Regarding Greed and Chaos

It’s not 1987 anymore – the year Oliver Stone’s Wall Street was a big hit. Michael Douglas won the Oscar for best actor for his work in that movie. Douglas played Gordon Gekko and delivered that famous greed is good speech – all of Milton Freidman and supply-side economics distilled in a few words:

The point is, ladies and gentleman, that greed – for lack of a better word – is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed, in all of its forms – greed for life, for money, for love, knowledge – has marked the upward surge of mankind. And greed – you mark my words – will not only save Teldar Paper, but that other malfunctioning corporation called the USA.

Stone had him as the villain who ruined everything and everyone around him. But for folks like Allen Greenspan, who had fused the Ayn Rand philosophy of selfishness (everyone grabbing what they can any way they can makes life better for everyone, as that insures progress and development), with the Adam Smith meets the University of Chicago crew, who assured us that self-interest keeps everyone honest and no markets would ever need to be regulated, with a bit of Social Darwinism thrown in (the weak or unlucky perish and the strong and most fit succeed and reproduce, so things always get better) – well, those folks no doubt thought Oliver Stone was simply pandering to the liberal losers in the world, who couldn’t compete with real Americans and thus were full of deep resentments. Douglas, with his slicked back oily hair, chewing up the scenery with his over-the-top sneering, was a cartoon villain, no more than that. There was nothing wrong with the concept – that greed is good – but Hollywood is always out to mock businessmen, and Republicans. That’s what they do. Greenspan read Ayn Rand every night – his touchstone. Movies don’t matter. That’s not real life.

But out here, the American Film Institute, just down the way, recently had a big dinner to present Michael Douglas with a lifetime achievement award, and this matter came up.

Erika Schickel was there:

They put together a lovely evening, swathing the soundstage in twinkly lights, warming us up with a clip reel of classic movie moments, plying us with free drinks. Then Douglas made his entrance, stunt-falling through a skylight and taking a bow and his seat on the dais.

As his movie clips reeled past, and the wine flowed, I relaxed and enjoyed revisiting the many scumbags Douglas has played in his career. There he was drowning Glenn Close in a bathtub in “Fatal Attraction,” falling face first into Kathleen Turner’s crotch in “Romancing the Stone,” then pushing her off a balcony in “The War of the Roses.” And what Mike Douglas event would be complete without Sharon Stone’s gratuitous, shadowy “Basic Instinct” leg-crossing?

But of course that all resolved to the greed speech:

Oliver Stone got up and said a few glowing words before the lights dimmed, and there was Gekko on the big screen, with his 1980s’ white-collared shirt, his greasy hair, his smug puss, saying the now famous lines…

I heard a collective gasp, then a moment of stunned, suspended silence as the mostly over-50 crowd was transported back to those heady, grabby days of yore, when all everyone thought about was their own upward surge. That was right around the time Hollywood let the bottom line trump art once and for all.

Now here we all were, 22 years later, in our Loehmann’s Back Room dresses and borrowed baubles, squeezed by Spanx, smoothed by Botox, mortgaged to our graying roots and anticipating a long valet line for our Priuses and what surely would be a diminished gift bag at the end of the evening…

Why hadn’t we listened? There was Michael Douglas embodying the message to lay off the Kool-Aid, and all we did was order another bottle of Cristal.

Why hadn’t they listened? Oliver Stone, back then, thought it was right to make the guy a cartoonish villain. But maybe he made him too cartoonish, so the problem was the guy, not his ideas – you found the character repulsive, and the concepts he was spouting were a secondary matter. And after all, since Reagan, you’d heard all sorts of important people saying exactly the same thing, and they seemed to know a lot about everything, and you didn’t. Stone may have wanted to make a movie about ideas, given how commonplace those ideas were at the time, but he got a movie about one fascinating character. Maybe Douglas deserved that Oscar. He hijacked Stone’s movie. That’s star power.

