Goldman Sachs and the “Gospel of Selfishness.”
The sensational public expos̩ of the moral climate at Goldman Sachs Рa leading Wall Street bank Рby a disillusioned executive this past week comes as no great surprise.
The great “vampire squid” (as it is affectionately nicknamed) has become a poster child for rampant greed, regardless of the damage it causes to others. It seems to embody Ayn Rand’s “gospel of selfishness” and Gordon Gekko’s famous speech in the movie Wall Street that “greed is good.” As one of Ayn Rand’s fictional characters tells us: “All that proceeds from man’s independent ego is good…The first right on earth is the right of the ego. Man’s first duty is to himself…His moral law is to do what he wishes, provided his wish does not depend primarily upon other men.”
As various commentators on Greg Smith’s cri de coeur in The New York Times have noted, there is nothing new in the Goldman Sachs’ story. Greed is as old as, well, who knows? Greed is inevitable. Just look at the past history of Wall Street and other financial centers. So, let the buyer beware and, let’s get back to greed as usual. It’s good for business.
But this is a cop out. The issue is a whole lot more complicated than that. For starters, the capitalist free market ideal is about mutual benefit. You make money by benefitting others not by exploiting them, or cheating them. Markets require fairness and fair dealing, otherwise it becomes a form of “predatory capitalism.”
Once upon a time, fair dealing and serving the interests of your clients/customers was the guiding moral principle on Wall Street, even though it was sometimes abused. It was enshrined in the ethical codes of Wall Street firms and in the legal principle of “fiduciary responsibility” – the contractual obligation to put your client’s interests ahead of your own. This strong moral standard was reinforced in two ways. One was the private partnership model, where the banks were owned by groups of partners who had to put their own fortunes at risk and who could only make money when their clients did as well. The other incentive was a tough and aggressively enforced set of financial regulations under the Glass-Steagall Act, which was enacted after an earlier orgy of greed on Wall Street during the 1920s and the great stock market crash in 1929. These regulations were designed to backstop our imperfect moral sensibilities.
Now both of these restraints are gone. The partnership model has been replaced by a public stock ownership model in which the top executives take risks only with other people’s money and benefit from trading commissions and bonuses based on short-term profits. And thanks to heavy bank industry lobbying, the Glass-Steagall Act has been repealed. The new Dodd-Frank regulations, enacted after the 2008-2009 financial meltdown are much weaker and are already under attack. Worse yet, there is now a prevailing climate of amoral group-think on Wall Street. Since everyone else is doing it, it’s OK to exploit your customers if you can.
The problem with this ethic is that it produces rot in the foundation of the system. Predatory, exploitative behavior – rampant greed – destroys trust, and trust depends on moral behavior. Indeed, it was a loss of trust that lay at the heart of the financial meltdown that has done so much harm to our economy and our people. When the banks stopped trusting one another because of doubts about their honesty and their behavior, the system “froze up.”
So, the way out of the woods for Wall Street seems clear. The principle of honest dealing and fiduciary responsibility must be reinstated as a basic moral standard that everyone should adhere to, and this must be backed by tougher and more zealously enforced rules. As Adam Smith himself warned in his earlier work, The Theory of Moral Sentiments, everything in a free market depends on a moral foundation of trust and “justice” (not doing “injury” to others). As a Stoic and Christian, he stressed that “There can be no proper motive for hurting our neighbor.”
Saturday, March 17, 2012
Saturday, March 10, 2012
When “Denial” Can Be Deadly
Have you noticed? We’re in a war for our survival.
We are faced with a truly alarming world-wide survival crisis, yet the global response so far has been (largely) myopic and self-destructive. I’m talking about climate change, of course. There is good reason to believe that the situation is much worse than most of us realize, thanks to the disinterested work of some respected independent researchers and accumulating evidence. (I’ll get to this.) If we don’t wake up from our delusional complacency and take drastic remedial steps, now, we are likely to see a global catastrophe within most of our lifetimes.
