Tuesday, February 09, 2010

Naive Anthropomorphisms


Children's stories contain animals, even objects, that have human-like characteristics. They have not only intentions, but often faces. Further, they are either good or bad. Only later do we learn that most of the world is not so much malicious as indifferent. Hopefully, we learn that many most facets of society, such as income distribution, or the creation of cities, of technologies, is an emergent phenomenon, created but not designed by individuals, and singular individuals mainly help us apply a narrative.

So, smarmy Elizabeth Warren, writes an article today that suggests all bank policy is the result of bank CEO intentions. They " brought the economy to its knees", and now are "determined to stop any kind of watchdog" (the SEC, Fed, FDIC, OCC, and state insurance regulators don't seem to count). They are "bonus babies who were so short-sighted that they put the economy at risk and contributed to the destruction of their own companies". She shows not mere mistrust, but contempt for the the financial market she plans on controlling. As William F. Buckley put it, I would rather have Citibank be run by the first 100 names in the Boston phone directory than a bunch of Harvard professors.

I've worked with a CEO of a large financial organization. He was a nice guy, but he had very little to do with the pricing, product design, or other tactical strategic issues in the bank. He managed 'the process', personalities, did public relations, and perhaps championed a handful of corporate actions such as acquisitions. To personify the banking industry's actions as the will of their individual leaders, is like saying that America does what Obama wants it to do. They have more of a say than anyone, but it's still a small say.

If Jamie Dimon wanted to price, say, credit cards at a rate higher, lower, or less nuanced than other banks, more power to him, but if that tactic started losing money, it would be abandoned, and if it made money it would be copied. That's how the market works, profits tell banks what to do, losses what not to do. To the extent they are making short term profits, say by lending to windfarms due to a stimulus package windfall, investors are the only ones with real incentives to evaluate and punish firms for this behavior. After all, in Washington, they not only still encourage home loans with only 3.5% down, they shamelessly blame bankers for lending too much to home buyers while boasting about their affordable housing initiatives that made any regulatory concern about lower underwriting criteria impossible, and indeed sued firms, and blocked their mergers, if they did not meet lending targets to people who by definition had little income (historically underserved communities).

That someone with such a understanding of complex financial institutions highlights her naiveté, as if things are what they are, not because they are an equilibrium of borrower and saver preferences, but rather, the whims of The Captains of Industry in their top hats. To give her power, would merely reinforce what everyone in the industry knows, that Washington regulators are out-of-touch. For her, competition is simply a "race to the bottom to develop new ways to trick customers", and so we should expect her to create a 'stable' industry, like in our education and postal industries, where there is limited competition but lots of guarantees, and little or no productivity growth. She knows what banking customers want, and so doesn't trust a market to provide quality services and products because evil CEOs hypnotize their customers into thinking they want things they really don't. A better definition of a do-gooder cannot be found. I think she might be successful in her primary objective, in that socialists countries were immune from financial crises. I just think she doesn't realize this cripples GDP growth, as highlighted by the Cold War 'experiment'. After all, you can keep a pet from getting sick by killing it, if that's your sole objective.

Bad things aren't the result of evil intentions, so much as smart people overconfident in their ability to make the world a better place. They see people who disagree with their means as disagreeing with their ends, totally dismissing the possibility that they could be making things worse. She thinks her new fiefdom, the CFPA , will "consolidate seven separate bureaucracies, cut down on paperwork, and promote understandable consumer products. In the process, it will stabilize the industry, rebuild confidence in the securitization market, and leave more money in the pockets of families". ORLY? When has a new bureaucracy reduced bureaucracy? When has it 'cut down on paperwork'? The pages of fine print and endless places to initial are because of our laws and regulations, not in spite them. Will the bureaucracy make people wealthier? Well, government's the main place of employment growth, so I guess things are looking up.

12 comments:

Anonymous said...

Interesting post as always, but I was struck by this:

Bad things aren't the result of evil intentions, so much as smart people overconfident in their ability to make the world a better place.

In other words, it's silly to think that bank CEOs with nine-figure bonuses had much of a role to play in the financial crisis. but it's entirely possible that the Community Reinvestment Act and people like Elizabeth Warren were critical players.

That just seems wrong to me. It's like saying, there's no such thing as conservative politics, only liberal politics; all conservatives want is for an apolitical unfolding of naturally occurring events. And I don't think this is true. It's wrong to take the attitude that everything boils down to politics (there are millions of individuals with some degree of freedom who shape the world inch by inch) but politics matter and conservatives engage in politics as well.

J said...

Just as Disney knows that children will reject the idea of a complicated, indifferent, impersonal world, Warren knows that people fervently wish to be reassured that their problems are caused by identifible bad people or spirits that can be exorcised. She is a champion debater, a politician in search of power, let's hope that she is smartly speaking "pour la gallerie" while being perfectly aware of the real world. Just as bankers do what the profits tell them, politicians say what the votes tell them. They rarely do what they say, policies mostly "happen".

randian said...

In other words, it's silly to think that bank CEOs with nine-figure bonuses had much of a role to play in the financial crisis.

Bankers are in it to make money, not make the world a better place. It's the idealist fools in government that are trying to do that, and as usual failing miserably because they don't understand that "better" doesn't come by regulatory fiat.

zby said...

