Econ 479

The Art of Writing, the Science of Economics

Gordon Gekko was wrong—maybe

An interesting question here, and one worth pondering.

Is greed the basic reason for economic chaos?

By Tom Raum
Tucson, Arizona | Published: 09.16.2008
WASHINGTON — Who’s to blame?
The government should have done more — or did it do too much? Alan Greenspan encouraged a housing boom that was destined to collapse. The White House and Congress were lax in overseeing the captains of finance.
People bought homes they couldn’t afford. Investors eagerly bought mortgage-backed securities they didn’t understand. Human nature was a guiding force in markets that were first driven by greed and then shaken by fear.
It turns out there’s lots of blame to go around for the spreading financial crisis. And political hay to be made.
What has happened?
Some seeds of the current crisis were planted in the late 1990s, when Congress and President Bill Clinton reshaped the financial landscape. They removed Depression-era barriers between commercial banks and investment firms, and allowed the creation of financial behemoths where, years later, the risks of underwriting risky subprime mortgages were somewhat hidden.
A chief author of that law was Phil Gramm, then a Republican senator from Texas and until recently one of the top economic advisers to GOP presidential candidate John McCain.
McCain voted for a Senate version of the bill but did not vote on the final package. Democratic vice presidential nominee Joe Biden voted against the Senate version but for the final compromise that was signed by Clinton.
Jim Leach, an Iowan who was chairman of the House Banking Committee when Congress enacted the overhaul, said he believes the current problems stem mostly from lawmakers’ unwillingness to more closely regulate either the mortgage giants Fannie Mae and Freddie Mac or investment banks.
That led to a proliferation of “new Wall Street instruments that came to be sliced and diced to the advantage of short-term profit-taking but long-term liabilities,” Leach said in an interview. “Wall Street became better at sales than at financial judgment.”
The problem will end up in the laps of the new president and the next Congress.
But despite now-widespread calls for stricter rules, “regulation will never solve the entire problem,” said David Jones, chief economist at DMJ Advisors, a Denver consulting firm.
“That’s because the problem is basically human nature, which will always fluctuate between greed and fear, between euphoria and despair, between complacency and panic,” Jones said. “That’s always going to happen.”

Written by gregorymcnamee

September 16, 2008 at 8:57 pm

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