But Stone was right. And here we are again, with seventy-two percent of Americans in favor of fixing the healthcare system with a public Medicare-like option – and a majority of Republicans agreeing – and no chance in hell that will ever come to be. There aren’t the votes for it in the Senate – too many of them still reading Ayn Rand and remembering that Reagan told us all that governments is always the problem, and never the solution. Or maybe they know that seventy-two percent has no lobby making major campaign contributions to them. It doesn’t matter. A parallel public-funded system would screw the pooch for the for-profits insurance companies – you can’t compete with low-cost, or free to the poor, subsidized reasonably effective service. That would put them out of business. So we can expect months of talk about how, if there is going to be rationing of services and denial of treatment, it’s far better that not be done by faceless bureaucrats in Washington, but by the authorization desk of the accounting departments of major corporations that have to show ever-increasing profits, year over year, to their shareholders. After all, we’re used to that – and you wouldn’t want to deny any businessman a chance to make an honest buck. You don’t want America to stop dead in its tracks. Greed may or may not be good, but it keeps things going, so you don’t mess with it.

Needless to say, many have been thinking about that, most recently Fareed Zakaria in Newsweek, arguing that greed is good, to a point. And he opens with what seems to be a sense of a crisis just averted among the greed crowd:

A specter is haunting the world – the return of capitalism. Over the past six months, politicians, businessmen and pundits have been convinced that we are in the midst of a crisis of capitalism that will require a massive transformation and years of pain to fix. Nothing will ever be the same again. “Another ideological god has failed,” the dean of financial commentators, Martin Wolf, wrote in the Financial Times. Companies will “fundamentally reset” the way they work, said the CEO of General Electric, Jeffrey Immelt. “Capitalism will be different,” said Treasury Secretary Timothy Geithner.

But these guys think they’ve dodged the bullet:

… over the past few months, even though we’ve had an imperfect stimulus package, nationalized no banks and undergone no grand reinvention of capitalism, the sense of panic seems to be easing. Perhaps this is a mirage – or perhaps the measures taken by states around the world, chiefly the U.S. government, have restored normalcy. Every expert has a critique of specific policies, but over time we might see that faced with the decision to under-react or overreact, most governments chose the latter. That choice might produce new problems in due course – a topic for another essay – but it appears to have averted a systemic breakdown.

But everyone knows there will be many more bankruptcies, and other problems:

Banks will have to slowly earn their way out of their problems or die. Consumers will save more before they start spending again. Mountains of debt will have to be reduced. American capitalism is being rebalanced, reregulated and thus restored. In doing so it will have to face up to long-neglected problems, if this is to lead to a true recovery, not just a brief reprieve.

But this will come, with a meaningless nod to our anger:

Most of us want to see more punishment inflicted, particularly on America’s bankers. Deep down we all have a Puritan belief that unless they suffer a good dose of pain, they will not truly repent. In fact, there has been much pain, especially in the financial industry, where tens of thousands of jobs, at all levels, have been lost. But fundamentally, markets are not about morality. They are large, complex systems, and if things get stable enough, they move on.

He then provides a history of crashes – with all the end-of-everything-as we know-it talk from the experts – and of the recoveries, where things worked out just fine. And his notion is that, in a few years, when things are better, we’ll be fine again with pure greed and, as “strange as it may sound, we might all find that we are hungry for more capitalism, not less.” Perhaps we’ll miss the Douglas character with the slicked back hair, and long for unregulated free-markets and find guys like Bernie Madoff kind of cool rascals. You never know.

Zakaria doesn’t go that far. He just notes this:

An economic crisis slows growth, and when countries need growth, they turn to markets. After the Mexican and East Asian currency crises – which were far more painful in those countries than the current downturn has been in America – we saw the pace of market-oriented reform speed up. If, in the years ahead, the American consumer remains reluctant to spend, if federal and state governments groan under their debt loads, if government-owned companies remain expensive burdens, then private-sector activity will become the only path to create jobs.

The simple truth is that with all its flaws, capitalism remains the most productive economic engine we have yet invented. Like Churchill’s line about democracy, it is the worst of all economic systems, except for the others. Its chief vindication today has come halfway across the world, in countries like China and India, which have been able to grow and pull hundreds of millions of people out of poverty by supporting markets and free trade. …

And he also notes, to be fair, that even if capitalism alone means growth, it also means instability – you do get major crashes. The trick is to “to regulate the system to stabilize it while still preserving its energy.” We’re always working on that, so, he argues, what we are experiencing is not a crisis of capitalism at all – “It is a crisis of finance, of democracy, of globalization and ultimately of ethics.” The system is fine. The situation – and particularly the people – are not so fine. It’s kind of like the Oliver Stone movie – “finance screwed up, or to be more precise, financiers did.”

