Saturday, May 14, 2011

Put Down Your Pitchforks

This opinion piece by BusinessWeek columnist and author Roger Lowenstein deserves not only the broadest possible exposure which can be afforded it, but also to be read by everyone and their brother carrying a pitchfork and torch towards the ramparts of Wall Street. There was a protest on Wall Street earlier this week wherein many of the demonstrators carried placards emblazoned with the slogan "Make the Banks Pay." If those people are truly interested in educating themselves about the sources of the financial crisis and perhaps even preventing another one in the future, they would have been far better served spending fifteen minutes reading this, instead of chanting slogans at a bunch of straw men.
The financial crisis was accompanied by fraud, on the part of mortgage applicants as well as banks. It was caused, more nearly, by a speculative bubble in mortgages, in which bankers, applicants, investors, and regulators were all blind to risk. More broadly, the crash was the result of a tendency in our financial culture, especially after a period of buoyancy, to push leverage and risk-taking to the extreme.

Mortgage fraud exacerbated the bubble—as did, among other factors, lax monetary policy, failure by Congress and successive administrations to rein in Fannie Mae (FNMA) and Freddie Mac (FMCC), and weak financial regulation, itself a product of the discredited but entrenched thesis that markets are efficient and self-policing. At the banks, overconfidence in "risk management" methods (which were mostly worthless) and ill-considered compensation practices were serious contributing causes.

As this list suggests, the meltdown was multi-causal. That explanation will be unsatisfying to armchair prosecutors, but it has the virtue of answering to the complex nature of the bubble. To prosecute white-collar crime is right and proper, and a necessary aspect of deterrence. But trials are meant to deter crime—not to deter home foreclosures or economic downturns. And to look for criminality as the supposed source of the crisis is to misread its origins badly.

But screaming "criminal," "bankster," and the like is far more satisfying—not to mention lucrative—to filmmakers like Charles Ferguson and polemicists like Matt Taibbi, who, after all, have tickets and magazines to sell. It also resonates nicely with the average American, who feels victimized by impersonal forces beyond his or her control or understanding. But it does nothing to help those Americans or their elected officials either understand or address the issues at hand.

As Lowenstein writes, the financial crisis resulted from the confluence of many different forces, which fell upon a system the checks and balances of which appear in retrospect to have been very badly designed and managed. But these flaws were evident before the fact to anyone who cared to look. They were hiding in plain sight. Nevertheless, almost everybody—bankers, regulators, politicians, ratings agencies, everyday financial consumers—decided to look the other way, because it suited our financial interest to do so. The pernicious fact about financial bubbles is that everyone has an incentive to prolong them, and almost everyone who participates in them profits from them, at least until the bubble pops and the last ones in are left holding a very smelly bag.

Writing about the ratings agencies, whose entire business model was designed to facilitate, support, and encourage the bubble, Lowenstein makes a point which applies generally to the entire crisis:

To call [this kind of behavior] criminal is to call the culture criminal, which is a point of rhetoric, not law.

Later, he states that

it's worth remembering that in the American legal system, people who merely act badly or unwisely do not do time. And people who contribute to a financial collapse aren't guilty of a crime absent specific violations that make them so.

The statutes which would have rendered the behavior most culpable for the financial crisis criminal—greed, stupidity, arrogance, willful recklessness—were not on the books in 2007 and 2008. Therefore, the people who committed those acts did not commit crimes. Period, end of story.

* * *

Now, if we want to reexamine our financial system in a measured, rational, determined way in order to actually fix the damn thing, let's do so. If we want to criminalize or enjoin certain types of behavior—formerly legal—which we now consider dangerous to the public weal, fine. That is what societies do. I am all for it, in fact.

But's let put a lid on the rabble rousers jumping up and down screaming "Criminals!" at the top of their lungs. They are nothing but a distraction to the proper focus and task at hand, and the energy and anger which they are stirring up among the public is getting frittered away in purchases of movie tickets, magazines, and overheated exposés of the crisis, not to mention increasingly unhinged and disconnected comments on blog posts and news articles.

Fixing the sources of the financial crisis will be long, hard, complicated work. Let's stop dicking around and get started.

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