Sunday, April 5, 2009

Greed vs. Stupidity

David Brooks April 2nd column from The New York Times entitled “Greed and Stupidity” outlines the two competing viewpoints on what’s wrong with the economy.

The greed argument goes like this:

… The U.S. financial crisis is a bigger version of the crises that have afflicted emerging-market nations for decades. An oligarchy takes control of the nation. The oligarchs get carried away and build an empire on mountains of debt. The whole thing comes crashing down. Johnson’s remedy is clear. Smash the oligarchy. Nationalize the banks. Sell them off in medium-size pieces. Revise antitrust laws so they can’t get back together. Find ways to limit executive compensation. Permanently reduce the size and power of Wall Street.

The stupidity narrative goes like this:

… The primary problem is … that overconfident bankers didn’t know what they were doing. …

… You’d think that with thousands of ideas flowing at light speed around the world, you’d get a diversity of viewpoints and expectations that would balance one another out. Instead, global communications seem to have led people in the financial subculture to adopt homogenous viewpoints. They made the same one-way bets at the same time.

… What’s new about this crisis, he writes, is the central role of “opacity and pseudo-objectivity.” …

The greed narrative leads to the conclusion that government should aggressively restructure the financial sector. The stupidity narrative is suspicious of that sort of radicalism. We’d just be trading the hubris of Wall Street for the hubris of Washington. The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize what’s left of functioning markets.

Pick your poison, I suppose.

To me, your preference between these says a lot about your worldview and your politics.

I would say professional economists are currently divided about 50/50 on this.

Having said that, we’ve been down this road before and the greed narrative doesn’t tend to hold water through the passage of time. For example, everyone blamed greed for the dot-com meltdown of 7-9 years ago, but all the new technology we’ve gotten indicates that we were right to be greedy, but that we were stupid about where we were placing our bets.

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