To this point, John McCain has maintained that the “fundamentals of our economy” are sound. But with the almost daily announcement that another of America’s most important finance firms has failed, McCain seems to be changing his position, just like Obama once did on the Surge, public financing of election campaigns, and other issues. McCain said this on Tuesday morning:
We are in crisis. We all know that. The excess, the greed and the corruption of Wall Street have caused us to have a situation which is going to affect every American. We are in a total crisis.
I understand that he’s trying to strike a populist note. But real leadership means contradicting and correcting the masses when they’re confused, not capitulating to the conventional wisdom. McCain should have kept quiet.
How many of your average Obama supporters can explain what the “fundamentals of the economy” are and offer up some real evidence that they’re not sound. Preferably something more than a shoulder shrug.
Yes, there is a crisis in our economy, because the money market isn’t in its own little bubble. It’s connected to the labor market and the market for goods and services. The turmoil in the financial sector threatens the other areas of the economy. But that doesn’t mean that the fundamentals of the economy are not strong: people are still working, businesses are still producing, consumers and businesses are still buying goods and services. I hope that doesn’t change.
But Obama’s, and now McCain’s, telling people that the economy is going down the toilet will only worsen the situation by convincing them to alter their behavior (e.g., stop buying) contrary to the real intuitive economic indicators in their own communities. Then the economy really could go down the toilet. Obama would find a scapegoat, of course, namely Bush.
A far bigger problem than the short-run performance of the economy is the precedent being set for government intervention in the private sector. How many young Obama zealots have spent five minutes pondering the implications of that?
When Barack Obama stands up and over-confidentaly tells a crowd of salt-of-the-earth types that John McCain is out of touch and the economy is in crisis — and they at least know that — Obama is pandering to them. They don’t know any such thing. It’s an old trick: get people to believe something by treating them as if they know something that everybody else knows, and in order to avoid appearing as stupid as they feel, they accept it. It’s peer pressure. People: just say NO!
McCain shouldn’t succumb to peer pressure from Obama on this point. That’s not leadership. Instead, he should point out to people that Barack Obama is manipulative and doesn’t know what he’s talking about. And, to try to win a few points in the polls, Obama is genuinely endangering the economy with his baseless economic jeremiads.
McCain has adopted the greed motif that has become a commonsense explanation of what’s happening in the world of finance. That’s an adequate explanation in some contexts, exactly as if I were to say that the problems in the financial sector are caused by sin. True enough, but without immediate application to questions of public policy. Likewise with greed talk.
Who can explain where “greed” enters into the picture of what’s happening on Wall Street? Answer: it doesn’t. Greed has nothing to do with it, at least not that any of us can ever detect. Which of us can look into someone’s soul and judge?
Are the taxpayers greedy for not wanting to spend money to help liquidate these firms? Are the voters greedy because they’re listening to Barack Obama tell them that they don’t deserve this? Are you greedy for wanting free health care? “Oh no, I deserve that.”
The hypocrisy takes my breath away!
Not that there’s even a person in view here. Nobody talks about the greed of Mr. So-And-So. It’s just “corporate greed” or “Wall Street greed” or some such nonsense. (I’m going to start talking about voter greed regularly.)
What is corporate greed, pray tell? A corporation may be a person for legal purposes, but certainly not for moral purposes.
So what real person’s greed caused the problems for these firms?
Were the governors of the Federal Reserve Board acting on their greed by keeping the money supply too large, keeping interest rates too low, and making it too easy for banks to lend to people?
Were mortgage brokers and salespeople being greedy when they tried to provide mortgages for homebuyers? They wanted too many big commissions, and so they put our entire economy and all the taxpayers on the line for the sake of a few extra bucks. Is that the story?
Was middle management at these firms being greedy? What was their incentive, I wonder.
Was top management and the CEOs of these firms motivated by greed? They made their decisions just based upon how it would affect their bonuses, with nary a care about how their employees, shareholders, or other people would be affected?
Were the boards of directors of these firms being greedy? What was their incentive, I wonder, to recklessly endanger their companies.
Or perhaps the shareholders were being greedy.
(I’m just waiting to hear some liberal nut try to blame everything on Bush, Cheney, Haliburton, and Al Qaida — all working together!)
Who in this big chain was motivated by greed? The homebuyers, the mortgage salespeople, the managers, the top executives, the boards of directors, the shareholders, or the government?
It’s easy to talk about greed in the abstract. You don’t have to blame any particular real person. Chest out, smug expression, finger wagging, tone of self-righteous indignation: “It’s all due to corporate greeeeeed.”
And even if a person is greedy, why do you care? What matters is whether they make sound decisions, isn’t it? Isn’t the problem facing Wall Street due to bad decision making? Greed doesn’t bring down a firm. Bad decisions do. Bad decisions might be motivated by greed — or ignorance, or confusion, or bad instincts, or bad information — but since it’s bad decisions that have created the problems, why talk about greed and not foolishness or bad luck?
The problem is that when you look at every one of the players — the homebuyers, mortgage salespeople, managers, executives, directors, and shareholders — there’s no evidence that individual people in any of these groups made foolish decisions because they were greedy.
