Collective action

Commenters and emailers are mad because I won't take a side and join them in their witch hunt for someone to blame for all of this.  The general run of the comments seems to be that I am attempting to excuse either my personal malfeasance, or that of my shadowy corporate masters.  Sadly, the only shadowy corporate masters I have pay me a modestly generous sum to bombard you with whatever I happen to be thinking about at the moment.  And I did about as well predicting this as anyone else, which is to say that I called the housing bubble, the savings glut, and the global imbalances, but not the specific disaster that would follow from them.  I just don't happen to think that in systemic crises, looking for some person or small group who was too greedy/stupid/venal/corrupt/arrogant is much help. 

You can perhaps understand my point of view if you think of unemployment.  It is absolutely true that people are often fired because they are lazy, criminal, or stupid.  But when unemployment skyrockets from 5% to 10%, it isn't because laziness, criminality, and stupidity have suddenly shot up.  Some people in the class of unemployed people are all of these things, and most of them could probably have avoided unemployment if they had exercised better judgement about their choice of career or employer.  But just because they could, in some theoretical universe, have avoided their involuntary redundancy, doesn't mean that we should look for ways to blame them.  Systemic effects sometimes swamp personal choice.

This is how I feel about homeowners.  They were caught up in a mania to buy a home, and most of the ones in trouble were at least a little greedy.  They were desperate to buy rather than renting because they thought that buying a house was a way to make money without working, and they bought more house than they could afford because they thought rising prices would help them get away with it.  But they were also getting bad information from the system.  Home prices had been rising for two decades.  How long are you supposed to ignore your lying eyes and put your faith in economic theory?  Especially if you have two years of junior college and never really learned the theory?

But by the same token, I don't harbor any particular animus towards most of the bankers.  The mortgage brokers and the smaller number of bankers who actively conveyed fraudulent information to the borrowers about the terms of their loans, or to the lenders about the income of the borrowers, yes.  (And for all the frothing from left and right, I haven't seen anything beyond very sketchy anecdotal evidence that one type of fraud was more prevalent than the other.  But most of the bankers were getting bad information from the same crazy system that was giving bad information to the borrowers about the risk of mortgages.  If one banker, or a few bankers, make a bad bet, I think we can focus on stupidity and greed.  But when almost all of them do, then I think it's not much more helpful to ask "What did they do to deserve this?" then it is to ask that question about the unemployed.

It's not that I don't think bankers are greedy.  I'm sure they are.  I also think homeowners are greedy. I think community organizers are greedy.  I think greed is a trait fairly evenly distributed throughout the human race, though the focus of that greed varies quite a bit.  That makes it unsatisfying as an explanation for . . . well, almost anything.  It's like blaming the financial crisis on oxygen.

So all of this "Why didn't you stop this!!!!" where "you"=anyone the screecher previously disliked for any of a myriad of reasons, leaves me cold.   Bernie Madoff is lying scum who should be buried in the darkest hole we can find.  But doing so won't fix the sad, sad state of your 401(k).  No one person, or even group of people, in America is powerful enough to bring down the economy, and thank frakking God they aren't.

It is much less satisfying, of course, to have history without villains.  Oh, sure, we've got Allen Stanford and Bernie Madoff, but in some sense they're a symptom of the crisis, not a cause of it:  recessions uncover what auditors can't.  We want someone who can be blamed, ridden out of town on a rail, and his successors hamstrung with so many regulations that they'll have to phone up Tim Geithner and beg for permission to sneeze.  Preferably, they will also be paid in Necco wafers.

But I think that the systemic fixes that will work will be ones that don't really involve blame:  things like preventing banks from getting too big to fail, and empowering regulators who can oversee banks at the holding company levels, rather than having each piece of the elephant examined by a different blind man.  Indeed, I think the biggest systemic fix, though temporary, has already taken place:  it will be a long, long time before anyone takes those kinds of bets on asset markets again, or lets their leverage ratios get so out of control.

And I think the biggest issues are ugly, thorny questions that don't map well onto some neat ideological framework.

  • Do we measure banks by a single standard, and risk that standard going wrong (as some of the Basel stuff arguably did) or do we give regulators more discretion, and risk them getting it wrong?  
  • Does America want to break up its banks and thereby lose its financial edge to countries willing to have national champions?  
  • Did the consolidation of banking in countries like Canada and Britain help or hurt? 
  •  What's the biggest way to put the Too Big To Fail (TBTF) institutions on a diet?  
  • Should we require 20% downpayments, which will stabilize the housing market in the long run, but shrink prices further, and seriously delay homeownership for young people whose parents can't stake them?  Homeownership is not an imperative, but it's at least arguably a boon for communities.  
  • What should countries--even big, rich, developed countries do--when capital flows swamp the ability of their markets to usefully absorb the investments?  Some theory favors capital controls, but in practice, they are often a source of political corruption.
  • (The one that comes to me at 3 am) Does the information problem inherent in investing in a foreign country mean we should rethink financial globalization?  Are foreigners a source of bubbles?

I also think that most of the people blogging on this often misunderstand what the fundamental questions are, because they are so excessively focused on the United States.  This crisis is global, and indeed, we aren't even suffering particularly badly.  When a crisis is global, it's hard to assign a lot of causal responsibility to something like Gramm-Leach-Bliley or the CRA.

This will not satisfy anyone looking to grind their ax . . . and then bury it in the head of some convenient political enemy.  But there you are.  The universe is not here to please us.