Here’s one factoid that might get your attention. California currently produces about one-quarter of all the fruits and vegetables consumed in the U.S. each year. As desertification creeps northward during the next 20-30 years, California may experience a mega-drought. It’s happened before. Among other things, this would have a huge impact on global food prices, and it will affect you personally. And this says nothing about the potential shortage of rainfall in our Midwest grain belt. Oh, and don’t plan on moving to Texas.
The definition of a climate denier is somebody who still thinks the Titanic is unsinkable, despite the evidence to the contrary. Well, we are rapidly approaching that iceberg, and we need to make a radical course change before it’s too late.
Who says so, you might ask? In fact, a small but growing number of researchers who are free to look objectively at the data and draw realistic – not politically correct – conclusions. One of the most prominent is the respected scientist William Calvin at the University of Washington, who has written sixteen books, including three increasingly-urgent books about climate change. (http://williamcalvin.com) Then there is the new independent study by Nathan Myhrvold, the well-known former chief technology officer at Microsoft and his co-author, the respected climate scientist Ken Caldeira (Environmental Research Letters, 7, 2012). There is also a new report in the works from the authoritative Intergovernmental Panel on Climate Change (IPCC).
Here is the situation in a nutshell. Climate change is happening much more rapidly than was previously estimated; the consensus projections have been much too conservative. The upcoming report from the IPCC is said to contain a new estimate that average U.S. temperatures will increase by two degrees Fahrenheit by 2028. (The global average increase will be 2.6 degrees by 2048.) More important, these averages smooth out and obscure the increasingly violent local weather extremes that will become the norm – devastating droughts, massive floods, deadly heat waves, raging wind storms, rampant rain forest fires, rapidly melting polar ice caps and rising sea levels and, most serious, drastic shortfalls in food production, deadly civil conflicts and even, possibly, the collapse of some populations and civilizations. As Calvin puts it, “the most pessimistic scenarios in the past have not been pessimistic enough…Things will probably be much worse and probably much sooner” than we are expecting. In any case, he asks, “why gamble?”
The heart of the problem is that it is already too late for measures that would only slow the increase in carbon dioxide emissions – like conversion to solar, wind and nuclear power. To reduce the impact of global warming, we must also reduce the 40 percent excess of heat-trapping CO2 gases that are already in the atmosphere. In other words, we must clean up the mess we have already made. Calvin estimates that we should extract something like 30-60 gigatons of carbon per year from the atmosphere for the next 20 years -- or sooner if possible. An idea like doubling the global stock of forests (to increase photosynthesis) is not nearly enough to do the job and is not really feasible.
Calvin proposes instead a massive program to develop vast plankton farms off the continental shelves, with windmills to drive push-pull pumps to help create plankton blooms and recycle their wastes into the ocean depths. He calls for a program comparable to the Manhattan Project in World War Two, which led to the Atomic bomb. Of course, our all-out national effort in that war was possible only because the attack at Pearl Harbor shocked this nation out of its head-in-the-sand denial about the threat we faced.
This time, we will need to use our rational faculties and our imagination as a way of overcoming our innate tendency to avoid “an inconvenient truth” (to borrow the title of Al Gore’s climate change movie). Perhaps we should all read the Pulitzer-prize winning scientist Jared Diamond’s profoundly disturbing book about the fate of past civilizations called Collapse. And if you don’t like Bill Calvin’s proposed solution, maybe you can come up with a better one, because this is a problem that cannot be wished away. We will have to muster the collective courage (and resources) to move beyond the denial stage -- or else.
We are faced with a truly alarming world-wide survival crisis, yet the global response so far has been (largely) myopic and self-destructive. I’m talking about climate change, of course. There is good reason to believe that the situation is much worse than most of us realize, thanks to the disinterested work of some respected independent researchers and accumulating evidence. (I’ll get to this.) If we don’t wake up from our delusional complacency and take drastic remedial steps, now, we are likely to see a global catastrophe within most of our lifetimes.
