Is Goldman Sachs the Root of All Evil?

The July issue of Rolling Stone has an article about a different type of rock star: the Goldman Sachs investment banker. The article, called "The Great American Bubble Machine," was written by Matt Taibbi. In it, he viciously attacks Goldman Sachs through a series of arguments, blaming the bank for engineering virtually every bubble, and pseudo-bubble, that has plagued the economy over the past hundred or so years.

I can't link to the article, because Rolling Stone does not put their content online. But it's an amusing read, so you might want to pick up a copy. I was pleasantly surprised to see that it was pretty nonpartisan and well-researched. I found myself agreeing with a fair amount of the article as well, but I think it ventures a little too far out into conspiracy theory land.

The article essentially has seven sections. Here's my interpretation of the general idea of each:

Intro
- Goldman's bankers, past and present, are pervasive in every aspect of leadership and power in the nation, if not world.

Bubble #1: The Great Depression
- Goldman was one of the banks running a sort of Ponzi scheme during the Great Depression that helped cause it.

Bubble #2: Tech Stocks
- Goldman was the biggest underwriter to push eventually worthless technology stocks into the market through initial public offerings.

Bubble #3: The Housing Craze
- Goldman was involved in creating and selling collateralized debt obligations, one of the securities that helped create the financial crisis.

Bubble #4: $4 A Gallon
- Goldman helped to ignite commodity prices, which led to oil prices going way up.

Bubble #5: Rigging the Bailout
- Goldman had alumni in place throughout the government to make sure it benefited from the bailout.

Bubble #6: Global Warming
- Goldman is pushing cap and trade because it stands to make money hand over fist once carbon trading begins.

Let's start with the intro. It's absolutely true that Goldman alums seem to be all over the place in positions of power. I'm not sure there's anything wrong with that, unless they all had some kind of explicit grand plan as a cooperative axis of evil to rule the world. That's silly.

It makes perfect sense that Goldman Sachs alums would end up in positions of power across the world for two reasons. First, they are some of the smartest people in the world -- that's why they get hired by Goldman Sachs, the premier investment bank. Smart, ambitious people always end up in positions of power, as they should. Second, they make boatloads of money at Goldman Sachs. As everyone knows, once you've got enough money, the next thing you want is power. That's why they end up pursuing such positions post-Goldman.

Then there are the bubbles. Taibbi essentially says that Goldman engineered -- not just participated in -- all of these bubbles. I think that's a whole lot of crazy. Goldman's relationship to these bubbles has a lot more to do with correlation than causation. There's no question -- none -- that Goldman made oodles of money off of these bubbles. But so did others. They just made more, probably because they were smarter. The idea that Goldman created even one of these bubbles is pretty ridiculous.

Some of Taibbi's arguments are stronger than others. I think his argument that Goldman engineered the housing bubble is particularly weak, as they were never a major player in the mortgage space. Sure, they sold lots of CDOs, but so did others, like Merrill. This demonstrates my point: rather than create the bubble, they probably saw profit to be made, and did so.

You can ask the question of whether or not it's evil to exploit something that you know is a bubble. While Taibbi can't really prove that Goldman always knew what they were doing in exploiting bubbles that would ruin the lives of others, several people he interviews claim they must have. I agree, because if they are so smart, how could they not?

I believe Goldman's bankers probably had the attitude: "If we don't profit from this, somebody else just will." Is that deplorable? A little. It's also completely rational, but that doesn't make it okay.

What's the solution? One obvious attempt might be to regulate the advantages that Goldman has out of the market. But that would probably involve destroying the market entirely; and besides, they'd just find other aspects to exploit within the new framework. Maybe they're the New York Yankees of banks, and the government could create laws requiring banks to "draft" MBAs like in basketball. They could also have salary caps like in football, so no one bank becomes too strong.

But that spits in the face of capitalism and the free market, so would shake the very foundation of the U.S. Allowing incentive and competition sometimes creates winners and losers, and Goldman knows how to win better than anyone else.