Greed Is Good

President Obama has blamed the current economic crisis on the “ethic of greed” that pervades Wall Street. His view finds much sympathy on “Main Street.” After all, a quick survey of just a few of the financial industry’s titans yields nothing but front-page scandals—from Bernard Madoff, the mysterious asset manager “extraordinaire” who was revealed to be the mastermind behind a wealth-draining Ponzi scheme, to John Thain, the former Merrill Lynch CEO who spent a reported $1.2 million redecorating his office suite (complete with a $35,000 commode) at the expense of the U.S. taxpayer while his company posted incredible losses.

The general explanation being fed to the public for our current financial crisis also rests on this “ethic of greed.” Money-grubbing banks, so the tale goes, provided loans to homeowners who were clearly ill-equipped to repay them. Somewhere along the line, Wall Street CEOs and executives ignored their consciences and followed their wallets, seeking high returns while ignoring the potential ramifications of their imprudent lending practices.

There’s one major problem with these versions of the story, however. While the outcomes in this case may have been extreme, the “greed” that Obama blames is nothing new. Rather, it is inherent in the market itself. Wall Street CEOs and financial kings have never had any professional interest other than making as much money as possible. And, until now, we thought that was just fine.

The primary goal of a financial firm has always been to maximize monetary profits; unlike “nonprofits,” a financial company exists solely to make as much money as possible for its executives, employees, and shareholders. One might rightly characterize this profiteering spirit as “greed,” but, prior to the recent economic meltdown, such greed was never an issue for the public. Bernard Madoff’s investors did not care if their money fueled a Ponzi scheme as long as they received their regular returns. Shareholders of Merrill Lynch were unbothered as the company’s managers liberally applied corporate funds to beautify their offices, as long as they were paid their quarterly dividends.

Our complacency may have stemmed from the fact that, in a free market, there is a natural check on this profiteering mentality. A typical business transaction is guided by a classic cost/benefit analysis, in which a firm weighs the potential rewards of a given action against the plausible ramifications of such action. In the case of a financial institution, its investment decisions, lending practices, and general business choices are guided by the monetary risks and potential losses associated with those actions. Imprudent and miscalculating banks would thus be out of the game as a capitalistic consequence of their actions, while the pool of remaining banks (and the executives running those banks) would be of a higher quality, having demonstrated an ability to make prudent and wise decisions in the face of higher-reward—and correspondingly higher-risk—opportunities.

But, with government-sponsored enterprises (like Fannie Mae and Freddie Mac, which are largely responsible for the financial crisis through their politically driven efforts to securitize mortgages that should not have been made in the first place), the emergence of government bailouts, and the overall shift to a more state-involved economy, we are beginning to see free-market assumptions wither away. Banks no longer must perform meticulous cost/benefit analyses for each and every loan or investment they make, and troubled financial firms can afford to take on even more risk knowing that the government and the American taxpayer will have their backs.

Greed is integral to success on Wall Street and was until recently a quality we celebrated during years of economic prosperity. Channeled correctly, it can fuel innovation, creative business strategy, and the completion of financial transactions on an enormous scale. Cut loose from its free market moorings, however, the profit motive may become dangerously misguided. Pumping taxpayer dollars into failing Wall Street firms will have all of the negative and none of the positive consequences of greed. Given no incentive to be prudent, we can expect them to do nothing other than what they’re best at—being greedy.


Shankar Ramaswamy ’11, a Crimson editorial writer, is an economics­­ concentrator in Lowell House.