Calvin Trillin, the NYT's last living link to the martinis-and-parties-at-Capote's-place days, has an outstanding piece on the correlation between intelligence and the financial crisis. It's a good point and admittedly one that I hadn't thought of previously: Wall Street was a "better" place – or at least had much less potential to do damage to the society in which it operates – when working there was a place for people who weren't smart enough to get into law, business, or the hard sciences. It was the collection point for, as Trillin puts it, the ex-jocks who slept in the back of his college classes. The students in the front rows paid attention and ended up in (comparatively) low paying work in academia or the public sector. The guys in back just wanted a relatively predictable way to make some money, "enough to buy a sailboat."
When Wall Street operated with that mindset – "We make an assload of money, let's make sure we don't screw up the gravy train" – its ability to fail spectacularly and take the country down with it was limited. They've only really screwed up when they tried getting clever. Take 1929 for example. It took an "innovator" to realize that people could speculate on stocks with borrowed money and no risk, or that banks could loan money with stock as collateral. In the modern context, it took some whiz kids and math geniuses to come up with Credit Default Swaps or complicated derivatives. If only Wall Street as a whole were a little dumber, this might have been avoided.
What changed? In my mind there are two major culprits. First, Reaganite society in the 1980s put the fast-talking, high-living Wall Street Guy on a pedestal. Boy, what a glamorous job, the kind of thing that a real man's man would be doing. Second, there's a lot of plain old greed. At some point Wall Street collectively determined that in the absence of effective oversight or regulation (Thanks, Ronnie!) they could make truly comical sums of money by indulging in substantially more risky behavior. The mindset shifted from "We make a lot of money, don't screw it up" to "Why make ten million when you could make eleventy billion?"
Ideally we want people on Wall Street to be like pharmacists: smart enough to do the job properly but not smart enough to start tinkering. We don't want the guy filling our prescriptions to 'innovate' or hire some Russian physicists who couldn't get tenure to craft complex mathematical models and determine how we could replace our single pill with an amalgam of 75 different pills with horrible side effects. The standard leg-humping free market mantra of the past few decades has sainted creativity and innovation, two things that people with specialized skills (math wizards, for instance) enable. But in this area have either of those qualities served us well as a society? What did all that mathematical creativity produce? It made some people who were rich obscenely rich. It (ultimately) made some people who were rich poor. For the rest of us it has made it impossible to find a decent job. It has destroyed entire industries. It has bankrupted the public sector to an extent unimaginable twenty years ago. If only they hadn't been so clever we might have avoided this; if only they were a bit smarter they might be able to provide us with a solution.
ladiesbane says:
The twist-and-slide that occurs between "let's not screw it up" and "hey, let's find the load limit by hitting the point of collapse" is part of all attempts at progress…except that when a person uses Just Too Much butter in a frosting, people simply refuse to eat it. The user is right there to judge. Hiring a middleman to make your investments removes a degree of threat, and therefore makes investors numb where they should be prudent.
This may be analogous to the electoral college.
Besides: the stock market is a gamble, and anyone not comfortable losing all he puts down should not be placing bets. I can make more money betting on fights and horse races than I can at the market — only because I know more about horses and men than I do about FCOJ.
duquesne_pdx says:
/delurk
I'm not sure that's entirely it. I think it's more along the lines of that plus, "…besides, if it all comes crashing down, we'll all be cashed out and living in the Caymans or some other non-extradition treaty country in the extremely unlikely event that someone ever enforces oversight."
$.02
/relurk
duquesne_pdx says:
Please to forgive the lack of quote indenting…
Aslan Maskhadov says:
The need for short-term profits is inherent in capitalism, so this theory cannot explain the crisis. If other banks are making money hand over fist doing one thing, one needs to follow suit or be driven out of business. It's the same as when one manufacturer employs new technology to produce more, and more efficiently. Those who stick with the old ways are likely to get shut out.
Bob says:
I thought conservatives had explained the crash: the Community Reinvestment Act forced banks to loan to poor (read dark-skinned) people who defaulted. Never mind that CRA mortgages accont for only a small percentage of all mortgages, and never mind that only a small percentage of of CRA mortgages were defaulted on. No, dark-skinned people caused the crash. Can't blame smart guys.
Ecks says:
I get the impression a lot of it was about leverage. Some clever clogs worked out that if you stacked a whole lot of boxes up to stand on top of them (efficient!) you could reach way high bananas. And it works beautifully and gets imitated as everyone else starts stacking up their crates, bracing their stacks against my stacks against your stacks, until something comes lose in the middle, and the fragile system has a lot of kinetic energy and no buffers, and no safety nets.
But then I always liked metaphors :)
Concerned Citizen says:
"Wall Street is the CIA
the CIA is Wall Street"
– Michael C. Ruppert, 2004
See also, Confessions of an Economic Hit Man – John Perkins, 2005
Uncle Bruno says:
What crisis? Wall St. bonuses are at an all-time high and shareholders got bailed out so they didn't lose anything. Unemployment hits 10%? So what? Not their problem.