In-depth analysis on Credit Writedowns Pro.

Greed is not good

gordon-gekko In the 1987 movie classic Wall Street, the sinister protagonist Gordon Gekko played by Michael Douglas gives this famous quote:

In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you. I am not a destroyer of companies. I am a liberator of them! 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.

Since that time, this quote has become famous as the “Greed is Good” philosophy of capitalism.  Gekko symbolizes an era in which it is believed that the free hand of market capitalism will steer the economy efficiently and effectively with little need for government intervention or regulatory oversight. Instead, so the theory goes, we are each allowed encouraged to pursue our manifest destiny of getting filthy rich. Screw everybody else.

Well, let me tell you something greed is not good.  Greed is corrosive and it is tearing at the very fabric of our democracy. A generation ago most people in America worked for a few institutions in their lifetimes.  Many had employer-paid healthcare and employer-financed defined benefit pension plans.

But, since the 1980s the moorings have come off and set us adrift in a world of economic insecurity.

  • Job insecurity has increased dramatically, especially as reflected in part work statistics(see here and here). This has resulted in deteriorating health and declining work safety.
  • The healthcare debate is front and center in the US today. Yet, incongruously, the focus has mainly been on how ‘socialist’ proposed remedies appear.
  • And defined benefit has been almost completely replaced with 401(k) plans, leaving retirees to face potential economic hardship in old age.

This is “the Great Risk shift” in which corporations in pursuit of shareholder value (remember ‘greed is good’) have sloughed off as many economic risks onto ordinary Americans as they could reasonably get away with. This is crony capitalism, not free market capitalism. And a anesthetized American public has put up with this. I continue to ask myself why.

Maslow’s hierarchy of needs was very much on display earlier in the year as we entered the worst of this financial crisis. Everyone felt vulnerable. But now that recession is over, it does seem that America is returning to business as usual, both on Wall Street and on Main Street.

What I find most galling is that just one year ago Barack Obama was saying, “Elect me! Elect me! I am change you can believe in. But, no sooner does he enter office and he continues the massive bailout of the financial services industry that was begun by the predecessor administration. And today there are really no substantive regulatory changes on offer by this Administration. It was this same support for the financial elite at the expense of the middle class which has led to a widening gulf in income and wealth.

And by the way, if you haven’t noticed, real incomes are lower now than 36 years ago.  So, this is certainly not change I believe in…yet. And given many of the players today are the same as they were before the crisis, don’t expect any real change. Apparently the only thing that is going to induce change in Washington (or London) is a horrific depression.

So, what about greed then? Roger Bootle takes this on in his latest book, “The Trouble with Markets,” which I highlighted earlier in the week. Here is how the Telegraph quotes him:

The free-market vigilantes are already rushing to defend the unfettered market system. Their defence is based on one or other of three arguments. First, the market solution is to let failing financial firms fail. If the state intervenes to stop this, the blame for the resulting mess cannot be laid at the door of the market system. Second, banking has been a heavily regulated activity. The regulators have failed in their job. Third, the monetary policy authorities should have paid more attention to the growth of money and credit and the resulting inflation of the property market bubble.

In this way, they try to argue that what seems on the face of it to be a failure of markets is in fact a failure of government. So the solution, they say, is not less freedom for markets but more.

These people are dangerous. The idea of letting the financial system implode and then waiting for the market to bring spontaneous, healthy revival out of the wreckage might read well on the pages of a book, but in the real world it would bring human misery on a gigantic scale. In today’s society, people simply will not tolerate it. If that is what the market system is about then they will have none of it; and rightly so.

Have a go at the full article linked below. Bootle makes some very good points. I liked his last book, “Money for Nothing”. So I suspect his new book is a good read too.

Greed isn’t good– it’s dangerous – Telegraph

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

10 Comments

  1. fred says:

    There’s nothing wrong with greed, it’s a basic human emotion. In a true capitalist system, greed is balanced by fear of failure, poverty, death, etc. The trouble with greed arises only when socialism takes the fore. The greedy soon learn that the brunt of their failure is borne by all, and the once effective regulation by natural selection becomes ineffective. Then the system is left trying to regulate every individual action that may hurt the group. The result is tyranny.

    Greed is not the problem.

    • Greed is not ‘bad’ anymore than greed is ‘good.’ But left unchecked, greed leads to sub-optimal outcomes. This is a view at odds with the central tenet at the heart of the prevailing view in economic orthodoxy.

      The question is whether we should let market forces (loosely defined by ‘greed and fear’) dictate substantially all economic outcomes in society.
      My answer is no.

      The trouble with greed DOES arise when socialism takes the fore. It’s called crony capitalism and it can only be stopped by adequate regulatory oversight.

      • fred says:

        As I mentioned above, greed is not “unchecked” under a true capitalist system. It is checked by respect for the consequences of unbridled greed. The “sub-optimal outcomes” are suffered by the ones who allow their greed to overcome their good judgement.

        Unfortunately, what we have is not a capitalist system, not any longer. Socialism has transferred responsibility from the individual to society, and the events of the past two years have furthered that process. What you are suggesting now, “further regulatory oversight” is simply the next step in the path toward tyranny. There will never be a good stopping point in your regulatory process, because humans will always strive for maximum personal advantage in every endeavor. Eventually the government must regulate every activity, for the good of society of course.

        You may think that prudent people can stop “regulating” at a prudent point. But, once the risks are socialized, and we are well down that road in every aspect, then that’s not possible. So, I say again, greed is not the problem, nor is regulation of greed the answer. Market discipline is the answer, the only check for greed that works short of totalitarianism.

        • That makes zero sense to me. It sounds like an advocacy of self-regulation which doesn’t work. The only thing that keeps people from embezzlement, perjury, or murder is not market discipline, it is the threat of law. That is the function that regulators serve. They are there to enforce the rules of the game.

          Are you telling me that banks wouldn’t try to securitize liar loans if ‘market discipline’ held them in check. That is preposterous. The risk has been offloaded onto a third party. Again, this is why regulations exist.

    • LavrentiBeria says:

      Greed, son, is one of the seven Cardinal or Deadly Sins. It is so destructive of the spirit that an act of God is required to correct its trajectory and annul its effect. You may want to begin giving consideration to the opinion of experts on the question, something rarely done in a culture that today does most of its educating on morality in college dorm room discussions. You’re worth more than that kind of abasement, eh?

      • Greed IS one of the seven deadly sins. Yes, it is a natural human emotion. But not one that should be flaunted as something to be proud of. We have to be realistic about whether we can control greed and fear or whether we should allow them to play out on some measured scale.

        But, it shows an enormous change in attitudes and beliefs for people to run around saying “Greed is Good.” It’s absolutely deplorable and will be the ruin of us.