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Where there is gold, there will always be fools

October 09, 2009|By ALLAN POWELL

In "Fool's Gold," author Gillian Tett has done all of us a favor in sharing her painstaking research about the people, the setting and the tragic consequences of unbridled human greed in our financial markets. While her fateful tale is packed with facts and figures about reckless financial gambling, the story is more about the human condition.

The leadership of this relatively small group of financial wizards was not the older, wiser leaders from the ranks of the financial elite. Rather, it was the much younger, rasher members of the banking and investment community.

This book is not easy reading. At times, the newly created terms for innovative investments were reminiscent of reading about quantum physics. Honesty requires the admission that much of this new-fangled talk was over my head. As the story unfolds, it turns out that a good number of these "best and brightest" conceded that they, too, weren't all that clear about what was going on.

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At base, the story of the tragic financial meltdown that climaxed in the latter part of the first decade of the twenty-first century is about the delicate management of risk vis-á-vis profit. This is also about good judgment and the use of money entrusted by others competing with the dream of personal riches.

What began as a series of innovations in investments ended as a catastrophic failure and ruin. Even such informed people as Alan Greenspan, chairman of the Federal Reserve, confessed that he was overtaken by events and admitted that he was helpless to turn things around.

There is an identifiable list of those who share the blame for the eventual collapse. Included are the bright young investment bankers who concocted the exotic forms of derivatives and pushed for a lowering of the banks' required reserves so that more money was available for speculation. They also worked relentlessly to allow commercial banks to engage in investment services.     

Another species of collaborators were the investment rating firms who engaged in a blatant conflict of interest by giving triple A ratings with abandon to securities clearly of inferior rating in order not to alienate the sellers and, at the same time, enhance their fees. Using word magic, a triple B, or less, could be transformed into a triple A without guilt or a sense of dishonesty.

The stability of a very large segment of our economy was undermined when banks offered mortgages to people who were not qualified buyers. These "sub-prime" mortgages flooded the housing market -- putting it at serious risk. This was aggravated when bankers packaged these questionable sales into bundles and used them as securities. They were not opened and inspected for true value.

This whole gruesome scenario brought to mind a profound analysis of the origins of the French Revolution made by Count Ségur. "We walked on a carpet of flowers, unconscious that it covered an abyss." Just as the carpet of flowers collapsed and the Monarchy was undone, our house of cards collapsed and, into the pit went $15 trillion.

It is hard to know for sure what kind of people we were dealing with in the rarified world of high finance. Behaviorist psychologists advise us to cease trying to study mental states that are hidden and look closely at behavior that is observable. If we follow their advise we see what look like "yuppies" -- young, upward-bound, ambitious to a fault, arrogant, very intelligent and self-centered people.

They do not appear to have altered their view of what happened. They still oppose reregulation, tout the virtues of a "free market" and are unwilling to admit that they were guilty of "short-termism" -- the fixation on short-term, quick results at the expense of slower-paced, long-term thinking. It remains to be seen if society will react to such a fixed thought pattern and rope in these financial mavericks. One fact, however, is dependable: Wherever there is gold -- there will always be fools.

 

Allan Powell is a professor emeritus of philosophy at Hagerstown Community College.

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