“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.”
The assumption behind Adam Smith’s concept of the “invisible
hand of the marketplace” is that if participants in a free market seek to
maximize their personal gains, society will benefit as a whole even though the
individuals have no other motivation beyond their self-interest. The character
of Gordon Gekko in the 1987 film Wall
Street expressed the idea succinctly with his exhortation that “greed is
good.”
However, in practice there have been a few problems with
relying completely on “the invisible hand.” First, for numerous psychological
reasons people do not always act according to their self-interest. For example,
many people are greedy and greed is not the same as self-interest. Greed is a self-destructive desire that is
listed as one of the “seven deadly sins.” Second, people do not always know the
course of action that is in their self-interest. In our modern complex economy
the best financial decision for an individual is not always obvious. Most
agreements concerning mortgages, consumer financing products, credit cards, and
bank accounts are complex contracts that are difficult for anyone to fully
understand. Without knowledge and understanding it is not possible for
consumers to act in their self-interest.
The government can do little to change human nature, but it
can put in safeguards against its excesses. For example, the government can
require that financial contracts be written so that consumers actually
understand the agreements. To better inform consumers, in 2011 the federal
government created the Consumer Financial Protection Bureau (CFPB). The purpose
of the bureau is to regulate consumer financial products so that the agreements
are fair and transparent. But, since its inception, the CFPB has been
excoriated by the banking industry, and the bankers have unleashed lobbyists in
Congress in a successful bid to limit the CFPB’s effectiveness.
The irony of this hostile action against the CFPB is that
the banks blamed consumers for the financial crisis. Consumers purchased homes
that they couldn’t afford, falsified mortgage applications, charged too much on
credit cards, and in general didn’t understand the obligations and consequences
of the agreements they signed. In other words, consumers were greedy and greed
isn’t good for the banks.
However the banks want to continue the same consumer lending
practices that preceded the financial crisis. Without the obfuscation and
one-sidedness characteristic of many of their lending agreements, the banks
feel that they can no longer profit. In other words, greed is good for the
banks, except for the fact that it wasn’t, which is why so many of them failed.
Complex contracts designed to disguise inherent unfairness,
benefit neither party. If a contract is so one-sided that a clear understanding
of its terms would not lead to an agreement, it is better for both parties that
there be no agreement. The banks should actually be vocal advocates of the CFPB
because adequate regulation would insure a level playing field.
Much like the role of drug testing in sports, in which no
competitor should be able to get an unfair advantage by engaging in unhealthy
practices, financial product regulation should serve the same purpose – keep
all players healthy.
But the banking industry continues to push for unfair
advantages because greed is good. In other words, greed drives the market. At
least until the market crashes, in which case the destructive consequences of
greed are everyone else’s fault and everyone else should have to pay.
What is often overlooked in Adam Smith’s quote is that the
butcher, the baker, and the brewer all need each other if they are each to have
a complete meal. If greed ruins anyone of them, it will ruin them all. In other
words, greed is not good and it is not what Adam Smith meant by self-interest.
Posts
No comments:
Post a Comment