Greed Is Fine. It's Stupidity That Hurts.

Masked activists stage a protest in New York on Tuesday.
Masked activists stage a protest in New York on Tuesday. (By Bebeto Matthews -- Associated Press)
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By Steven Pearlstein
Friday, October 3, 2008

During financial crises like this one, after people have had their fill of discussions about margin calls and credit-default swaps, they experience a strong desire to have the whole thing put in some larger and more human context. Invariably they come around to some variation of, "Isn't this really just a story about excessive greed?"

I've never really figured out how to answer that question. In a capitalist economy like ours, the basic premise is that everyone is motivated by a healthy dose of economic self-interest -- the shopper looking for the best bargain on tomatoes and the farmer looking to get the highest price for his produce, the grocery clerk looking to earn the highest wages for restocking shelves and the investor looking to earn the biggest profit from Safeway stock. Without some measure of greed and the tension it brings to most economic transactions, capitalism wouldn't be as good as it is in allocating resources and spurring innovation.

Perhaps that's why most definitions of greed refer to an excessive desire for wealth that is beyond what anyone really needs or deserves. The obvious problem with that, of course, is that those are terribly subjective criteria. Do you draw the greed line at two cars, a three-bedroom house, two weeks at the beach in the summer and college tuition for the kids? Or is it at seven houses, 50 pairs of designer shoes, a yacht, two Bentleys and a Renoir?

Others suggest that for greed to really be greed, the money or goods that are desired have to be denied to somebody else who might want, need or deserve them. A landowner who gets rich by overcharging tenant farmers who can barely feed and clothe their families -- he's obviously greedy. But somehow the owner of a restaurant in the Hamptons who overcharges his millionaire patrons for lobster salad and foie gras is a lot less greedy.

In many minds, greed may have less to do with the amount of wealth or possessions someone has, or aspires to have, than it does with the way in which it is earned. Even before they decided to give away most of their money, nobody seemed to begrudge Bill Gates or Warren Buffett their billions or criticize them for their "unbridled" greed. That seems to have a lot to do with the fact that Gates and Buffett made their money on the basis of their own ingenuity, skill and hard work. On the other hand, when people line up to buy tickets to a Powerball lottery with a $10 million payout, we don't consider them particularly greedy just because they want to get rich through dumb luck.

If the person who wins that lottery, however, doesn't send some of that money to his struggling Aunt Mildred or offer to fix up the local Little League field, most people would call him greedy. But no matter how many millions the overpaid corporate chief executive gives away to charity, in the minds of many, greed will always be his middle name.

Which brings us to the now widespread belief that the cause of the current financial crisis has been "the greed on Wall Street." Both John McCain and Barack Obama believe that. So do Joe Biden and Sarah Palin. A clip search of major publications over the past month turns up about 2,700 stories that contained the words "Wall Street" and "greed." The month before, there were less than 200.

If there is a surprise here, it is that anyone should be surprised by the level of greed on Wall Street. Wall Street is nothing if not an organized system of greed, a high-stakes game in which the object is to take advantage of customers and counterparties by buying pieces of paper from them at less than they are really worth and selling them to others for more than they are worth. And while it's hard to see a grand social purpose in all that, it has proven a relatively efficient process for connecting people who have money with the households and businesses that want to borrow it.

The big problem with Wall Street isn't that it's greedy-- it's that it keeps making the same mistakes over and over. Each cycle, the masters of finance start out with reasonably good products and good intentions, only to get swept away by their success. They become arrogant, take too many risks and begin to believe their own marketing spiels. Then, when the cycle turns against them and the risks turn sour, they try to cover it up and begin lying to their customers, to regulators and to each other. Trust erodes, and the whole thing collapses.

In the populist "greed" fantasy, it is ordinary people who are the losers while the Wall Street bigwigs walk off with all the loot. But in the real life version, most of the bigwigs lose as well. They lose their jobs, their stock becomes worthless, their reputations are ruined. They spend the next several years shelling out $700 an hour to lawyers to defend themselves against lawsuits and regulatory inquiries and $250 to psychiatrists to help figure out where they went wrong. Bottom line: They wind up worse off than they would have been if they had simply done their jobs well, put their customers first and managed their companies for the long term.

To some, that may be a story of greed. To me, it looks more like old-fashioned incompetence.

Steven Pearlstein can be reached atpearlsteins@washpost.com.


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