Markets & Morals

by Vadim Medish (’12)

One of the hardest things in life is maintaining a sense of balance and knowing when to stop.  It is often said that you cannot have enough of a good thing.  But that philosophy would seem to ignore the ancient wisdom of “nothing in excess.”  Going too far, desiring too much, having too much is the definition of excess.  That is exactly what happened to America’s finances during the past few years, culminating in the Great Meltdown on Wall Street and a deep recession on Main Street.  Our current financial drama turns out to have less to do with economic science and more in common with a classic morality play where the mighty have legs of clay.

These days Congress is debating whether to impose a new, stronger regulatory framework on Wall Street — for example, to segregate commercial banking from proprietary trading, to limit the size of big banks, to regulate derivatives markets, to curb executive bonuses.  Similar debates are taking place in Europe, most notably London.  This marks a potential sea change.  Ever since the Reagan-Thatcher “Revolution” of the early 1980s, the trend had been toward greater de-regulation inspired by the idea that free markets could and would regulate themselves.  For the past 30 years, the ideology of market fundamentalism grew stronger and stronger.  Until 2008, that is, when the names Bear Sterns and Lehman Brothers were etched on the tombstones in Wall Street’s graveyard.

The former “masters of the universe” at the mega-banks have taken a beating.  Bank chiefs such as Robert Rubin, who had once been extolled as the greatest Treasury secretary since Alexander Hamilton, were brought down to size as the US Government seized a massive stake in his bank, Citigroup as part of the bailout of banks deemed “too big to fail”.

Goldman Sachs, the world’s premier investment bank, was also saved in the bailout.  Later Goldman executives claimed they did not really need the money, implying that they took bailout money in order to be good sports.  As the story emerged of huge profiteering schemes engineered by Goldman Sachs to take advantage of the market in shady mortgage derivatives, the firm’s CEO Lloyd Blankfein joked in an interview that Goldman was actually “doing God’s work.”  Blankfein’s Freudian slip revealed a colossal loss of perspective.

On one level, Blankfein was probably trying to articulate a systemic defense of his bank’s role.  The capitalist system depends on what the economic historian Schumpeter called “creative destruction,” a kind of economic survival of the fittest.  By engaging in aggressive financial operations, Goldman Sachs simply makes the system of creative destruction move along more efficiently, come what may.  The problem with this defense is that it is too clever by half, because it justifies every excess.  Blankfein is basically saying that Goldman’s actions are beyond judgment — not only is Goldman too big to fail, it is too big to be second-guessed.  Goldman cannot harm the system because Goldman is the system, so nobody should presume to question the validity of its actions.

It seems as though Wall Street got drunk on its own market fundamentalist ideology.  Listening to the testimony and interviews of the Wall Street titans, there is a missing sense of proportion.  Perhaps it is not surprising.  After all, Goldman’s total market value is about $1 trillion — or more than the GDP of 170 countries.  Goldman and some of the other global financial giants are not only too big to fail; they are too big to exercise good judgment and self-restraint.  Growth has become an end in itself.  We would all like to believe that we instinctively know when enough is enough.  But perhaps it is hard to know when to stop seeking the next dollar or the next billion dollars of profit.

A market purist would say that the system has worked well and that the best medicine for excess is simply to let the pain rip through the system.  More destruction will eventually lead to more creation.  So the theory goes.  In the meantime, real people — for example, the millions of Americans who have lost their jobs since 2008 — must deal with the consequences of Wall Street’s excesses.  They are the “collateral damage” from other people’s greed.

The economy is not just an abstract system.  It is not just an agglomeration of corporations and banks.  The economy is based on individuals, and its health depends on their judgment and sense of responsibility.  In Oliver Stone’s prescient 1987 film “Wall Street,” the antagonist Gordon Gekko in self-defense exclaims, “Greed, for lack of a better word, is good.”  He might have had a point, akin to Blankfein’s concept of “God’s work.”  In a market economy, personal financial ambition drives productivity, innovation and growth.  What Gekko and Blankfein both miss, however, is the critical dividing line between ordinary greed, which can be a useful vice, and blind avarice, which leads to folly.  Telling the difference between the two is a question of individual moral insight.

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