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 Are CEOs at investment banks
evil? Of course they are! Everybody knows that. But why are they evil? Nature or
nurture? The New Yorker magazine argues firmly in favor of the latter. In this
week's issue, a piece by John Cassidy informs us that Charles Prince, Stanley
O'Neal et al. were not only not at fault for last year's meltdown, but were, in
fact, victims of the "rational irrationality" that rules
capitalism.The piece does make some valid points about the madness of crowds and its role in inflating and perpetuating asset bubbles. But none of that is anything new. Nor are the points about liquidity (it seems to evaporate exactly when markets need it most, leaving the government as buyer of last resort). To hear Cassidy tell it, the boom in mortgage securities was something the big banks simply couldn't pass up if they wanted to remain competitive. Their CEOs knew it was risky and may have even known the subprime stuff was a ticking time bomb (the story has some pretty telling quotes from Prince in particular). But it didn't matter because shareholders were (supposedly) clamoring for them to jump in with both feet. To refuse would have put their jobs and careers at great danger. To wit: "Attempts to act responsibly and achieve a cooperative solution cannot be sustained because they leave you vulnerable to exploitation by others. If Citigroup had sat out the credit boom while its rivals made huge profits, Prince would probably have been out of a job earlier." It wasn't just the guys in the corner offices either. The culture of irrationality pervades all the way down the Wall Street food chain: "The same goes for individual traders at Wall Street firms. If a trader has one bad quarter, perhaps because he refused to participate in a bubble, the results can be career-threatening." Nice, so not only were the CEOs not to blame, the guys beneath them weren't either? Maybe all the out-of-work Wall Street folks should attach Cassidy's piece to their resumes when they send them out. But if nobody is responsible on an individual basis, who or what is? Cassidy points the finger squarely at free market capitalism itself. Instability in financial markets is no aberration, he writes, but "the inevitable result of individuals going about their normal business in a relatively unfettered marketplace." Which is not a new argument either. Karl Marx said the identical thing a century and a half ago: "In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur -- a tremendous rush for means of payment -- when credit suddenly ceases and only cash payments have validity." Oh, and by the way, this whole moral relativism argument is literally identical to the first line of defense uttered by Nazis and war criminals. You know, they were just following orders. Everybody was doing it. Which is not to compare CEOs to Nazis (maybe in next week's edition of The New Yorker). To be sure, the financial crisis has taken significant, maybe even unprecedented steps by governmental bodies to rectify. More may be needed before we're through. Executive compensation surely needs to be rethought, as the article points out. But this does still not mean capitalism itself is broken. The New Yorker has provided some compelling analysis of the crisis. But neo-Marxist fantasies should be best left to undergraduate dorm rooms and out of serious discourse. - Nathaniel Baker
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