Saturday, November 8, 2008

There is no question that we are in a financial crisis — and no doubt that it has and will continue to bleed into the real economy. It is more debatable how we got here and who is to blame.

It is trite but true to observe that there are many contributing factors and parties. Nevertheless, central to the issue, in my view, are two causes: the encouragement and enabling by the federal government of homeownership beyond legitimate affordability, as captured in the lowered lending standards of Fannie Mae and Freddie Mac, and the use of enormous leverage on the part of the professional community.

Regarding the latter: it was a mistake and, yes, a very big mistake. Was it greedy, corrupt and stupid or was it understandable? What is greed? Would we all be better off if Bill Gates, Steve Jobs and Warren Buffett had retired young and spared us those products and decisions that made them wealthy beyond imagination?

When does more become greed? Corruption and stupidity are part of the human condition, but in 50 or so years of exposure, I haven’t found them to be widespread amongst the very successful.

The reality, is that financial risk takers have been well-rewarded for the past 70 years for ignoring the remote possibility of an Armageddon, betting on a glass half full. Furthermore, financial innovation encourages the often illusory belief in risk reduction and transfer. A good idea — no. Greedy, corrupt and stupid — also no. A few bright or lucky people are able to change their stripes at just the right moment, but very few, indeed.

As to the political class, spare me the self-righteous hand-wringing. Not only were they in the vanguard that gave rise to the crisis, but they and the great majority of us have long fed at the table of the creative, the productive and the hardworking.

The political class and its favored beneficiaries, as well as the rest of us, have long enjoyed the product of their efforts and have appropriated large fractions of the rewards for the benefit of those whom we choose to anoint.

When they err with excess, we whine and squeal and criticize. We can and probably will impose lots of new regulations, but we, more than they, will pay the price in reduced benefits of innovation and production.

The best regulator, in reality, is the punishment that the market imposes for error. That already has been felt. What remains is the rescue of all of us, not a bailout of the few.


Forest Hill, Md.

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