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April 07, 2009

Poor Greed
by Brady Willett and Todd Alway

The Wall Street Journal recently suggested that a 'culture of greed' may be to blame for today's crisis. Billionaire investor Stephen Jarislowsky has said that he thinks 'extreme' greed was to blame. And nestled within the mob of protestors ahead of last week's G20 meeting was a little girl, no more than 5 or 6-years of age, holding a sign saying 'You Greedy BosTards'. Let us simply say, while acknowledging the views of the Wall Street Journal and Mr. Jarislowsky, that the protesting little girl may have been misled.

Greed: Excessive desire to acquire or possess more (esp material wealth) than one needs or deserves.

To begin with, what people seem to be confused about is the difference between greed, fraud, foolish investment decisions, and regulatory neglect. The financial crisis resulted because of a serious escalation of fraud, foolish investment decisions, and widespread regulatory neglect. Greed on the other hand is simply the compulsion that helps anthropomorphize the capitalistic spirit. There is nothing necessarily right or wrong with greed, and there is no magical measuring stick to measure when an escalation of greed goes from being a good thing to bad. Rather, there is only greed - something that in and of itself does not cause financial crises (many factors unite to spark the 'booms') and something that does not drive people to commit illegal acts (immorality does).

Frustrated by the 'bust'? Riot!

The theme threatening to turn greed into a profane word is loss of control. Frustrated from watching their investment dollars disappear, losing their jobs, and/or having their retirement plans shredded, many have lost the financial control they once thought they had. And they are mad. So they attack overpaid bankers and traders, politicians, and anyone else they think is to blame for their current state. They attack what they believe is the enemy in greed.

Don't get us wrong, the increasingly visible indignation from all walks of life is potentially productive in that it may help coerce regulators and politicians to start doing their jobs. After all, if the dissent grows large enough and/or can acquire some semblance of organization, it is feasible that politicians will have to start exacting fundamentally sustainable policies and - dare we say it - that the Federal Reserve System will be unceremoniously dismantled. Imagine a world where markets are free yet competently policed, risk and reward actually mean something, and credit is no longer the building block for financial disasters but something that is produced thriftily and thoughtfully. Just imagine!...we wonder if you can.

But alas, the controlled demolition of a financial system grounded upon debt, fraud, and a lack of transparency, would require the actions of people who are not themselves deeply embedded in this process. What we have instead is a new cadre of functionaries in the Treasury and Fed that have deep links to the old. We have individual voters demanding not so much a reduction of manipulation and an increase in visibility, as the use of political power for their own ends: I need to make my money back so ban short selling, manipulate accounting rules, and bail out my holdings in Citigroup!

Where Have All The Gekkos' Gone?

With his 'greed is good' speech in the movie Wall Street, Gordon Gekko crystallized why greed is right and why greed works. Mr. Gekko also added the following: "I am not a destroyer of companies. I am a liberator of them!" As policy makers liberate taxpayer monies to selectively bailout entities that should have been allowed to be destroyed, people should be longing for the day when greedy characters like Gordon Gekko can take a more active role in the marketplace. Gekko-like greed can serve the function of making the difficult choices corporate America and policy makers fail or take too long to make. Here are some recent examples of how greed could have played the role of common sense.

* GM can't pay its bills and no one, including elected officials, is stupid enough to throw more money into the company. GM immediately goes bankrupt. This is the simplest story ever told and it should have happened last December.

* Bear Stearns is about to fail so all the company's counterparties logically start to run for the hills. What they do not do is pray for a government or Fed bailout and/or hoard cash as a defense. From the ashes of the systemic meltdown that quickly devours Lehman Bros., AIG, Citigroup, JP Morgan, and countless other financial institutions across the globe, capitalism ultimately reemerges. While not as simple as the GM story, this tale nonetheless transpires much more quickly than path we are now on...

Instead of embracing greed and allowing the marketplace to efficiently allocate and destroy capital, policy makers have arbitrarily extended every effort imaginable to keep the debt, derivatives, and deception-based financial monstrosity alive a little while longer. Ironically, the result is that capitalistic greed has been caged: a confused Gekko has gone AWOL and is thinking about moving into gold and shorting capitalism, market 'price' has become the punch-line that arrives only after the next stimulus packager or bailout, and unbridled pressures compel regulatory bodies to affix preposterous rules that attempt to conceal the chaos.

The Un-winnable War Against Greed

The angry (some might say 'greedy') crowd has focused their energies on combating capitalism in a frantic and anarchistic manner. Many average Americans that never saved a dime and thought that they could become rich by owning stocks and flipping houses and are now being called victims. Profound anger. Deep frustration. Devastating and mounting losses. And as the darkness grows the question is finally asked:

Should we simply restart the monopoly game over by seizing all the property and money and redistributing it?

Suddenly the little girls crayon colored sign, which just so happened to be in red, begins to make some sense.

Altruism: Behavior by an animal that is not beneficial to or may be harmful to itself but that benefits others of its species.

As elected officials devour taxpayer funds to start running busted companies, we fail to see their sacrifice. We also fail to see how squandering the next generation's wealth by chasing investments that no one wants to own today makes sense. What we do see is escalating acts of madness.

Amidst this insanity, those that aim to hastily put greed on trial need only witness the example of Buffett. By some people's definition Warren Buffett, the world's second richest man, is one of the greediest bosTards that ever lived. The only problem is that Buffett has led a modest life and he has donated the bulk of his wealth to charity. His greediness notwithstanding, is Buffett to be damned or admired?

As for Gekko, while he did embody the capitalist spirit at times, he also got arrested - not because he was greedy but because he broke the law. The morality of competitive card players and professional athletes is the determining factor of whether they break the rules. The same holds true for greedy investors.

In short, greed is not some exogenous and ruinous force that mysteriously and temporarily infects the marketplace until it sparks a financial disaster. Rather, greed is the constant. Everything else is the mirage; 'everything else' (to paraphrase Obama) temporarily provides an oasis of hope without the context of concrete change. Blame the crisis on the regulators and policy makers that were either asleep or paid-off, blame those that the broke the law, and blame (or thank for the opportunities) the passive, naïve and outright stupidity of many investors. Yes, blame and demand real change! But leave poor greed alone.

Brady Willett and Dr. Todd Alway
FallStreet.com

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