…I suppose this applies to myself as well. When confronted with opinions that clash with my own view of the financial crisis and recession, my first step is often to find the loophole, the way around. Because obviously my view is right and so it is just a matter of working out the angles to knock down another sharp attack. All wonks do it. All politicians do it. Debates over the cause of the financial crisis are no different. But the stakes are high on this one, because the narrative of the cause of the crisis is shaping the response.
This is no clearer than in the debate over restricting the use of private-equity to recapitalize the failed banks in wake of the deep economic storm. Andy Stern, president of the hyperactive labor union SEIU, wrote in a WSJ op-ed this morning about the FDIC’s new proposed rules for how private capital can be used to save any of the 69 banks that have failed this year:
Meanwhile, private-equity stalwarts have been arguing against those guidelines. If we are to believe these guys, any attempt to rein in private equity’s ability to invest in bank deals would stifle investment and hinder economic recovery.
They promise they’ll play by the rules this time, that we can trust them, that they’re looking out for taxpayers. But we’ve played that game before. And we learned ordinary Americans pay the price when financial markets are unregulated and overleveraged deals—which initially thrived—eventually go bust.
This critique is playing into the narrative that “the market” did it. But there is no substance to this beyond the surface of the argument. It’s like blaming the gore of a bull for attacking a matador at the Running of the Bulls. But the gore is attached to the bull, and the bull charged because the guy ran out in front of him wearing red and taunting its mother. Sure we could regulate gores and have them all sanded down, but the real issue is people taunting the angry creatures.
Again, it is very easy to choose to see only what you want to see. Mr. Stern represents millions of employees and just wants to see their wages go up. That is his interest, even if it damages firms or states (like California).
For those that think the free market did it, the answer is obviously to scale back the free market. For those that just like to yell at the nasty derivatives, they are looking to attack them like Bud Seilig going after steroids and other PHSes. For those that want to blame Alan Greenspan alone, Henry Waxman has started a group on Facebook to air grievances.
My own take, as has been well chronicled on this blog, is that perverse government incentives teed up failures in the financial sector as banks and investors moved beyond the realm of prudence, to a state of euphoria over gains—excessive exuberance if you will—while resting in the comfort of government protect. I think virtually any critique of the free market system can be traced back to a government incentive or a social policy belief.
The quick and dirty would be that the government’s decades of subsidies for low-income housing eventually led to Washington pushing more MBSes on Fannie and Freddie, over saturating the housing market and expanding the toxic debt market (not to say that all MBSes are bad). The too big to fail policy entrenched over the past few decades instilled enough confidence in the big banks that they were too important to be left to die by the Fed or Treasury that they were fine leveraging themselves 50 fold. And the complaints about unregulated credit-default swaps, low lending standards, excessive debt, and the like would all be moot if Wall Street had a culture of understanding the ramifications of failure. But failure just meant leaning on the government, or at the very least, a consortium of friends.
It all combines to have a government under pinning. And when you bring the fact that most of us have a notion for how society should work, and how that influences us, you see even more clearly that the market didn’t fail us as much as it might have failed our desires. The market system is designed for profit and loss. And if we aren’t willing to accept loss as a society, if big failures exceed our pain tolerance, then of course we’re more likely to blame the system. But that is derived from a misunderstanding of the system and, like Mr. Stern, is trying to use a surface level issue to promote one’s desired social norms. Understandable practice, but harmful for everyone in the long-term.