Please, sir, may we have some justice?

We have just witnessed highly compensated investment bankers asserting that they are the clueless victims of an unforeseeable, unpreventable hundred year financial crisis (except when it happens every five to seven years).

Until last year, I had always assumed that at least one reason for investment bankers' high compensation was that the market had chosen to reward them for competence and knowledge about high finance, things we lesser mortals couldn’t possibly grasp with our mundane, tiny little minds. Now we find out that they apparently hadn’t even grasped the basics that my rather less well-paid businessman father drilled into me from a very early age. “Maxine,” he used to say. “The higher the returns, the higher the risk, and if the returns are high and sustained, you’re in a Ponzi scheme or a bubble. Never forget that.” And I never have.

It seems so basic and no amount of clever math and models can really change it. Say it now, all together, children: Higher returns means higher risk and if the returns are high and sustained, you’re in a Ponzi scheme or a bubble.

We and our elected representatives have a choice to make. We can continue to compensate clueless investment bankers way beyond the value of their marginal product in any domain of productivity you care to name and we can continue to allow them to cluelessly manage financial institutions for their own short-term short-sighted gains until they plunge the rest of us into serfdom or we can change how they are compensated and maybe even who is compensated (as in throw the bums out) and we can change the rules by which they are allowed to "play" with our money.

The latter shouldn’t be rocket science were it not for the wealth and power bankers are able to exert in their own interest. If the political will is not there now to do this, for heaven’s sake, when will it be????

Oh, right...after a full-blown depression, like last time.

But even then, reform and regulation will not be enough. We need a new language about business and markets that is sensible and grounded in reality. In the last thirty years, both have been elevated to near religion, with financiers and CEOs as high priests.

Something has been lost in that transformation. When Adam Smith wrote about the value and advantages of commercial society, he saw all of society (and, of course, was comparing it to the vestigial remains of feudalism which set a very low, preliminary standard). He wrote about how even those at the bottom were made better off. He appeared to care about them. He worried that because of the drudgery of the work at the lower end of society, people in those roles would require additional inputs, like education, paid for by the larger society. He viewed the entire wealth of the nation including the distribution not only of wealth but of opportunity (admittedly within the confines of a rather rigid class structure). And he was quite critical of the ne’er-do-well rich and of businessmen who colluded to extract welfare from consumers in the form of higher prices.

Perhaps most importantly, Adam Smith appears to have understood the value of the moral side effects of commercial transactions: trust, sympathy for our fellow tradesmen and women, for our customers, for our neighbors, a sense of community and of the common good, all traded in the marketplace along with the money, goods, and services that change hands. He recognized the interdependencies that markets create and reinforce, interdependencies that bind us to common objectives and that lower the transaction costs of achieving them.

So you see it isn’t just about the money. If it were, then the investment bankers who appeared before the Financial Crisis Inquiry Commission would still have much to answer for. But it’s about more than money. It’s about the moral side effects of market transactions and exchange. Morally clueless investment bankers have trashed the fabric that binds us together as a nation. They have sent a message loud and clear that short-sighted, immoral cluelessness that serves only one’s own short-run self-interest is what is rewarded. That unearned wealth, power and prestige have more political and economic currency than the hard-earned trust, confidence, and lower profit margins of honest businessmen embedded in, committed to, and serving their customers and their communities.

Remember Potterville in the Frank Capra film, It's A Wonderful Life? The movie is a capitalist morality play that explains how banking and commerce are supposed to serve the greater good and the public interest, even as they provide returns to investment and commercial endeavor. (You thought it was just a Christmas movie, didn't you?) In the movie, the problem with Potterville isn't just that it was economically unequal. It was morally bankrupt. People were ill-natured and distrustful, not inclined to help each other or to help a stranger.

The community's moral bankruptcy was a cause and an effect of the income inequality. The income inequality was a cause and an effect of the community's moral bankruptcy (combined with Mr. Potter's unfettered market and political power and his "clueless" immorality). This is how empire's fall.

Moral, socially responsible, honest (usually small) businessmen and women like George Bailey (and my father) provide some of the moral glue that holds us together. Market forces in small, truly competitive, transparent markets (which financial markets most definitely are not) often reinforce the moral glue and sometimes even provide it by reining in the Mr. Potters and the Gyges of the world.

Mr. Potter testified last week, pockets bulging with cash earned on the backs of the people of Bedford Falls, that he is clueless and incompetent and that stuff happens. He harmed Main Street, both the people who shop there and the people who own businesses there. He harmed the backbone of our democratic society. We bailed him out. Isn’t it time we held him to account?

We can reduce the moral hazard we’ve created with a no-strings bailout, we can reduce the moral side-effects of the moral hazard, and we can help Main Street. Let’s start by using all the bonus money to extend the safety net for unemployed workers, please. Then let’s tax the finance sector’s inordinate Ponzi scheme profits and use the proceeds to build new infrastructure and to retool the US workforce for the 21^st century. And for God’s sake, let's regulate Mr. Potter.  Let’s take a longer-term view of economic and societal well-being. Let’s make something good from this that will benefit our grandchildren.

Please, sir, may we have some justice?

Comments

[Doug]

Dear Maxine,
I encourage you to read my book On Value and Values: Thinking Differently About We In An Age Of Me.

Why?

Because it explores all the issues of moral philosophy and economics you've highlighted in this post (including Adam Smith, Gyges and more) -- and, it does that exploration with reference to the actual world in which so many of us now live: a world of markets, networks, organizations, friends and families (as opposed to a world of places, friends and families in which, e.g. Adam Smith lived and wrote).

Sincerly,
Doug Smith

[Maxine Udall (girl economist)]

Dear Doug,
Thank you so much for letting me know about your book. I will be sure to look for it. It sounds very relevant to courses I teach.
Best,
Maxine

[Dave]

Good stuff and great writing. Thanks for sharing.

-Dave

[rjs]

what courses does Maxine teach?

[Maxine Udall (girl economist)]

RJS, over the years, micro, math methods, intro to econometrics, health econ. More recently, Economics of Social Justice, a special topics course on Ethics & Economics, and a course called Economic Issues in Health Policy.