There’s a nice spat a-brewing between two people I hardly know, but nevertheless consider friends. The Epicurean Dealmaker offered some thoughts on financial reform, and in particular “resolution authority”. Yves Smith took exception. TED took exception to her exception taking. I suspect the sparks have just begun.
Me, I’m a lovah not a fightah, so I’ll split the difference. TED is right that constructive ambiguity and discretionary power are prerequisite to an effective, non-public-raping resolution regime. But Yves is right to take him to task for leaving things there, because whatever gets writ in the ex post memoirs, there are predictable and repeatedly observed incentive problems that prevent regulators from using discretionary authority until it’s too late (and then they whine to stenographers about how powerless they were). Read Michael Pomerleano and Andrew Sheng, or watch Richard Carnell, or check out l’il ol me. To be fair to TED, I know he is cognizant of these incentives; elsewhere he has offered ideas on how to change them. (See e.g. his reformist manifesto. I believe TED has also proposed adopting the Singapore model, conjuring an extraordinarily well-paid, independent regulatory caste that would be structurally resistant to capture and could recruit talent competitive with Wall Street’s finest. But I can’t find that link.)
TED is right on here:
Ms. Smith appears to advocate “root and branch reform” of the system, which makes her, by definition, more radical than me. As befits my nature as an investment banker, I am a pragmatist and an incrementalist. I think the prospect of true root and branch reform of the domestic financial system—not to mention the global one with which it is inseparably interconnected—is such a vast and daunting task to undertake in our current sociopolitical environment as to be unlikely at best. Notwithstanding the theoretical attractions of radical reform—which I personally would favor, by the way—I would much rather cobble together a partially effective, imperfect resolution authority today than wait the ten or twenty years serious reform might take… Sympathetic or not, however, I would also like to caution Ms. Smith. Like many radical reformers, I suspect she would be surprised how little common ground she has with other would-be radical reformers. It is always a revelation to discover, as revolutionaries always have, just how little agreement you have with your peers when it comes to deciding just exactly which roots and branches of the ancien régime need to be trimmed.
As, um, a proponent of root-and-branch reform, these are the questions that keep me up at night. For the record, I think we will end up with root-and-branch reform, but I fear we’ll get it hard and painful following a much more serious crisis that we have already failed to avert. I think the Great Financial “Panic” of 2008 has shrunk into another LTCM or Enron, a moment we will someday look back upon and wonder why we failed to deal with problems that were so freaking obvious, but for now all we hear is “It worked!” I’m a middle-aged Jewish guy who thinks and writes about finance, makes much of his living as a speculator, and avoids honest work. The tail risk I worry about is that I’ll get to see the sort of financial reform I advocate from a wonderful vantage high atop a lamppost.
But that is precisely why I want to take issue with TED here:
Like many other econobloggers opining on the state of affairs in the world of finance, Ms. Smith has gotten into the nasty habit of using the term “banksters” to refer to members of the financial services industry. (It is in the title of yet another post of hers today.) The overarching metaphor behind this coinage—which, I emphasize again, is neither original nor limited to Ms. Smith—is that commercial bankers, investment bankers, insurance company employees, and presumably everyone else in the financial industry are uniformly engaged in a vast, intentional, and irredeemably criminal enterprise. Ms. Smith reinforces this metaphor often, including in the post dissected herein (with the crack of “financiers [looting] taxpayers”), and implicitly in the title of her new book, ECONNED.
Now, I am all for the charms of expedient exaggeration. (Although mine tend to be limited to sarcastic and humorous uses, rather than bitter and humorless character assassination.) It can be funny, and it can emphasize important points. But uniformly and universally excoriating millions of people who work in finance as gangsters, thieves, looters, and con men is just fucking dumb. It’s like saying all management consultants are morons, or everyone from Iowa is a hick. While there certainly must be examples of moronic management consultants and hayseed Iowans among the myriad constituents of each of those groups, no honest or intelligent person would believe all of them are that way. Why, then, do so many bloggers writing today tar the entire finance industry with the same tired, thoughtless old brush?
