The Greed Factor Survives Despite Conscious Efforts to Curb Its Influence


By Tom Cleveland

Another financial crisis has come and gone, although its remnants will persist for years to come, and the seeds of the next crisis are already planted and destined to reach a “tipping point” in perhaps another decade or so.  In the past three decades, we have witnessed the Savings and Loan crisis, the Enron debacle, and a present day financial version of the “China Syndrome”, a near meltdown of our global financial system.  In all three cases, “Greed” was the driving force that pushed the limits of credulity beyond the need for excess to the very precipice of an ethical dilemma.

Anyone that has been in the business world for the past thirty years has learned two common truths for commercial enterprises – first, change is constant so be flexible at all times, and second, incentives work.  Greed is the primary “incentive” at work in our capitalistic society, whether we wish to admit it or not.  Excessive wealth and the pursuit of it are often glorified in the media, rarely exposed in a negative light unless portrayed by a “Gordon Gekko” type of capitalist in the “Wall Street” sagas.  While the audience may easily judge the main character for his lack of integrity in the pursuit of his goals, no one walks out of the theater wishing to banish his excessive lifestyle from the realm of possibilities.

Greed without context tends to be despised by all.  Other species on the planet may be content with survival alone, but human behavior has a difficult time merely quenching its thirst.  The mantra that propels our thinking is that, “One is satisfied when one’s needs are met, but happiness comes when one’s desires are met.”  Must one desire more than he needs to live in this society?  Isn’t the pursuit of happiness guaranteed as an inalienable right in the basic tenets of our democracy?  The issue is then more about human behavior and ensuring fairness such that a minority does not deliberately get away with taking more than its fair share of the wealth.

Societies have continually responded to this conundrum by attempting to reduce judgment to a set of rules or procedures that can then be audited, or regulated if you prefer that term, and then yield a series of indicators that can be measured in report-card fashion to identify cracks in the system.  Vast bureaucracies are created to administer these rules, produce constant directives explaining their meaning, and generate mountains of reports that obscure the real perspective in the marketplace.  In the meantime, the real intellectual energy at hand toils away at finding ways around the rules with complex tactics that will surely beat the system.

This “merry-go-round” appears to be alive and well once again.  Our Congress responded to the Savings and Loan crash by enacting the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) that dramatically changed the industry and how it was regulated.  Likewise, Enron was followed by Sarbanes-Oxley, and the present crisis, by the Dodd-Frank Act, a 2,000-page tome destined to generate multiples as much of tedious regulations and interpretations.  Each wave of legislative reform focused on new rule generation and increased regulation as solutions, ignoring the incentive structures that fostered the very breakdowns in the first place.

Judging from past experience, we should not have to wait too long to witness a repeat performance of financial processes being circumvented by a new form of guilt-driven activity.  As long as our corrective response is to deal with the symptoms and to ignore the root causes at hand, we will be doomed to repeat the mistakes of the past.  Conflicts of interest will persist, as will inordinate compensation and bonus entitlements.

Hopefully, these crises have happened in quick enough succession to imprint caution in the minds of more than a single generation of our leaders.  There may only be a few people that understand the meaning of “CDO’s” or <a href=”” “rel=nofollow” target=”_blank”>“GBP USD”</a> derivatives, but members of Congress have fastened on rule making because that is what they do.  Lobbyists control election contributions, and our own Supreme Court has installed “Greed” as the guardian of the voting booth.

The aftermath of each financial crisis has been a prolonged affair.  After each debacle, asset values plummeted and took years to recover.  Unemployment skyrocketed, and again took four years or more to recover.  Lastly, public debt grew enormously, not necessarily from federal bailout programs, but from reduced tax revenues and stimulus programs designed to lessen the blow of a protracted economic contraction.

Regulatory officials admitted recently in New York that their resources might be constrained going forward due to tight budgets.  Compliance with new rules has now been reduced to a hope and a prayer.  Greed has prevailed, and the next crisis clock is ticking.