I was pleased that Matt Ridley quoted me in his blog about the Emperor’s New Clothes Trilogy and out of curiosity I read his previous post (“ Chiefs, priests and thieves“). Strangely enough it’s closely related to the post of mine that followed The Emperor’s New Clothes Trilogy: about Jane Jacobs’s view of two moral systems, guardian and commercial.
In “Chiefs, priests and thieves”, Ridley wrote about what he’d learned from what sounds like a truly fascinating book: Empires of the Sea by Roger Crowley.
As always, ordinary people wanted to carry on with commerce, but chiefs, priests and thieves — sultans, emperors, popes, pashas, holy knights and corsairs — just kept plundering the fruits of that commerce for their own enrichment and their own glory. Little wonder that, as the historian Meir Kohn concludes, preindustrial government was predominantly predatory in nature. Not that it is entirely free of that suspicion today.
This is exactly what Jacobs was talking about — the close connection between government and predation, in contrast to trading (commerce). And it’s what Russ Roberts is talking about in his terrific essay about the cause of the financial crisis. When large financial firms become close to government (“In the week before the AIG bailout that put $14.9 billion into the coffers of Goldman Sachs, Treasury Secretary and former Goldman Sachs CEO Henry Paulson called Goldman Sachs CEO Lloyd Blankfein at least 24 times“), they become predatory rather than commercial. Was Goldman Sachs providing useful innovation when it provided and sold the bonds that the SEC is now complaining about? No, it was basically predatory, under the guise of being commercial.
I think the rest of us let this sort of predation happen because of apocalyptic stories spun (always in future tense) by leaders: The infidels will . . . The terrorists will . . . The financial system will . . . Under cover of these stories, leaders do stuff that strengthens them and weakens the rest of us. But recently a countervailing story has gathered strength:Â Guardians as idiots. These stories are past tense: Harry Markopolos went to the SEC five times with incredibly persuasive evidence of Madoff’s Ponzi scheme, and the SEC did nothing. I think the hearings about this were incredibly embarrassing to SEC officials and a big reason they’re now doing something about Goldman. Another example of the genre is …First Do No Harm, wherein doctors nearly prevented an epileptic child from getting life-saving therapy. And, of course, Al Gore is looking more and more foolish as it becomes clear he trusted research (that hockey-stick graph) he had no clue about.
More More future tense: “To the Indios they said, “If you don’t work, this God will kill you.”
When businesses are in a position to exploit people, they are just as happy to do it as any government, or any church. When a government represents the interests of the people a business or other government seeks to exploit, it’s generally all they have to protect them.
It’s absurd to suggest that businesses become predatory only when a government is involved. In any group of people enabled to exploit others, some will happily step up.
blogs.discovermagazine.com/notrocketscience/2010/04/27/power-breed-hypocrisy-%e2%80%93-the-powerful-judge-others-more-harshly-but-cheat-more-themselves/
I’m surprised you are joining the criticism of Goldman Sachs. You say they were being predatory in selling the bonds. But the bonds were known to be from spotty mortgages. They were basically a way for people to bet on whether those mortgages would be paid off. Investors got high interest rates in return for accepting the risk of default. But they took that risk voluntarily.
Goldman is accused of not telling investors everything about how the mortgages were chosen. But apparently the basic facts about the deal were available. It’s going to be something of a judgment call as to whether Goldman was obligated to share everything they knew. Many observers are skeptical about whether the SEC will prevail in court (if it gets that far). Given the legal ambiguities, it’s a stretch to call this predatory behavior.
In finance people take opposing positions all the time. Long vs short, buyer vs seller. Differences of opinion are what make markets possible. It’s good because it means that voluntary trades make both sides happier. Plus these transactions benefit bystanders by providing information about fair prices and future trends which are crucial to allocating resources. Goldman was an important part of this picture, and from what I read the Abacus bonds fit pretty well into this model.
The problem is the idiotic pension fund managers, cities, and other institutional investors that bought these bonds because they were so easily deluded by financial charlatans carrying pie charts, credentialed investment experts and theories, and ratings agencies. All those morons kept their jobs, the taxpayer gets screwed.
sorry, not bonds… derivatives
vic, you think institutional investors should ignore ratings? that seems like asking a lot.