In the aftermath crisis of 2008, a common explanation is that “greed” caused the collapse. When thinking about this explanation in some more depth, one must consider that in order for “greed” to be the reason behind the collapse, then people would need to have become abruptly more greedy than normal.
The contrary view is that if greed is a constant function. (meaning that people do not become more or less greedy over time) There are most certainly people who are highly greedy and others who are less greedy. However, it seems quite unlikely that people would become abruptly more or less greedy than their natural disposition.
Is it possible that greed is being used as an easy answer to distract attention away from what really caused the problems?
My perspective is that incentives play a very important role in economic activity. Trying to diagnose the factors causing a financial collapse must begin with a look at the incentives that were put in place by government policy. Fannie Mae purchases the overwhelming majority of mortgages. They also required that banks underwrite high-risk borrowers in order to have their mortgages purchased. is it any wonder that risky mortgages increased? Interest rates are held artificially low through excessive monetary expansion. Is it any wonder that the number of high-risk loans exploded?
This isn’t to say that “greed” doesn’t factor into the equation. Is it fair to say that greedy bankers caused the financial crisis when the policy they were working under was written by politicians who wanted to curry favor with special interest groups? It is very important to avoid knee-jerk responses to problems that lead to easy answers. We must dig deeper to find the real causes so that they can be avoided in the future.
Who Gets to Define Greed?
The most important piece in the discussion about greed is defining what it means. This is a critically important distinction since the topic is so emotionally charged. In this situation, the person who sets the tone on the definition of ‘greed’ typically sways the court of public opinion. Unfortunately, this court of public opinion is highly subjective.
Because of this, each person needs to look beyond the politics and find the true root cause of situations. This way we can make our personal decisions in an optimal manner. In most cases, we are not able to directly alter the global financial and political environment. However, we can make different decisions for our own personal lives. In making these decisions, it is less important to understand “who” is really greedy. It is even more important to understand what we can do to avoid being devastated by the impacts of government policies when easy money inevitably turns into inflation.