Here’s one factoid that might get your attention. California currently produces about one-quarter of all the fruits and vegetables consumed in the U.S. each year. As desertification creeps northward during the next 20-30 years, California may experience a mega-drought. It’s happened before. Among other things, this would have a huge impact on global food prices, and it will affect you personally. And this says nothing about the potential shortage of rainfall in our Midwest grain belt. Oh, and don’t plan on moving to Texas.
The definition of a climate denier is somebody who still thinks the Titanic is unsinkable, despite the evidence to the contrary. Well, we are rapidly approaching that iceberg, and we need to make a radical course change before it’s too late.
Who says so, you might ask? In fact, a small but growing number of researchers who are free to look objectively at the data and draw realistic – not politically correct – conclusions. One of the most prominent is the respected scientist William Calvin at the University of Washington, who has written sixteen books, including three increasingly-urgent books about climate change. (http://williamcalvin.com) Then there is the new independent study by Nathan Myhrvold, the well-known former chief technology officer at Microsoft and his co-author, the respected climate scientist Ken Caldeira (Environmental Research Letters, 7, 2012). There is also a new report in the works from the authoritative Intergovernmental Panel on Climate Change (IPCC).
Here is the situation in a nutshell. Climate change is happening much more rapidly than was previously estimated; the consensus projections have been much too conservative. The upcoming report from the IPCC is said to contain a new estimate that average U.S. temperatures will increase by two degrees Fahrenheit by 2028. (The global average increase will be 2.6 degrees by 2048.) More important, these averages smooth out and obscure the increasingly violent local weather extremes that will become the norm – devastating droughts, massive floods, deadly heat waves, raging wind storms, rampant rain forest fires, rapidly melting polar ice caps and rising sea levels and, most serious, drastic shortfalls in food production, deadly civil conflicts and even, possibly, the collapse of some populations and civilizations. As Calvin puts it, “the most pessimistic scenarios in the past have not been pessimistic enough…Things will probably be much worse and probably much sooner” than we are expecting. In any case, he asks, “why gamble?”
The heart of the problem is that it is already too late for measures that would only slow the increase in carbon dioxide emissions – like conversion to solar, wind and nuclear power. To reduce the impact of global warming, we must also reduce the 40 percent excess of heat-trapping CO2 gases that are already in the atmosphere. In other words, we must clean up the mess we have already made. Calvin estimates that we should extract something like 30-60 gigatons of carbon per year from the atmosphere for the next 20 years -- or sooner if possible. An idea like doubling the global stock of forests (to increase photosynthesis) is not nearly enough to do the job and is not really feasible.
Calvin proposes instead a massive program to develop vast plankton farms off the continental shelves, with windmills to drive push-pull pumps to help create plankton blooms and recycle their wastes into the ocean depths. He calls for a program comparable to the Manhattan Project in World War Two, which led to the Atomic bomb. Of course, our all-out national effort in that war was possible only because the attack at Pearl Harbor shocked this nation out of its head-in-the-sand denial about the threat we faced.
This time, we will need to use our rational faculties and our imagination as a way of overcoming our innate tendency to avoid “an inconvenient truth” (to borrow the title of Al Gore’s climate change movie). Perhaps we should all read the Pulitzer-prize winning scientist Jared Diamond’s profoundly disturbing book about the fate of past civilizations called Collapse. And if you don’t like Bill Calvin’s proposed solution, maybe you can come up with a better one, because this is a problem that cannot be wished away. We will have to muster the collective courage (and resources) to move beyond the denial stage -- or else.
Thursday, March 1, 2012
“Moral Hazard” or Moral Myopia?
The psychological principle of “just deserts” has run amok.
During one of the Presidential TV debates, Representative Ron Paul was asked whether a person who does not choose to purchase health insurance coverage should later be refused medical treatment if he/she is unable to pay for it, even if it is life-threatening. Rep. Paul -- a physician who opposes the new “Obama care” health insurance mandate -- responded (to loud audience applause) that people should accept the consequences for their decisions. In other words, the needy person should be allowed to die.
This was a particularly egregious example of the currently fashionable economics term “moral hazard” -- the idea that a person should pay for their voluntary bad decisions, whether it be failing to purchase health insurance or defaulting on their home mortgage. In both cases, so the reasoning goes, people should have known the risks, and “irresponsible behavior” should not be rewarded. This would only encourage more of the same.
