Thursday, October 16, 2008

Fear And Greed

“Greed, for the lack of a better word, is good.” So said Gordon Gekko in the film “Wall Street” in the 1980s. Of course, Gekko was a fictitious character, and the moral of the tale was that those who lived by that creed eventually came unstuck. Despite that, it seems there has been no shortage of people who saw Gordon Gekko as the film’s hero, rather than the real hero’s nemesis.

The word “greed” also featured heavily in Prime Minister Rudd’s speech to the nation, in which he focused on the twin forces of fear and greed. Mr. Rudd has told us that the Government must first deal with the fear, and later address the greed. He has foreshadowed the idea of somehow regulating the remuneration of big bank executives, on the basis that it is unacceptable that their greed should be fed at the expense of shareholders, customers and taxpayers who are all picking up the tab for the financial mess we now confront. In doing so, he is playing to the sentiment that market forces have failed us and that now is the time for direct intervention.

Clearly, intervention is now necessary, but it’s not accurate to say that market forces have failed. The truth is that market forces are doing exactly what we should expect them to do. Market forces are punishing bad decisions, and the scope and size of those bad decisions mean that the dose of punishment is massive. Unfortunately, intervention now, especially in the United States, will reduce the severity of the punishment dealt out to those who made the mistakes. Of course, we must accept that because the alternative is to allow the financial system to fail in which case the punishment would flow through to the innocent.

The fact is that the Wall Street Masters Of The Universe were practicing the “Greed is Good” code and playing games with other people’s capital to benefit themselves. There may well also be some investment bankers here in Australia guilty of the same thing on a smaller scale. They all played up the idea that market forces should be allowed to set their salaries in order to justify themselves sucking the blood out of the financial system through complicated investment structures until nothing was left but a hollow shell. Rather than being managers of other peoples’ capital, they became buccaneers plundering it.

Now the so called Market Forces allowed this to happen, but markets always correct themselves, and that is why we can point to those same Market Forces as meting out the punishment of the Global Financial Crisis. Bailing out the World’s financial system now is necessary to preserve economic stability for the community, but that doesn’t do anything about the causes of the crisis. That’s why Kevin Rudd has identified the need to do something about runaway executive salaries.

Fear and Greed are nothing new. They have always been the primary drivers of the market place. What needs to change is who has control over the capital: the pirates who have been employed to manage it, or the people who actually own it.

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