That’s the way it always is:

Finance has a history of messing up, from the Dutch tulip bubble in 1637 to now. The proximate causes of these busts have been varied, but follow a strikingly similar path. In calm times, political stability, economic growth and technological innovation all encourage an atmosphere of easy money and new forms of credit. Cheap credit causes greed, miscalculation and eventually ruin. President Martin Van Buren described the economic crisis of 1837 in Britain and America thusly: “Two nations, the most commercial in the world, enjoying but recently the highest degree of apparent prosperity and maintaining with each other the closest relations, are suddenly plunged into a state of embarrassment and distress. In both countries we have witnessed the same [expansion] of paper money and other facilities of credit; the same spirit of speculation – the same overwhelming catastrophe.” Obama could put that on his teleprompter today.

So, he argues, the regulatory reforms that people in government are talking about now “seem sensible and smart.” It’s all pretty basic:

Banks that are too large to fail should also be too large be leveraged at 30 to 1. The incentives for executives within banks are skewed toward reckless risk-taking with other people’s money. (“Heads they win, tails they break even,” is how Barney Frank describes the current setup.) Derivatives need to be better controlled. To call banks casinos, as is often done, is actually unfair to casinos, which are required to hold certain levels of capital because they must be able to cash in a customer’s chips. Banks have not been required to do that for their key derivatives contract, credit default swaps.

But he’s still wary, as new isn’t always better:

Keep in mind that the one advanced industrial country where the banking system has weathered the storm superbly is Canada, which just kept the old rules in place, requiring banks to hold higher amounts of capital to offset their liabilities and to maintain lower levels of leverage. A few simple safeguards and the whole system survived a massive storm.

This is followed by a great deal on monetary policy and interest rates, but he gets to the core of things with this:

Since Ronald Reagan’s presidency, Americans have consumed more than we produced and have made up the difference by borrowing. This is true of individuals but, far more dangerously, of governments at every level. Government debt in America, especially when entitlements and state pension commitments are included, is terrifying. And yet no one has tried seriously to close the gap, which can be done only by (1) raising taxes or (2) cutting expenditures. Any sensible proposal will have to feature both prominently.

This is the disease of modern democracy: the system cannot impose any short-term pain for long-term gain.

Well, we know all about that out here in California. But he argues something even more curious, that things had been going too well around the world for too long. Since the eighties “the world has been moving toward an extraordinary degree of political stability.” Really:

The end of the Cold War has ushered in a period with no major military competition among the world’s great powers – something virtually unprecedented in modern history. It has meant the winding down of most of the proxy and civil wars, insurgencies and guerrilla actions that dotted the Cold War landscape. Even given the bloodshed in places like Iraq, Afghanistan and Somalia, the number of people dying as a result of political violence of any kind has dropped steeply over the past three decades.

And hyperinflation, “which destroyed the middle class, destabilized societies and led to political upheaval” – that doesn’t happen anymore. And there is the information and Internet revolution adding further interlocking stabilization. Things went too well:

Good times always make people complacent. As the cost of capital sank over the past few years, people became increasingly foolish. The world economy had become the equivalent of a race car – faster and more complex than any vehicle anyone had ever seen. But it turned out that no one had driven a car like this before, and no one really knew how. So it crashed.

The real problem is that we’re still driving this car. The global economy remains highly complex, interconnected and imbalanced. The Chinese still pile up surpluses and need to put them somewhere. Washington and Beijing will have to work hard to slowly stabilize their mutual dependence so that the system is not being set up for another crash.

And then everything went all global on us:

We have globalized the economies of nations. Trade, travel and tourism are bringing people together. Technology has created worldwide supply chains, companies and customers. But our politics remains resolutely national. This tension is at the heart of the many crashes of this era – a mismatch between interconnected economies that are producing global problems but no matching political process that can effect global solutions. Without better international coordination, there will be more crashes, and eventually there may be a retreat from globalization toward the safety – and slow growth – of protected national economies.

