Perhaps unsurprisingly, I have some disagreements with my colleague’s post on Wall Street, blame, and the financial and economic crises. For one, I disagree with the statement that investment bankers have a particular moral responsibility “to not practice what amounts to predatory lending and, secondly, to see this coming”. I don’t think that looking to corporations to behave morally on their own is useful–if we feel strongly enough on a point, then we can legislate morally as we have in the past (eg child labor laws). Deeming corporations useless because they engage in (largely) legal activities to make money in ways we disagree with is a leap I can’t make. [Note: I may be misreading Patrick here, who may have been referring to the economists who didn’t see this coming. On this, I will only say that academic and government economists proffered a range of opinions on the subject, and many did warn well ahead of time of the potential for calamity.]
Second, I’m not sure he’s right to assert that banks didn’t see it coming. The number of bankruptcies (Lehman, Bear Stearns, and about a thousand other banks have went under)–suggest they didn’t have perfect foresight. Perhaps they should have seen things coming, but the actions of so many suggest that they were fairly well in the dark.
Finally: I don’t think it matters whether or not they saw it coming, which might be disagreeable to Patrick, given his apparent frustration. However, I think he might be on board with the conclusion. Tyler Cown makes (and Will Wilkinson summarizes) the argument better than I could, but, in essence, Wall Street banks have bet, year after year, that the economy would do well. And most years, it does–or at least does well enough that most of their bets pay off, and they can reward themselves fabulously. However, every once in a while, the economy will tank–with or without Wall Street’s help. There were financial crises before modern Wall Street existed, and, on the whole, I’ll take the modern economy as is over returning to classical, medieval, Renaissance, or whatever times, thankyouverymuch.
So what happens when the economy tanks? Well, all of the banks’ bets go bad at once, freezing credit markets, the lifeblood of commerce today. When this happened, the government had two general options. First, they could have let it work itself out, and allow massive bank failures–but we’d likely have 25% unemployment, according to Cowen. So that’s no good. Second, they could have nationalized the losses–meaning that the government (and thus ultimately the taxpayers) assisted in filling in the gaping holes on these banks’ balance sheets, a fundamentally unfair idea. Even if the banks played zero active role in creating the catastrophe, bailing people out for making bad bets is unjust. However (and this is crucial): we don’t have 25% unemployment! So I would say that we chose the better option here.
And Wall Street knew this. They knew that they’d win if the economy did well, and they’d (or, most of them) win if it didn’t. So it didn’t matter if they knew something was coming–they knew they’d be fine regardless! A worrying thought indeed.