The standard contemporary political blame-game tells us that in our modern economies financial crashes occur due to ‘excessive greed’. Yet is important to understand that in some senses the meltdowns take place when people become individually LESS greedy.
In really simplified terms...
During the good times an elite group of capital-rich individuals assume risks that most people either don’t want to assume or cannot assume. By and large they will rationally anticipate substantial returns provided that the risks don’t get the better of them between now and pay-day.
Fast forward to the weeks or months before meltdown and the investing pack has expanded considerably. One might even say ‘democratised’ if one were inclined to be charitable.
Collectively this group is now chasing a smaller reward, because the risks appear to have diminished. But whether we are talking about banks selling mortgages or private investors after their own little chunk of the tech boom bonanza, many of the people parting with their cash know that ‘sure thing’ investments are usually significantly over-priced. And many try to artificially re-create the original higher risk/higher reward conditions they missed out on via debt and other forms of ‘leverage’.
Yet overall, they are individually at least chasing a more modest return than those who ‘bought cheap’ and can thus expect to clean up. So, which group is truly the greedier? Intuitively we are I think drawn to the wrong answer to this question — which is why the nuances of the term ‘greed’ are perhaps better suited to religious ethics than high finance.
I had personal experience of a parallel phenomenon in the early 90s, when I was one of a small group of individuals who exited their career paths by way of the turning marked information superhighway.
At the time very few people had heard of the Interwebs, let alone understood their transformative tendencies, but we were already true believers prepared to invest our projected future earnings in developing the medium’s potential. We correctly anticipated wave after wave of hazard ahead, but also a considerable return if we could find a way to weather them — so in that sense we were compelled by greed of the ‘long’ kind.
As the Millennium approached our industry started to look very different, its personnel base now largely comprising frantic Johnny-come-latelies with options (often dubious) rather than equity in their pockets. And the mood of aggregated avarice was now palpable. These people were chasing the last crumbs and — mostly — knew it. The maelstrom of untethered desire that they kicked up drove the market over a precipice.
The screenplay for Oscar-winning film 'The Big Short' demonstrated an implicit understanding of the topsy-turvy pre-crash world where mavericks inside the financial system could be taking on the ‘right’ kind of long positions, but based on shorting the system as a whole. And that this is happening because the ‘systemic’ problem is that the system has somehow come to be made up of dumb, irrational, bottom-feeders.
Now, the fact that bottom-feeders are the essence of the problem does not a stirring political soundbite make. But our society’s most disreputable representatives of the type can be handily aggregated into something any populist politician can really get their teeth into: a ‘bank’ or, better still, ‘Wall Street’.
These are not loose-associations of high-flying entrepreneurs but monolithic institutions which effectively dominate such a significant portion of our economic output that they can afford to reward even their least effective bottom-feeders in ways that anyone outside this milieux tends to find obscene.
Such is the collective bargaining position of powerful, irrational greed in our society. There is no other sector other than finance where this kind of desperation and dumbness is so strongly incentivised by disproportionate returns. 'Curbing' this kind of greed will be no easy political task, because it has insinuated itself deeply into the natural habitat of the 'good', economically-beneficial sort of greed.