The homebuyers were trying to get the best value for their money. What’s wrong with that? Did some lie about their income or assets? If so, the problem isn’t greed but dishonesty that induced the lenders to make a bad lending decision, out of ignorance.
The salespeople were trying to make the best living possible. What salesman doesn’t try to sell as many of his products as he can? Is that greed? I call that doing your job well. But, if the salesman lies or misleads, whether the homebuyers or the bank’s managers, then the problem isn’t greed but dishonesty that induced homebuyers and lenders to make foolish borrowing and lending decisions — out of ignorance.
Were the managers motivated by greed when they didn’t clamp down on all the loan originations? They’re taking instructions from the executives. I don’t think middle management can possibly bear any responsibility here.
Now we’re getting to the real bogey men: the CEOs, those evil greedy CEOs who swim in pools of money, while Lazarus, covered in sores, lies begging for a crumb at their doorstep. Surely they were motivated by greed. (How many people who believe this have ever known a CEO, I wonder. How many people who repeat this hogwash don’t know what CEO stands for, I wonder.)
Let’s get this straight: someone works his entire life finally to end up in the driver’s seat of a major corporation, only to trash the company for the sake of lining his own pockets. Is that the idea? Of course not. There is no idea. That’s my point. If CEOs made foolish decisions, call them foolish. There’s no basis for moralizing and talking about greed. CEOs are responsible to their customers, their employees, and most of all to their shareholders, and they answer directly to a board of directors. I don’t believe there are any CEOs who aren’t doing as good a job as they know how to balance the best interests of all those parties.
“Oh, but they weren’t personally greedy. They were greedy for the corporation. Trying to maximize its profits.”
Is that so? Here’s news for you, kid: that’s called doing a good job. If they tried to maximize profits now at the cost of future earnings, by taking too many risks that ended up causing the firm to fail, that’s called foolishness or ignorance, not greed.
The same applies to boards of directors.
Now finally we come to the shareholders. And that includes you and me, unless you’re a bona fide socialist who expects Barack Obama to house you in a government Quonset hut and feed you MREs in your golden years.
Shareholders are mostly ordinary folks. They’re saving for retirement. Or their children’s college education. And they want the best return on their savings possible. Just like the homebuyer wanted the best house value, the salesman wanted the most commissions possible, and so on up the line.
So here’s a question for you, Mr. Shareholder: if your investment in Firm X returns you 5% per year, but Firm Y’s shareholders have been getting 10% per year, what are you going to do with your investment in Firm X, ceteris paribus (which means, all else being equal)? You’ll liquidate it and put it into shares of Firm Y. That’s not greed, it’s doing a good job in managing your investments in pursuit of your retirement goal or your child’s education fund.
What if it turns out that Firm X is only returning 5% per year because they have a very strict mortgage lending policy, whereas Firm Y lends to all and sundry? After all, housing prices keep going up and up and up, and there’s more than enough money to go around. What happens is that Firm X’s stock falls in price as its investors sell it to buy Firm Y’s stock instead. It’s all supply and demand, and if X and Y are subsitutes but Y has better features (a higher return), demand drops off for X, sending its price down,
Now the Board of Directors at Firm X is in a bind. Their responsibility to their remaining shareholders is to deliver the best return possible over the long run. But the share price is falling. Shareholders aren’t happy. They have a retirement to save for! They have a college education to finance! The shareholders are going to replace the boardmembers with new ones if they don’t generate a better return. So the board wants the CEO to adopt a more liberal lending policy, and pretty soon the return of Firm X is comparable to the return of Firm Y.
You see, there’s competition in both markets: the market for capital (the market the shareholders are participants in) and the market for final goods and services (the market the homebuyers are in). Firm X has to adopt a liberal lending policy to attract business, generate a good return for its shareholders, and help them to finance their retirement or college education.
Nobody is being particularly greedy. Everybody is making the best decision they know how with the information they have available to them.
Or, we could look at it from the opposite angle and say that everybody is being greedy, including the voters and taxpayers! If it’s true of one group, it’s true of all of us, because we’re all in analogous positions and making analogous decisions.
But greed is a red herring. The real problem is ignorance and foolishness. The question is whether some people are culpably ignorant, culpably dishonest, or culpably reckless with other people’s assets. The problem with moral hazard is that people who engage in it are behaving rationally from their own standpoint. And whether greed is the motivating force is irrelevant to our public discourse. If you’re talking about greed, you’re not critically distinguishing political rhetoric from reality.
Getting back to the presidential election now, what we need is more leadership from both John McCain and Barack Obama. Obama is a motivator, never a leader. McCain has been a leader until recently. Leadership means being willing to be unpopular. If that means he doesn’t get elected, then hopefully Americans will at least learn something for the future. And if they won’t abide correction, maybe they’ll have to learn the hard way. But leadership means telling people things they don’t want to hear because it’s for their good — something Barack Obama has never done in his entire life, so far as I can tell.
John McCain should not have adopted the moralistic self-righteous greed talk of Obama and his young untutored devotees. We need someone who will help our confused electorate think more carefully about these important matters.
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