The blogosphere is abuzz with the spectacle of Congress grilling Goldman Sachs executives. On Wall Street, it's just another day at the office. There are so many delicious ironies here, but one in particular stands out.
When Michael Swenson, a managing director for the structured products group at Goldman says "I don't think we did anything wrong," he is referring to current law—the Giant Vampire Squid did not break the law. The exquisite irony here is that the very Congress asking him these "tough" questions is the same Congress that changed the law when they passed the The Commodities Futures Modernization Act of 2000.
First, the Act clarifies that certain over–the–counter (‘‘OTC’’) derivatives transactions are outside of the jurisdiction of the CFTC.
Having decreed OTC derivative transactions free of any meaningful regulatory oversight in 2000, the same Congress is shocked, shocked that gambling was (and still is) going on in 2010.
Michael Swenson may be right—this giant bloodsucking invertebrate may not have violated the letter of the law. Perhaps Swenson would also deny that he and the others testifying are degenerate pond scum, garbage-eating slime, sleaze bags, etc.
Here Swenson would be wrong. By even the weakest definition of ethical (moral) behavior, shorting your own clients or setting up buyers of your "structured products" to fail is, in Christian terms, a sin against the rest of us. These Goldman executives are leeches on society's body, sucking off blood which would otherwise support the body's metabolism. If the Wall Street-Washington Axis of Evil weren't rigged to protect such parasites, they would fail of their own accord because they're untrustworthy.
Which brings us to Adam Smith, who wrote The Theory of Moral Sentiments in 1759. Smith was a professor of Moral Philosophy. His oft-cited Wealth of Nations was a follow-up to his Moral Sentiments. As Harvard economist Amartya Sen points out, Adam Smith did not think that the "self-love" which motivates economic exchange—"Greed Is Good"—was the only requirement for a Good Society.
Smith discussed that to explain the motivation for economic exchange in the market, we do not have to invoke any objective other than the pursuit of self-interest. In the most widely quoted passage from The Wealth of Nations, he wrote: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love." In the tradition of interpreting Smith as the guru of selfishness or self-love (as he often called it, not with great admiration), the reading of his writings does not seem to go much beyond those few lines, even though that discussion is addressed only to one very specific issue, namely exchange (rather than distribution or production) and, in particular, the motivation underlying exchange. In the rest of Smith's writings, there are extensive discussions of the role of other motivations that influence human action and behavour.
Beyond self-love, Smith discussed how the functioning of the economic system in general, and of the market in particular, can be helped enormously by other motives. There are two distinct propositions here. The first is one of epistemology, concerning the fact that human beings are not guided only by self-gain or even prudence. The second is one of practical reason, involving the claim that there are good ethical and practical grounds for encouraging motives other than self-interest, whether in the crude form of self-love or in the refined form of prudence. Indeed, Smith argues that while "prudence" was "of all virtues that which is most helpful to the individual", "humanity, justice, generosity, and public spirit, are the qualities most useful to others". These are two distinct points, and, unfortunately, a big part of modern economics gets both of them wrong in interpreting Smith.
The nature of the present economic crisis illustrates very clearly the need for departures from unmitigated and unrestrained self-seeking in order to have a decent society....
Smith used derisive terms to describe those who engage in unrestrained greed—
... he called such promoters of excessive risk in search of profits "prodigals and projectors" - which, by the way, is quite a good description of many of the entrepreneurs of credit swap insurances and sub-prime mortgages in the recent past.
The term "projector" is used by Smith not in the neutral sense of "one who forms a project", but in the pejorative sense, apparently common from 1616 (or so I gather from The Shorter Oxford English Dictionary), meaning, among other things, "a promoter of bubble companies; a speculator; a cheat". Indeed, Jonathan Swift's unflattering portrait of "projectors" in Gulliver's Travels, published in 1726 (50 years before The Wealth of Nations), corresponds closely to what Smith seems to have had in mind. Relying entirely on an unregulated market economy can result in a dire predicament in which, as Smith writes, "a great part of the capital of the country" is "kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it."
The theoretical basis for unrestrained avarice as allegedly set forth by Adam Smith does not exist. The wasters and destroyers have been, and are, running the show in 21st century America. Ever since The Wealth of Nations, these "projectors" have used a flawed interpretation of Smith to justify theft.
There will always be scumbags among us. The trick is to keep them bottled up. To paraphrase Adam Smith, we should never have allowed a situation to arise in which a great part of the capital of
the country is not available to those most likely to make a
profitable and advantageous use of it, but is instead put into the hands of those which are
most likely to waste and destroy it.
I believe it is too late to overturn the current order, which favors the profligate over the prudent. After almost 30 years of fraud and waste, watching our corrupt Congress grill greedy gamblers investment bankers does not fill me with Hope that Change We Can Believe In is just around the corner.