And then there are the bad guys (as played by Michael Douglas):

…very few people acted responsibly, honorably or nobly (the very word sounds odd today). This might sound like a small point, but it is not. No system – capitalism, socialism, whatever – can work without a sense of ethics and values at its core. No matter what reforms we put in place, without common sense, judgment and an ethical standard, they will prove inadequate. We will never know where the next bubble will form, what the next innovations will look like and where excesses will build up. But we can ask that people steer themselves and their institutions with a greater reliance on a moral compass.

And he sees that changing:

One of the great shifts taking place in American society has been away from the old guild system of self-regulation. Once upon a time, law, medicine and accounting viewed themselves as private-sector participants with public responsibilities. Lawyers are still called “officers of the court.” And historically they acted with that sense of stewardship in mind, thinking of what was appropriate for the whole system and not simply for their firm. That meant advising their clients against time-consuming litigation or mindless mergers. Elihu Root, a leader of the New York bar in the late 19th century, once said, “About half the practice of a decent lawyer consists in telling would-be clients that they are damned fools and should stop.”

Maybe we’ll go back to that:

We are in the midst of a vast crisis, and there is enough blame to go around and many fixes to make, from the international system to national governments to private firms. But at heart, there needs to be a deeper fix within all of us, a simple gut check. If it doesn’t feel right, we shouldn’t be doing it. That’s not going to restore growth or mend globalization or save capitalism, but it might be a small start to sanity.

He is a hopeful fellow, isn’t he?

Duncan Watts, a principal research scientist at Yahoo! Research and the author of Six Degrees: The Science of a Connected Age, is not one of those. In the Boston Globe he offers Too Complex to Exist. Watts argues that we’ve built systems that have to fail, massively, as that is what large-scale systems always do. It’s built in:

On August 10, 1996, a single power line in western Oregon brushed a tree and shorted out, triggering a massive cascade of power outages that spread across the western United States. Frantic engineers watched helplessly as the crisis unfolded, leaving nearly 10 million people without electricity. Even after power was restored, they were unable to explain adequately why it had happened, or how they could prevent a similar cascade from happening again – which it did, in the Northeast on Aug. 14, 2003.

Over the past year we have experienced something similar in the financial system: a dramatic and unpredictable cascade of events that has produced the economic equivalent of a global blackout. As governments struggle to fix the crisis, experts have weighed in on the causes of the meltdown, from excess leverage, to lax oversight, to the way executives are paid.

Although these explanations can help account for how individual banks, insurers, and so on got themselves into trouble, they gloss over a larger question: how these institutions collectively managed to put trillions of dollars at risk without being detected. Ultimately, therefore, they fail to address the all-important issue of what can be done to avoid a repeat disaster.

The issue is how to deal with “systemic risk” – and Watts says that isn’t easy:

Much like the power grid, the financial system is a series of complex, interlocking contingencies. And in such a system, the biggest risk of all – that the system as a whole might fail – is not related in any simple way to the risk profiles of its individual parts. Like a downed tree, the failure of one part of the system can trigger an unpredictable cascade that can propagate throughout the entire system.

It may be true, in fact, that complex networks such as financial systems face an inescapable trade-off – between size and efficiency on one hand, and global stability on the other. Once they have been assembled, in other words, globally interconnected and integrated financial networks just may be too complex to prevent crises like the current one from reoccurring.

He argues that the only answer is preventing the system from becoming overly complex in the first place, and making sure no one single firm can bring down all the others – so break up the firms that are too big to fail. Modify the anti-trust law, which was designed to guard against firms growing so large that they stifle competition into an “anti-systemic risk” law. Those are nice, ideas, from a systems wonk, but Gordon Gekko wouldn’t like that at all. It’s a free country.

And that may be the root of the problem, and something we don’t want to fix. Zakaria may build to the conclusion that greed is, after all, good, and longingly wish that people were too. And Watts may argue that any systems designer would laugh at what we’ve built, and offer a careful plan to build something more stable and certainly more elegant. But too many people have a life or death stake in what we have now.

It’s seems we’ll have to make do with greed and chaos. There is no reasonable alternative.


About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
This entry was posted in Economic Meltdown, Economic Theory, Free-Market Capitalism, Greed is Good, Healthcare Reform, The End of Capitalism, The Financial System. Bookmark the permalink.

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