players in financial markets right now are highly risk averse–hence assets are undervalued from the perspective of a society or a government that is less risk averse. Paul judges that assets have low values because they are unlikely to pay out much cash.

In fact, Delong’s entire FAQ is worth reading if you want a brief, clearly written analysis of the plan.

I’m not an economist so dear reader beware. But, as I sort through the various opinions of economists, it seems to me some of the disagreement is about values, not technical economic issues.

Some people emphasize the fact that this scheme throws more taxpayer money at the same dingbat scumbags who got us into this mess. The government will insure overpriced assets that will have little value in the future, and we will end up once again rewarding investors for their bad bets. This is fundamentally unfair and unjust. These folks don’t like the plan.

Others emphasize the chance that this plan will get the bad assets off the bank ledgers and encourage more lending, giving consumers more buying power and firms less reason to lay off workers, thereby (hopefully) stanching economic decline. These folks like the plan a lot more.

I think both sides are right on the economics. It seems to me that there is plenty of incentive for investors to buy these assets since the government will limit their losses if they go bad. That is good and should provide further stimulus to the economy. They also have an incentive to bid up the price of the assets since they don’t have to put a lot money on the table to acquire them. That is bad because undoubtedly the taxpayers will have to pay up.

No one knows if this will work or not, and my economics crystal ball shattered many decades ago. But the moral philosopher in me would rather sacrifice a little justice and fairness to avoid the misery that a prolonged recession (or worse) entails. So independently of the economic issues, I think the administration gets the value question right.