There is, in fact, much evidence that our innate sense of justice and fairness includes the principle of “just deserts” -- due rewards for merit and, conversely, equivalent punishments for our transgressions and the harm we may inflict on others. For instance, many Americans are still angry about the taxpayer bailouts for the Wall Street banks in 2009 followed by a quick return to giving multi-million-dollar bonuses to the bank executives who had caused the financial meltdown. It seemed they were being rewarded for their malfeasance.
There is also much evidence, both in economics and in psychology, that our behavior is influenced by various “incentives” -- the potential for rewards and the risk of penalties. Thus, health insurance co-pays are often used to deter the overuse of covered services. Likewise, good health habits may be rewarded with lower premiums, a good driving record may result in lower auto insurance premiums -- and vice versa. And gambling casinos can be depended upon to keep your money when you lose.
But many situations in life are more complicated, especially when it involves public policies that encompass a large class of our citizens. There is an old saying “you can never do just one thing” – meaning that there may be many indirect and unintended consequences associated with your actions, and these unanticipated effects may outweigh what you intended to do. Thus, a moral hazard may be the lesser hazard in some cases.
A prime example is the current debate over government assistance for distressed home owners. Early on, the Florida Attorney General opposed the idea with the warning: “Don’t reward those who simply choose not to pay their mortgage.” More recently, the CNBC TV commentator Rick Santelli opposed the new $26 billion package of mortgage relief measures saying that we should not “subsidize the losers’ mortgages.” Indeed, is it fair toward those who have conscientiously continued to pay their mortgages to aid those who have not?
What these and other critics seem to be saying is that, if a homeowner fails to make the payments on their mortgage, it’s their own fault. But wait a minute. The mortgage mess in this country is a lot more complicated than that. The vast majority of those who have fallen behind or defaulted on their mortgages are victims of the financial meltdown and the worst recession since the 1930s. They lost their job or saw their income dry up. The few who “chose” to stop paying their mortgages are already paying a price with a bad credit rating that will follow them for years to come and perhaps hinder their ability to get a future job. Do we refuse to help the many who involuntarily stopped paying their mortgages to avoid rewarding the undeserving few? Why not screen the applicants to weed out the “cheaters”?
Then there are the many millions of homeowners who have not defaulted but are struggling with high payments and can’t refinance at today’s lower interest rates because the current value of their home, thanks to the recession, is worth less than the mortgage. Helping these “underwater” mortgage holders to refinance is hardly a case of moral hazard.
Of course, there are also homeowners with mortgages they should never have taken on in the first place. Some no doubt can be blamed for these mistakes. But what about the predatory mortgage brokers who knowingly seduced people who were not qualified to take on “toxic” mortgages that they could not pay, or who trapped mortgage applicants with “teaser rates” and well-hidden escalator clauses? Who is really to blame?
There is also another fairness principle that needs to be considered here. Most of us are more than willing to help those who have what could be called “no-fault” needs (to borrow an insurance industry term) -- needs that are not the victim’s fault. Hurricanes, tornadoes, earthquakes and tsunamis are obvious examples. We don’t blame the victims in these cases. Nor should we blame the victims of an economic tsunami.
Indeed, most of us are inclined to give people a second chance if they are willing to learn from their mistakes. We do this for corporations when they are allowed to declare bankruptcy and start over. And even our all-knowing credit agencies allow people to rebuild their credit scores over time.
Finally, there is the huge indirect benefit that the $26 billion mortgage relief program could provide to every homeowner if it helps to revive our moribund housing market and increase home values.
So let’s keep moral hazard in its place and stop the hypocrisy of applying it to homeowners while excusing the banks.
During one of the Presidential TV debates, Representative Ron Paul was asked whether a person who does not choose to purchase health insurance coverage should later be refused medical treatment if he/she is unable to pay for it, even if it is life-threatening. Rep. Paul -- a physician who opposes the new “Obama care” health insurance mandate -- responded (to loud audience applause) that people should accept the consequences for their decisions. In other words, the needy person should be allowed to die.
