Monday, January 5, 2009

Human Nature and the Failure of Our Institutions

We start the New Year hopeful that it will be better than last year, but here is a suggestion: let’s go beyond ‘hope’ to examine one of the many things that went wrong in 2008, particularly in the financial sector, and how we can begin to fix the problems.

One of the fundamental, recurring problems, as I see it, is the assumption that human beings will act for their benefit and the benefit of others if they are acting out of self-interest. A corollary of this mistaken assumption is that people regulate each other, or that the market disciplines itself, and so the less interference you have in the marketplace, the better for everybody around.

Yet when investment banks were allowed to take on unprecedented debt, in 2004, not only did they do so, but they did it to the detriment of their shareholders. Again, when mortgage brokers were allowed to peddle subprime mortgages to those who did not understand them, or who were themselves riding the real-estate boom, on no or shaky documentation, these brokers did it enthusiastically. When politicians were allowed to accept millions from banks, brokers, and other financiers, to promote the “American Dream” of owning a home, these politicians took the money and ran to their bully pulpits to hawk what became an American Nightmare. When Henry Paulson was given $350 billion, with little strings attached from Congress, guess what Mr. Paulson did? Here a clue: he didn’t do what he said he would do, the banks that received this money kept it, and we are no closer to helping los de abajo, those at the bottom of the heap.

The Securities and Exchange Commission failed us. The Federal Reserve failed us. The United States Congress failed us. The President failed us. Many of our banks failed us. Mutual funds failed us, for charging us too much for mediocre returns. Moody’s and Standard and Poor’s failed us, for not rating risk the way they should have, for accepting money from the very institutions they were rating. Even the media failed us. Today, newspapers and TV shows are doing double time to expose the shenanigans which led to the debacle of 2008, but during the boom most of them were cheerleaders for the financial sector, for promoting mortgages to people who couldn’t pay them, for innocuous, celebrity-obsessed, simplistic reporting that eschews complexity, thoughtfulness, and precise criticism. The media were giving us the lowest common denominator, what produced the most ratings, and so in the end we failed ourselves, for not demanding something better when it mattered most, before 2008.

Human beings will take advantage of a situation, if they can profit from it, and if they don’t see it will affect others terribly and immediately, and if they are allowed to do so. So many large and small actors in our debacle performed in this way: why even think about the long-term, or the big picture, if I can get away with it, and if it brings me benefit, and if it’s strictly legal? Of course, millions of these selfish decisions, and a few of these selfish decisions worth billions of dollars, did corrode our general welfare, did damage our financial sector, and are now giving the world pause about whether they should keep lending us billions to keep us afloat.

The point is not to regulate for the sake of regulation, or to assume government will be immune from its own special brand of corruption. It won’t. But there is a crying need for common sense legislation or regulation that protects us from our own excesses, that forces upon us a sense of the general, long-term financial welfare of our country, that safeguards the consumer from predators, that encourages and funds the vigorous investigation of the powerful and well-connected to keep them honest, even when they claim nothing is wrong. Let’s not hope people do the right thing; let’s make sure of it.