in free market’s name, amen

Self-destructive greed is not good, especially self-destructive greed financed with public money.





In the wake of the nightmarish financial crisis that’s stifling the economy today, those hurt by banks and warehouse lenders have a perfectly legitimate desire to point their fingers in blame. While it’s true that many Americans spent well beyond their means, taking toxic mortgages and racking up giant debts financed by home equity loans, we have to ask what the banks were thinking when they were approving stated income loans for a customer with a credit score just a few ticks higher than rock bottom. Greed is not always good and irrational greed hurts shareholders, customers and the economy at large.

The problem with excessive greed in business is that aggressively going after every dollar you see on the horizon just so you can get quick, short term gains, gets you to make decisions that will hurt your company in the long run. An insatiable desire for loan origination fees lead to an industry built on what’s called Pulsen Pen lending. Got a pulse? Got a pen? You’re approved for an adjustable rate $600,000 mortgage with no money down. Income verification? Credit score? No, we’ll be fine without seeing that. Worse comes to worst, we just kick you out and sell the house when we foreclose and assume title. Have a nice day and tell the next guy we’re ready for him. When I was working on my business degree, this is exactly what my professors warned us not to do if our companies did any lending for the sake of our long term business model. Why? Making an enormous loan to someone with no money is like throwing all that cash out the window.

What stockholders and investors want to see is steady, consistent growth over a long period of time. What they’ve been getting for the last 40 years or so is enormous short term gains which take a massive hit when the bubble that generated them bursts. You’re a millionaire today, in a week, you’re in debt, your IRA is more like an IOU and your 401k is worth $4.01 without a “k” in sight. And the funny thing about all this is how the people who have to weather the storm react to this kind of roller coaster ride. They don’t like it. They want some safeguards. It makes them mad when banks lend money they’ve deposited into bad loans and close their doors. And they aren’t too fond of their financial advisers doing anything to make a dollar, then loosing it all on a bad bet. Kinda ruins their day. Or a few years. They want to make sure that when companies are reckless with their money and their safety, they have a way of getting retribution.

But believe it or not, there are people who oppose the idea of basic safeguards to keep a check on the economy with all their being. In their minds, greed is downright holy, every man should be for himself and any interference in someone’s God-given right to make a dollar or two with no regard for the future or those around him is tantamount to one of the seven deadly sins. In fact, if they could, they’d make it the eighth. Gluttony, lust, envy, regulation, sloth, etc, etc. They constantly invoke the USSR (something that grates on me to no end since I’m a native of what’s been affectionately called the Evil Empire during the Cold War) and maintain that the forces of the free market work in mysterious ways, but it’s always for the better and everything will turn out in the best possible way when greed is given free reign. Free markets to them are like God to devoted theists. They can do no wrong and they always know best.

This train of thought is a product of the Cold War. I’ve written before on a few major misconceptions about the way things worked in the USSR. Rather than practice communism or any form of social welfare, the Soviet Union was a kleptocracy. People were used as a tools for government enterprises owned and maintained by the power players of the Party. With cheery speeches about brotherhood of all humans and thinking about the collective rather than just oneself, Soviet leaders stole and used for their own benefit. In its twilight years, when they ran out of things to steal but kept stealing by inertia, the nation was primed for an implosion. In a few years, the people in power cashed out of the USSR and broke apart the union. However, to those who hold free markets as their faith, this history doesn’t matter. They heard the USSR’s claims to be a communist state, therefore all bad things must’ve happened because there was constant government involvement in the economy.

Today, when banks run to the government to ask for cash despite labeling the slightest bit of regulation with the generic “socialism” smear, these people conveniently forget that it was the previous president who nationalized $5 trillion of loan obligations and gave the banks a blank check rather than make them face the music. They also disregard that the banks themselves, in a totally un-free market way, asked the government to buy them out of their errors instead of taking their lumps, and proclaim that in today’s crisis the government has become a tyrant hell bent on establishing a socialist utopia. Whatever that means, as long as it has a negative or menacing connotation. To them, the companies can’t be faulted. The free markets are the light and the way and companies are their instruments. To say that the companies in America enjoy a backwards form of socialism in which they use the government as an insurance policy which never fails to pay out, no matter how badly they mess up, is blasphemy to the followers of the free-markets-are-infallible dogma.