Saturday, March 28, 2009

Bankers: The Height of Evil and Stupid

It's been 3 weeks, so maybe I should make another post!

The subject line really does appear to be one of the popular political lines drawn these days, though it's rarely explicitly laid at as such.

For instance, consider the following links:
1. Bankers are immoral
2. Bankers are stupid

Alright, I'm mis-characterizing #2 a little bit. The larger point of the IF post is that we need to regulate maximum bank size, because big banks have negative side-effects that carry real costs, without much obvious benefit. But one line does stand out:
Bankers are famous lemmings, and a whole lot of small banks who pile into the same poor investment can fail together like one really big bank



I am not entirely sure that this is going to be an effective rallying cry. First, one can hardly call the bankers "immoral" and then blame the lack of their morals for the current economic crisis. Now, certainly, there may be bad eggs among them, but the same could be said for any industry (Doctors still have to evaluate the moral importance of this guy, after all). The difference being that, in finance, a few bad regulations and a few bad apples can lead to major problems. In finance, one guy can lose $7 billion. It's very difficult for a single doctor, even if he is exceedingly incompetent, to start an epidemic. He would have to be consciously evil and stealing biological weapons from the US government.
There is also the obvious issue of making a bad bet. Let's say that the financiers were perfectly socially conscious. They might find their securitization of subprime loans to be a great social good, because they honestly thought that they were reducing risk while also providing houses to people who historically could not afford them. The African-American home ownership rate probably went up quite a bit during the Housing boom. That's a good thing, right?
Well, it's not a good thing if you realize that the bets you were making were bad. But then the error isn't of morals, but of information. Our bankers didn't cause a massive system collapse because they were immoral: they caused it because they were wrong.

There is also the issue of incentives; people were paid to do things that were wrong. Mortgage originators and their employees were paid by volume, leading to them selling lots of mortgages in an attempt to make more money. The same applies to other professions as well: doctors pushing drugs because they are paid to by drug companies, for example, or Arthur Andersen helping to cook the books at Enron. It's hard to be good when people are dangling a big paycheck to be evil. But that doesn't mean the industry as a whole failed because they were bad people, so trying to instill a sense of "wider social purpose" would be bad. We want them to be smarter.



And that's not to say bankers are totally stupid, either. For this, I'll outsource the arguments to Megan McArdle

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