Should Wall Street Have Saved Itself?

On the way in from doing a CNBC spot early (early) this morning I heard a Cato Institute commentator on NPR suggest that critics shouldn’t be blaming ex- Fed chair Alan Greenspan for inflating a bubble. Better, he argued, would be to blame Wall Street itself, which should have anticipated the real estate bubble, credit crisis, etc.

That is awfully naive. Because not only did Wall Street know there was a bubble, it embraced it, the same way it did the Nasdaq bubble of the late ’90s. It did? You bet — it had to. Shorting the bubble would have been disastrous; avoiding the real estate sector would have had your results trail your competitors disastrously. Creating an environment where financial services companies had to take big risks to maintain parity, and then blaming the banks for doing what the had to do to pacify shareholders, is just plain silly.


  1. Jack Straw says:

    Hmm. So you are writing that it would have been against shareholder interests to accurately evaluate the real estate market and take an appropriate but contrarian position that asset prices were overvalued. Instead, bankers should get paid enormous salaries to simply do what everyone else is doing because that is what the market really wants, after all.
    That doesn’t sound like your normal thinking.

  2. “Creating an environment where financial services companies had to take big risks to maintain parity…”
    It seems like maybe the Cato commenter should have id’d Greenspan as the creator of that environment, and left it at that — one in which money was so cheap that it was also cheap for Wall Street to invest badly.

  3. I see, so if only Greenspan, the “creator of the environment”, had acted more responsibly, all this would have been avoided. That seems an even sillier reading of the situation, Paul. As Jack says, bankers are paid big money to do their due diligence and find out if the mortgages being sourced aren’t fraudulent or the dot.coms actually do anything of value. If they chose not to do so and run with the herd, they and the fraudulent borrowers or worthless dot.commers deserve all the blowback they get. Blame the myopic financiers and shareholders who participated in a speculative orgy, not the guy at the thermostat raising or lowering the temperature and hoping to cool people off.

  4. The Cato guy is wrong in that Greenspan was hugely at fault – he was the enabler. However, the idea that Wall Street CEO’s can’t see or care further in the future than their next bonus payment or option award is the problem with today’s version of casino capitalism. No public company runs their business with an eye toward surviving full cycles of both good times and bad as a successful, going concern anymore. This is why bonus awards and options payments need clawback features. It is also why, unfortunately, regulation is needed and must be especially severe in the world of finance. Grownups have to be looking over the shoulder of the kids so that they don’t blow us all up playing with dynamite.

  5. It’s going to be increasingly difficult to lay blame at the right door in this mess. The fact is that everyone for Greenspan to Wall Street CEO’s the common overextended home owner bear some blame. Finding (and punishing) the responsible party is actually beside the point, “all are responsible, and all shall have losses”. The point is we need to fix the system so it doesn’t happen again. Regulation for the financial system will need to be evaluated, and modified. But, it is critical now that we don’t overreact. I’ve been seeing some disturbing things written out there… Please tell me that nobody agrees with Michael Lewis (Bloomberg) that we should nationalize the financial system!

  6. Mickey, I can’t believe I’m typing this, but if the government is taking the risk, then they should reap the reward. Perhaps the Fed should own $29 billion of warrants on Bear Stearns instead of giving future profits to JPM. Fundamental to capitalism is risk-taking, with subsequent gains and losses accruing to the risk taker. Our current system is privatized profit and socialized risk. Those who gain hugely in good times are not allowed to fail. This is not capitalism. We have an incredibly large agency problem here at the least.