This was a particularly egregious example of the currently fashionable economics term “moral hazard” -- the idea that a person should pay for their voluntary bad decisions, whether it be failing to purchase health insurance or defaulting on their home mortgage. In both cases, so the reasoning goes, people should have known the risks, and “irresponsible behavior” should not be rewarded. This would only encourage more of the same.
There is, in fact, much evidence that our innate sense of justice and fairness includes the principle of “just deserts” -- due rewards for merit and, conversely, equivalent punishments for our transgressions and the harm we may inflict on others. For instance, many Americans are still angry about the taxpayer bailouts for the Wall Street banks in 2009 followed by a quick return to giving multi-million-dollar bonuses to the bank executives who had caused the financial meltdown. It seemed they were being rewarded for their malfeasance.
There is also much evidence, both in economics and in psychology, that our behavior is influenced by various “incentives” -- the potential for rewards and the risk of penalties. Thus, health insurance co-pays are often used to deter the overuse of covered services. Likewise, good health habits may be rewarded with lower premiums, a good driving record may result in lower auto insurance premiums -- and vice versa. And gambling casinos can be depended upon to keep your money when you lose.
But many situations in life are more complicated, especially when it involves public policies that encompass a large class of our citizens. There is an old saying “you can never do just one thing” – meaning that there may be many indirect and unintended consequences associated with your actions, and these unanticipated effects may outweigh what you intended to do. Thus, a moral hazard may be the lesser hazard in some cases.
A prime example is the current debate over government assistance for distressed home owners. Early on, the Florida Attorney General opposed the idea with the warning: “Don’t reward those who simply choose not to pay their mortgage.” More recently, the CNBC TV commentator Rick Santelli opposed the new $26 billion package of mortgage relief measures saying that we should not “subsidize the losers’ mortgages.” Indeed, is it fair toward those who have conscientiously continued to pay their mortgages to aid those who have not?
What these and other critics seem to be saying is that, if a homeowner fails to make the payments on their mortgage, it’s their own fault. But wait a minute. The mortgage mess in this country is a lot more complicated than that. The vast majority of those who have fallen behind or defaulted on their mortgages are victims of the financial meltdown and the worst recession since the 1930s. They lost their job or saw their income dry up. The few who “chose” to stop paying their mortgages are already paying a price with a bad credit rating that will follow them for years to come and perhaps hinder their ability to get a future job. Do we refuse to help the many who involuntarily stopped paying their mortgages to avoid rewarding the undeserving few? Why not screen the applicants to weed out the “cheaters”?
Then there are the many millions of homeowners who have not defaulted but are struggling with high payments and can’t refinance at today’s lower interest rates because the current value of their home, thanks to the recession, is worth less than the mortgage. Helping these “underwater” mortgage holders to refinance is hardly a case of moral hazard.
Of course, there are also homeowners with mortgages they should never have taken on in the first place. Some no doubt can be blamed for these mistakes. But what about the predatory mortgage brokers who knowingly seduced people who were not qualified to take on “toxic” mortgages that they could not pay, or who trapped mortgage applicants with “teaser rates” and well-hidden escalator clauses? Who is really to blame?
There is also another fairness principle that needs to be considered here. Most of us are more than willing to help those who have what could be called “no-fault” needs (to borrow an insurance industry term) -- needs that are not the victim’s fault. Hurricanes, tornadoes, earthquakes and tsunamis are obvious examples. We don’t blame the victims in these cases. Nor should we blame the victims of an economic tsunami.
Indeed, most of us are inclined to give people a second chance if they are willing to learn from their mistakes. We do this for corporations when they are allowed to declare bankruptcy and start over. And even our all-knowing credit agencies allow people to rebuild their credit scores over time.
Finally, there is the huge indirect benefit that the $26 billion mortgage relief program could provide to every homeowner if it helps to revive our moribund housing market and increase home values.
So let’s keep moral hazard in its place and stop the hypocrisy of applying it to homeowners while excusing the banks.
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