A Total Breakdown in Trust
posted by Frank Pasquale
The recent Madoff scandal, along with the ongoing Blagojevich farce, are almost too repulsive to blog about. The sheer chutzpah of the banker and stupidity of the politician are breathtaking. The Panglosses among us would like to believe that a “few good men” could have averted something like the banking crisis–a Bullworth-meets-Carlyle theory of history. But it’s increasingly apparent that our Darwinianly structured markets and politics have made fitness synonymous with greed and self-dealing in far too many settings.
That’s one reason why this Speaking of Faith interview with moralist Parker Palmer is so refreshing. It is rich with ideas and insights, and at the core are Palmer’s ideas about the necessity of trust and community. Here is a brief glimpse of the ideas discussed:
Alexis de Tocqueville [essentially argued] that the French Revolution happened long before it happened. The eruption that shattered French society at the end of the eighteenth century was the result of small seismic shifts that had been accumulating for decades deep underground. If people had paid attention to the tectonic instabilities caused by greed and injustice, and had responded wisely to the nervous needles on their inner seismographs, the “Reign of Terror” might have been avoided.
A parallel point can be made about the economic terrors that now engulf America: at some level, most of us knew they were coming. Who doesn’t know that a society in which the rich get richer while the poor get poorer is a society that will someday have to pay the piper? Who doesn’t know that when a relatively small fraction of the world’s population uses its power to command and consume a disproportionately large fraction of the world’s resources, the chickens will come home to roost? Who doesn’t know that an economic system that encourages us to live beyond our means and refuses to regulate greed is one in which our avarice will come back to bite us? Who doesn’t know that at every level of life, from personal to global to cosmic, what goes around comes around?
[Unfortunately, while r]eclaiming identity and integrity in personal and public life may make you a person who evokes the better angels of our nature . . . it will not improve your “bottom line” — at least not in the understanding of that phrase that has landed us in so much trouble. Take, for example, the companies that banks hire to identify people on the verge of foreclosure, people so desperate to salvage their homes that they can be conned into signing up for yet another mortgage scam. Who cares about destroying these families’ finances, along with the credit market itself, as long as the scammers’ bottom lines improve?
Palmer has great wisdom to offer in the face of the terrible incentives we all face in a “devil take the hindmost” society. And his book The Courage to Teach is a great guide for educators as we try to take stock of the moral challenges of our own institutions and profession.
December 13, 2008 at 3:40 pm
Posted in: Economic Analysis of Law, Securities
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Responses (7)
Dave - December 13, 2008 at 6:51 pm
Great post Frank. Don’t forget Marc Dreier in your rundown of this week’s repulsive behavior: http://blogs.wsj.com/law/2008/12/08/doj-files-criminal-complaint-against-marc-dreier-others-sue/.
Seth Finkelstein - December 14, 2008 at 3:18 am
Do these people have anything to offer in the way of PRACTICAL solutions?
It’s all well and good to preach – but a significant portion of the population is not going to care. What then?
A Voice of Sanity - December 14, 2008 at 5:37 am
Who doesn’t know that a society in which the rich get richer while the poor get poorer is a society that will someday have to pay the piper? … Who doesn’t know that an economic system that encourages us to live beyond our means and refuses to regulate greed is one in which our avarice will come back to bite us?
Has anyone looked at the final result of the asset stripping of very robust companies with junk bonds? Were there any benefits except to the pirates? What were the costs to the country of losing such great names, now all too often merely rented out to disguise cheap junk from Asia?
A.W. - December 14, 2008 at 12:52 pm
Here’s the solution on the market end of things…
Stop trusting people. Look behind the numbers. Look to the moral end of things, too.
For instance, the company i work for has massive loans from important banks whose names you instantly recognize. They aren’t being bailed out right now. Why? Well, you take the loan my company has: it has what i call an “economic morals clause” in it. It says that if you have any dealings with anyone that is underhanded, they can withdraw the loan and demand immediate repayment. And “underhanded” is as broad as it sounds. You could win a legal case by some trick of law, for instance, and that counts. Why? Because they don’t want to deal with someone who escapes their obligations by trickery.
You cite this as darwinism, but what you forget is that death is as much a part of darwinism as anything else. you do not get giraffes with long necks just because the food is up high, but also because the ones who can’t reach the higher food die more often. You don’t get cheetahs that can run 100 mph just by having fast cheetah genes, but also by weeding out those who are slow.
So a few humans being ruined financially, the economic darwinist version of death, is part of the system. Sucks for them, but it is necessary to preserve the freedom that you sneer on as “darwinism.” There is simply no way to prevent every single economic scandal without eliminating all human freedom. that’s not to say these bad actors shouldn’t go to jail, but we should not squelch freedom so much that it is impossible to committ bad acts, because in the process you will squelch freedom that you and i would care about.
And even then, you probably wouldn’t eliminate corruption. a govt. takeover of the private sector merely means that there will be more —-ing valuable things in the hands of people like Blaggy. Blaggy shows that the government is not the cure of the corruption problem.
Brett Bellmore - December 15, 2008 at 7:42 am
With respect to A.W.’s comments, I have to admit that I was confused by the notion that the success of a Ponzi scheme, which relies on people trusting you to provide high rates of return without a detailed explanation of how they’re achieved, is due to a lack of trust.
What we’ve got here is a crisis level failure to exercise due diligence, an excess of trust.
Frank - December 15, 2008 at 10:45 am
Thanks for the comments….for Seth, here is something that is a little more practical:
http://www.imf.org/external/pubs/ft/fandd/2008/12/sacasa.htm
A.W. - December 15, 2008 at 2:06 pm
Brett
Excellent point.
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