Did Greedy Execs Really Cause the Problem?

All the events with the economic meltdown in the housing finance industry made me think about reality and rational behavior... We are told (over and over) that the whole problem came from greedy wall-street executives, that they were purposely giving out loans to people who could not afford them, and that we need more regulation to stop it from happening again! But does that make any sense? Let's first ask some basic questions.

Pretend that you are a business owner- What is the basic reason that you are in business, or the reason why you engage in any business transaction? To earn a profit. If you thought of something else, then you may want to think about the question some more. If your first motivation isn't first to make a profit, then you can't really ever accomplish any of your other desires like providing meaningful employment or other worthwhile goals. Say that you are a banker- For what purpose would you give a person a loan? To earn a profit! There can't be any other reason otherwise you will not stay in business long. How would you determine who to give a mortgage to? Would it be based on the person's need, based on whether or not they deserved a house, or would it be based on an analysis of whether the person will likely be able to pay the payments? Clearly you would look at the applicant and weigh the risk of giving that person a mortgage, and if the risk was high that he or she would default, you would not make the loan.

If these banks executives were driven solely by greed in pursuit of profit, then does it make any sense that they would give loans to people who they knew could not afford them? No. People defaulting on the loans that you give them is not a way to gain profit. So, if it doesn't make sense that greed was driving the lending behavior, something else must have motivated such industry wide behaviors...

"I'll give you a hint. Contradictions do not exist. Whenever you think that you are facing a contradiction, check your premises. You will find that one of them is wrong." Francisco d'Anconia to Dagny Taggart in Atlas Shrugged

The behavior was going on, however, my purpose is not to answer the question of why the behavior was going on, but to point out that the reason we have been told doesn't make sense. It has contradictions. There are lots more questions to ask about this episode in our history. Keep asking them, and you will likely find that lack of regulation was not even a small factor... You may even find that those calling for more regulations were a large part of the problem to begin with.

There is a new book out (I have not read it but plan to) that addresses the behaviors that were going on. The book is- Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
By: Gretchen Morgenson, Joshua Rosner

Gretchen is a business writer for the New York Times