From Reuters, regarding today’s CITI testimony before congress:
Prince’s infamous comment that his bank was “still dancing” even as the subprime crisis worsened came back to haunt him at the commission hearing where he was asked about it. His explanation seemed to boil down to this: it was a race to keep up with competitors who kept loosening lending standards and Citi couldn’t afford to drop out.
Prince is too defensive. The correct response was that the government was madly printing money in an attempt to recover from the tech bubble’s crash.
In this environment of cheap cash, Bankers must lend or be forced out of business by the actions of the government. The risk was compounded by the governments failure to regulate new financial instruments. And the government failed to regulate them because academic economists has proposed models and equations that promised risk, and many financial luminaries, of which Greenspan was a member, believed that these instruments had indeed reduced risk.
THe problem is this: by printing money the government created a moral hazard, and the government is responsible for the outcome. A banker, with understanding or not, should not be forced into being uncompetitive or into insolvency because the state dumps the commodity we call money on the market. Bankers just protected their organizations from the government’s interference in business. Sure they profited from it. Because the only other choice was to go out of business.
If capitalism fails, it fails because of government interference. Markets cannot solve all problems, in particular, they cannot concentrate a large volume of capital on long term projects such as infrastructure. But failures of capitalism are almost universally failures of government to refrain from those acts which cause long term harm for short term good.
We are two years into this crisis and still the blame is on the wrong parties. Bankers are normal people, and few of them have all but the vaguest understanding of the economy. They are largely clerical workers and accountants who move the commodity money around our civilization. For all there terminology, graphs and formulae, for all their statistics and reports, the vast majority have little understanding of the impact of their decisions, the outcomes of their actions, or the limits of our conceptual technology in forecasting such things as risk. If the greatest minds in history have had trouble with such consensus, then why should we think bankers should?
Furthermore, why do we think government is capable of doing any better than bankers?
It’s hubris on the part of government. Practicality on the part of bankers. And foolishness all around.
But the people who CAUSED this problem, are the people who have, at least since FDR, but likely since the start of the federal reserve, conspired to destroy our money, and with our money, our cautious behaviors, and with our behaviors our nation.