Why We Need Greed

This commentary first aired on the PBS program Nightly Business Report .

Maybe we should have been a little nicer to all those greedy guys who wrecked Wall Street. Because we could use some greed right about now.

Hey, I understand -- we need some villains to blame for our economic mess, and they can't be us -- that old comic strip still isn't funny. The rich guys who ran the profligate banks are the obvious targets. They care about making money above all else, and for that, they've been trashed by politicians and voters alike.

So now we have banks that don't want to make money. They just want to sit on the money they have and make sure they don't lose it. They're afraid to be greedy, so they're being careful instead.

I liked it better when the banks were greedy. Back then, they'd loan money to people who needed it, because they'd make a profit on the loan. They made a lot of profits, which made them eager to lend a lot of money. Some of the people who borrowed the money even used it to make their own profits, by expanding a business or buying a house. When it was the little guy getting ahead, we didn't call it greed; we called it building a better life.

It used to be nice to invest in greedy companies, too, because they earned profits and their stock went up and your retirement portfolio got bigger. We didn't want them to steal or lie, but we all understood that in the Greedy Economy, the whole point of public companies was to make money.

Now we seem to have a Nonprofit Economy. Greed is unfashionable, so we're begging banks to lend money for the good of the planet or to feel better about themselves. And big surprise, bankers don't even speak that language. When there's something in it for them, that's when they'll open for business once again. Maybe there will be something in it for the rest of us, too.

Comments

[Ramani:]

We don't need Greed. That's not the right word for running profitable business. What we need is Confidence.

2008 Oct 24 02:57 PM

[GeminiAtlas:]

I would say that is what "risk management" is all about. In a market system, the greed (for profit) is balanced with fear (of loss). So when the table is skewed to the greed side (by congress, Fed, etc) it created an incentive to be greedy as possible without the balancing "fear" to keep folks from overextending themselves. Now those losses are being realized because the risk is always there now matter how you try to mitigate it away. Wall street created these CDS, MBSs. and other financial vehicles as risk mitigation tools, but they only shifted the risk to the entire system, and therefore to the government which would "have to" save them because the banks are "too big to fail."

2008 Oct 24 03:53 PM

[JasonC:]

The Basel capital requirements for banks tell them how much reserve capital they must hold against an asset of a given risk class. Governments are the lowest, considered essentially risk free in credit loss terms, while corporates and loans are higher. If they have less capital and what to report themselves as "well capitalized" anyway, they have no choice but to increase their holdings of safe treasuries and decrease their holdings of corporates and loans.

When they all do this at once, credit spreads explode. Governments can borrow at 3-4%, first rate companies go begging while offering 10-11%.

The normal, elementary job of credit intermediation is to seek to profit from such spreads in perceived riskiness, to pick likely winners, borrow at the lower rates (available to banks on insured CDs etc) and lend at the higher ones.

If banks do not have sufficient capital to perform that intermediation function, then somebody else has to - and gets to. Gets to, because it represents a collosal profit opportunity just lying there in the street, that no one is picking up.

You can lend to the likes of American Express or Goldman today at double digits rates, for 5 years or for 30, in the secondary market in corporate bonds.

There are literally trillions sitting stock-still in money market funds yielding 2-3% or in CDs paying 3%, passing up those offers. Why? The retail saver doesn't have a Bloomberg terminal and doesn't know they exist. The men with said terminals are not authorized to increase their institutions' credit risk exposure.

The first major new fund or capital pool established to exploit this is going to make someone a billionaire within 5 years.

Why wait around for someone else to be greedy for you?

2008 Oct 24 04:10 PM

[Smarty_Pants:]

"The first major new fund or capital pool established to exploit this is going to make someone a billionaire within 5 years" - JasonC

Send your investments to:

Smarty_Pants Get Rich Quick Fund
Somewhere in the Cayman Islands

2008 Oct 24 05:04 PM

[moonbat1775:]

Couple greed to an honest banking system and we should do fine.
Now, about that honest banking system.