These casual, unthinking insults would not bother me if I did not think they lower and coarsen the important conversation we are having in society and the blogosphere about financial reform. Sure, investment banking has its fair share of crooks, but we are no different than the rest of society. Some of us, closer to the top and more successful, perhaps, probably do have a more highly developed sense of entitlement and aggressiveness than your average bear. But we are not criminals. We work the system, hard, to advance our own and our families’ personal and professional interests, but 99.9% of us are not out to rape and pillage the commonfolk of their daily bread. To think otherwise is just plain stupid.
I myself don’t use the term “banksters”. And I sympathize with TED. I like financial industry professionals, personally. I enjoy meeting bankers. They are usually smart, interested in the arcane crap I’m interested in, and assholes of the sort that I enjoy sparring with. Bankers are great fun, and they are not bad people.
But we are who we are collectively as well as individually. Large organizations can and do evolve to do evil things while isolating people individually from illegal or morally uncomfortable acts. That capacity can confer tremendous advantages over smaller, more personal and accountable, collectives. It’s harsh, but we don’t get a pass just because the particular lever we are paid to pull only shifts a cog in a vast machine whose overall function we don’t control. As moral agents, it is not enough to follow the law and let pecuniary incentives guide us. We have to take responsibility for the behavior of the collectives to which we belong.
We are all dirty. Seven years ago I supported a war that has been responsible for hundreds of thousands of deaths, and that has not achieved any of the positive ends I thought it would achieve. That was a moral error I’m not sure I deserve to have survived, and I’m a terrible hypocrite, because I don’t live like Mother Theresa to atone, but carry on as a comfortable American. I won’t point a finger at anyone and claim moral superiority.
But I am responsible, and it’s important that I know I am responsible. We all have an obligation, not to self-flagellate like monks, but to be aware of the systems in which we are situated, and to work a bit, at the margin, to correct them. Obviously, so long as there are badly skewed incentives, a bit at the margin won’t be enough. I won’t hold a grudge against some mid-level banker who put together crap CDOs because everyone was doing it, and who knew housing would collapse?, and it was very lucrative. But neither will I abstain from using words like “fraud” and “looting” to describe organized practices which, innocuous act by innocuous act, do in fact serve to extract wealth from many and distribute it to a well-organized, well-placed few. And if you work in the industry and that makes you uncomfortable, it should make you uncomfortable, even if your accuser is a hypocrite and morally reprehensible himself. We can and should make better rules and fix perverse incentives in the financial system. But we won’t be able to design a game so perfect that self-interested amoral agents plus an invisible hand ensure decent outcomes. We need industry participants to take responsibility for the organizations and practices in which they participate, and to take an active, serious role in policing those practices. That will require a cultural shift, an understanding that actions that are legal and profitable can be illegitimate and disreputable, and should be avoided even if competitors will profit from your scruples. If context makes that impossible, if behaving well implies that you’ll be fired or your firm will go bust, you (like Chuck Prince!) must try to alter that context.
Calling out misdeeds by hard names helps. Words like “looting”, “theft”, “fraud”, and “scam” are fair descriptions of a lot of common practices, even if some of the perpetrators worked 18 hour days putting together pages 120 through 237 of mind-numbing prospecti and meant only to earn a living.
Yves and TED and I all derive sustenance, one way or another, from the financial industry. Many, perhaps most, people with significant savings in the US, nearly all workers whose pension will support a financially comfortable retirement, are beneficiaries of practices that involved shifting wealth from others to us by means of questionable legitimacy. Many of us profited from asset bubbles; we extracted rewards from price signals that harmed the real economy rather than guiding smart decisions. This is not just about “them”. It is about us. We, the savers, the affluent, educated, hard-working “core” of American society have become thieves, or at best unwitting beneficiaries of theft. We ought to be uncivil to ourselves for that, and we ought to be trying to ensure it never happens again. Both Yves and TED are doing a good job, doing more than their parts to make sense of what’s happened and agitate for something better. But as for the people watering down derivatives reform, defending bank gigantism, shoving the CFPA into a cubicle six sub-basements beneath Ben Bernanke’s ass, well, I’m glad as hell to have people like Yves calling them out as “banksters”.