Blame the financial referees, not just the players

Blame attribution is something we all like to do when something goes wrong and the financial crisis covered in “Inside Job” is no different. Knowing what I did about the crisis from information sources such as NPR, I had assigned blame to the private financial institutions (AIG, Morgan Stanley, Countrywide, etc.) as they created this mess, they fed the beast, and then when the bubble popped, the leaders took their money and ran. The lack of apparent guilt and remorse just made me even more certain of the blame. However, after watching “Inside Job”, I think the US government is even guiltier than the private companies.

While I’m not one to give a “pass” to wrong doers (citizens or organizations), government’s job is to make the rules and enforce them in order to ensure things are fair. Imagine a soccer game where the referees didn’t show and the players self-regulated. I doubt anyone would be surprised if the rules were broken. Most athletes and the high-school level and beyond break the rules regularly, and just don’t get caught (“It’s only a foul if you get caught” mentality). If we take this soccer analogy further and say that there are enough goals for every player to continually score on goal with no risk of themselves being scored on, we might have the business climate leading up to this crisis: no referees, no rules, and no downside. Why? Because the referees weren’t there.

Private industry in the United States is incredibly productive and innovative due to the business freedoms that encourage and reward innovation and hard work. That often leads self-interested folks to say that no regulation is needed and that the free market will self-correct (Adam Smith’s invisible hand). That may be the case in a TRUE free market, but that is not reality either. When governmental rules are put in place to regulate the market, but it is the industry titans themselves that set those rules, we get into oligopolistic scenarios, the antithesis of a free market. An independent (or “balanced” at a minimum) government is needed in order to put rules in place to protect its citizens, national economy, and the global economy as a whole. Short-term wins need to be balanced against long-term risks. In fact, corporations owe a debt to the nation as a whole for the security and infrastructure it provides for those companies to operate profitably. Perhaps nobody has explained this “social contract” concept as well as Senator Elizabeth Warren when campaigning in 2011 (link)

As covered in the documentary, this lack of regulation began decades previously with the Regan administration attempting to boost the economy by removing regulation. With this school of thought continuing (through a particular school of thought made popular in industry and academia) through all subsequent US administrations, the regulation was loosened and loosened. Even when the government became aware of what now seems all the warning signs (CDOs, leverage ratios, etc.), they didn’t turn a blind eye, they actually endorsed this behavior.

Does this lack of regulation by the government provide a free pass to the corporations? Absolutely not. These financial leaders, men and women with years of experience and the intelligence to build such complex financial offerings, should have been more responsible. They knowingly focused on short-term revenue and ignored the inherent risks to their corporations and to the global economy. They had the smarts to foresee this crisis and the responsibility to prevent it. However, there are so many players in any market and they are, by definition, motivated by profit. We don’t expect our professional athletes to self-sacrifice a championship (and their related compensation) just because it would be for the betterment of their conference. Instead, rules are setup ahead of time to guide and motivate the teams in other ways to accomplish what is best for all. Likewise, it is the government’s responsibility to regulate markets in a fair and balanced way so as to respect the social contract, ensure fair and level playing grounds, and look out for the long-term interests of its people. Those were all violated in the case of this recent financial crisis and thus the government has the lion’s share of the blame.