Sounds like plain old scapegoating. But yeah - I concur Anonymous said above - there is no 'natural balance of economy', economy is shaped by policies and it is often that the outcome of 'less regulation' is actually more regulation but by other agencies (like private monopolies).

Robert Johnson said...

"That's how the market works, profits tell banks what to do, losses what not to do."

There is a subtlety though. When there is a delay in a feedback loop, wild oscillations due to overcorrection are the likely result. So, when banks can make money hand over fist in the short run by implementing bad policies but those same policies will ruin the bank in the long run, then there IS a problem.

Maybe it's a problem that markets can correct, but so far I don't see that happening. Is there a pure market solution for the business cycle?

Anonymous said...

Bankers are in it to make money, not make the world a better place. It's the idealist fools in government that are trying to do that, and as usual failing miserably because they don't understand that "better" doesn't come by regulatory fiat.

So there is no such thing as good and bad, except when people try to do good -- that's bad.

The hostility to do-goodism is an interesting thing. If a liberal suggested that strict rent control policies would lead to a giant residential construction boom and landlords renting apartments out left and right, conservatives would laugh. But these conservatives are intrigued by the possibility that government pressure on banks to lend money to black people led to the complete dissolution of underwriting standards throughout the entire global economy.

This is a great blog though (and I'm a godless radical socialist).

David said...

Anonymous, you said:

"In other words, it's silly to think that bank CEOs with nine-figure bonuses had much of a role to play in the financial crisis. but it's entirely possible that the Community Reinvestment Act and people like Elizabeth Warren were critical players."

I don't know whether you're misreading the post, or whether I'm misunderstanding you, but I wonder whether you're seeing a contradiction where there is none.

To me, the post is about unintended consequences; the banks are not absolved, but did not intend to bring down the system like Warren believes. We can argue forever about how much each actor contributed to the mess, but the point here is whether the mess is intended, and whether it is even possible to get a complex system to sit up and beg on command. This is where Warren is naive. Moreover, she has far more power to mess with the system than any CEO, so her ignorance on finance and economics is that much more appalling.

randian said...

"The hostility to do-goodism is an interesting thing."

Do-gooders seek utopia and rarely care what gets destroyed in the process. Conservatives know utopia is not an option.

Anonymous said...

Let's pick a relatively uncontroversial example. In 1850, some Americans owned other human beings.

1) Was this state of affairs good, bad, or neither?
2) Did people "intend" for slavery to end, or was the abolishment of slavery a purely emergent phenomenon?
3) If there were some people who "wanted" slavery to end, were they utopians? Was utopia an option?

Now I don't really want to get into a discussion about the bloodbath that was the Civil War, but my point is that the conceptual framework presented here -- which posits that only actions motivated by the possibility of monetary profit can possibly produce good in the world -- is wholly inadequate to treat slavery as any sort of moral issue. And thus I find blanket statements like "utopia is not an option" to be ridiculous, more dogmatically unfounded than anything Elizabeth Warren could possibly say.

The notion that "utopia is not an option" can be salvaged somewhat by distinguishing between, say, radical utopians who find no value in the status quo, and moderate incrementalists who wisely understand the limitations of government. Of course this turn mainly consists of pretending that someone as milquetoast and deferential as Barack Obama is a wannabe radical socialist dictator who understands nothing about the limitations of power.

Anyway, in short, I find the moral theory presented here intriguing but fundamentally incomplete -- it seems to be an opinion about legitimacy (government actions for the "common good" = fundamentally illegitimate) dressed up as a basic "fact" about how the world works. My two cents.

sms gateway said...

>1) Was this state of affairs good, bad, or neither?

That depends WHEN.
Morality is not an absolute, it is evolving and changing.
Majority of, let's call them 'decision makers', for the last 5000 years would answer to this question: "good".
Majority of people, at this time, would answer "bad".
What does it tell us?
It does not make sense to make a judgment "over time", a valid judgment is only momentarily,
it only exists in time, just like space.

Anonymous said...

If you want to be picky about it, it also depends on FOR WHOM. For slaves, bad; for slaveowners, good. (I applied the principle of revealed preference.) Whether morality is absolute or relative or time-dependent or whatever is besides the point, however -- I was just saying that "utopia is not an option" is a dramatically incomplete moral philosophy.

Or to put it another way, it seems silly to reply to criticisms of the Obama administration with "quit your whining, utopia is not an option." And yet what is the difference? The difference lies entirely in whether or not one thinks the Obama administration is part of the "natural order" of things.

Anonymous said...

This is a remarkably ill informed post.

First, the credit card example is patently ridiculous. Credit cards are an oligopoly in the US. Credit card company can and do have substantial pricing power, and the idea that the "market" can correct it reflects abject ignorance. The business has substantial barriers to entry, hence the high prices will not lead to more entrants and a challenge to high prices.

Similarly, you depict CEOs as face guys who have little involvement in business decisions that affect the bottom line. That certainly is not true of Dimon (ironic that you mention him) who is a notorious micro manager. And if the CEO is not meaningfully responsible for the actions taken by his enterprise, how can you justify the exorbitant pay?