2008 Oct 24 05:23 PM

[global87:]

over extension is stupid

2008 Oct 25 08:43 AM

[carey_jim:]

Better to say that greed, prostitution, theft, murder and all that other good stuff will always be with us, so get used to it.

Greed isn't going away any more than war is. But neither is fear and mattresses either.

As a senior editor put it: People Don't Stop Smoking. But we don't have to gloat over the fact. It's better to buy cigarette companies if the P/E ratios are right, and get on with our lives.

Hey, if you live in San Francisco you can even vote to legalize prostitution and gay marriage too.

But don't moralize because no one listens anyway and if they did, it wouldn't do any good. It's a form of mental socialism that we are only allowed to practice on our children and relatives.

2008 Oct 25 01:47 PM

[mdmrjsds:]

Well then, I guess you don't have a problem with independent socialists. If someone sticks a gun in your belly and takes all your money, that is just being greedy. If someone creates a financial scheme that pretends to be risk free and takes all your money, that is just being greedy. If someone, say the government, creates a ponzi scheme that takes all your money, that is just being greedy. Greed is good!

Do you see the common thread among these. It is greed unconstrained by morality, by rules. The crisis we are experiencing isn't one of greed, it is the con game ending. Those without ethics have taken those with ethics for a ride. Hmmm, I liked it better where we were before, can we go back now? Soooorrrrryyyyy, there is no way back there from here, one way trap function.

There were real losses here. Suckers suffered them and they are hidden. That is the uncertainty. Like a game of old maid, no one wants to get stuck holding the bag. All the confidence in the world isn't going to change that. Someone has to pay the piper. I know, let's elect a tax and spend socialist as president and borrow from our great-great-great grandkids. We've already borrowed from all the intervening generations. Take that you little blighters. In the finest tradition of FDR and LBJ.

What a mess! And worse, the people dealing with it are clueless. They are like earth-centric astronomers dealing witht he effects of a sun-centric solar system on their theory. Like newtonian physicists dealing with relativistic effects. Their paradigm won't let them see the problem, so they stumble about blind.

2008 Oct 25 01:49 PM

[woodsey:]

I was there during the Great Depression. People took care of one another. Greed was gone. This culture extended into the New Deal. One manifestation was Social Security which I am benefiting from now. In 1980 greed came back. Republicans and Democrats alike thoght it was a great idea. Soon we shall have a president who will try to bring back a culture of caring. He will need our help.

2008 Oct 25 04:47 PM

[Urbane Gori...:]

There is a difference between 'unbridled greed' (as a Gordon Gekko character in 'Wall Street') and good business practices.

Unbridled greed encourages CEOs to line their own pockets while throwing their shareholders to the wolves. It means bald faced lies, cooking the books and leaving the mess for chance, the future managers, and in the most recent case the taxpayer to wipe their behinds.

Good business practice requires that you stay current in your business, not turn a blind eye to problems, be open and honest with your shareholders and do the sometimes unpleasant to maintain the integrity of your business, the people that work for you, your shareholders and ultimately, the taxpayers.

Good business models : CHK FCX AAPL DNA
Bad business models : AIG BAC GE SHLD

jegan ;-)

2008 Oct 25 07:55 PM

[moonbat1775:]

About that honest banking system: Fractional reserve banking started as a cheat by goldsmiths who issued claim checks to non-existent gold and continues today as a government backed banking cartel.

Greed is a matter of degree and opinion. Don't we all agree on basic honesty, though? The government cannot legislate against greed but it sure can require 100% reserves, can't it?

Fractional reserve banking STEALS via inflation for the benefit of the banks, borrowers, and to some extent the depositors of those PARTICULAR banks.

The system is set up to make victims and victimizers of the vast majority of us. When you borrowed money for your house, guess what? You drove up prices for the renter down the street. Are you content to oppress the poor that way? Are you proud that you made money by buying on margin when the money for the loan cheated others by inflation?

And to top it all off, the system is unstable as von Mises pointed out. It led to the Great Depression as he predicted. The Great Depression was a leading cause of World War Two which killed 50 MILLION and maimed who knows how many for life. It really is long past due that we have an honest and therefore stable banking system.

2008 Oct 25 07:56 PM