The truth is, some of us did see this coming. We tried to stop the excessive risk-taking that was fueling the housing bubble and turning our financial markets into gambling parlors. But we were impeded by the culture of short-termism that dominates our society. Our financial markets remain too focused on quick profits, and our political process is driven by a two-year election cycle and its relentless demands for fundraising.
I’ve had a unique vantage point during my five-year term as chairman of the Federal Deposit Insurance Corp., from the early failure of IndyMac Bankto the implementation of reforms designed to ensure that no conglomerate ever again is deemed “too big to fail.”
Now that I’m stepping down, I want to sound the alarm again. The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favoring the short term over the long term, impulse over patience. We overvalue the quick return on investment and unduly discount the long-term consequences of that decision-making.
Our decades-long infatuation with financing our spending through ever-growing debt, in the private and public sector alike, is the ultimate manifestation of short-term thinking. And that thinking, particularly in business and in government, is actually getting worse, not better, as we look for solutions to put our economy on a sounder footing.
Today, some want to repeal or water down key financial reforms, fearing that strengthening the rules for firms will curtail our recovery. But the history of crises makes clear that reforms will make our economy stronger in the long run.
While short-termism on Wall Street and in Washington was a huge driver of the most recent financial crisis, we all fall prey to this tendency to some extent.
Households have failed to save enough money to carry them through hard times or to achieve long-term goals. It became old-fashioned to save up for the down payment on that first home. Taking out a mortgage shifted from the most serious financial decision a family would make to a speculative bet on how far home prices would rise. Homeownership went from being a source of stability in our economy to a source of instability.
Business executives squeeze expenses of all types to meet their quarterly earnings targets, even cutting research and development that could create a competitive advantage down the road. This market failure leads to under-investment in projects with long payoff periods. “Patient capital” has become almost quaint.