Goldman Sachs: a case when the greed becomes too much for Capitalism!!

Imagine you go to bank and the “investment advisor” (I never dealt with them, since I don’t invest) gives you his valuable advice on how to go about investing the money that is lent to you, the bank in the meantime very much aware it will be difficult for you to repay and will eventually default. And on the other desk another part of the bank is putting money on you to fail. In the mortgage crisis that hit US millions lost all their savings and home but companies like Goldman Sachs earned huge profits (they bought securities from the firm, sold them to clients, and then bet against those same securities). Whatever euphemism they use this is gamble and the worst part is they are gambling on common people’s savings. An insider expert in BBC (as also many including one Mr Andrew Clark in Guardian) was quoted as saying this is a “normal practice in big organization”. Really!!. I thought ‘conflict of interest’ was another concept you come across in well written essays!!. Incidentally Goldman Sachs CEO Lloyd Blankfein calls his company ‘a machine” another euphemism for professionalism to obfuscate ethics, clearly. He argues that “there's no problem in selling clients a security that Goldman will then bet against, because that's the nature of the market”. Frankly the issue here is much more than Goldman Sach, it is whole nature of economy system as is being practiced and replicated all around the world.

Two references: one is a book by Michael Lewis “The Big Short” (read few things on the net) and second the documentary by Mike Moore “Capitalism: A love story” (finally I got the cd last week). Both these are apt in understanding the problems of corporates like Goldman Sachs and how societies end up paying for their greed. The shocking level they intrude into policy making (Goldman Sachs is well documented by Moore) and even have the clout to scuttle law making (if this could happen in US, just imagine how much vulnerable poorer societies around the world are). It is not a coincidence that powerful people always talk of removing regulations while poor queue up to elect government to regulate the country. Indeed many Corporates see democracy as a threat. The problem with capitalism is that it is a monster if it is not regulated. Capitalism arose from ethical context but when greed replaced ethical norms the system had already started to cannibalize. Therefore the paradox of unethical act but not illegal. It is becoming very much clear that only democracy can temper market greed. Incidentally Lewis (“The Big Short”) did point out that Goldman Sachs and other banks conspired to inflate the price of mortgage-backed securities well into 2007, even when they knew the true value was falling, only marking them down in value after their own hedging strategies were in place. And that top executives were largely clueless about the risks their organizations were taking.

It is not surprising that Church (et al Protestant ethics and Spirit of Capitalism-Max Weber) nor founders of market economy will find anything admirable about present nature of market functioning. One of the most neglected aspects of Adam Smith is the book “Moral Sentiment”. In the age of market hooliganism it is time to revisit his writings. Smith writes, "A great part of the capital of the country is kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it". Smith saw the task of political economy as the pursuit of "two distinct objects": "first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and second, to supply the state or commonwealth with revenue sufficient for the public services". He acknowledged the importance of interventions on behalf of the poor "When the regulation is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters." Smith was both a proponent of a plural institutional structure and a champion of social values that transcend the profit motive, in principle as well as in actual reach (some quotes taken from Amartya Sen).

The tragedy of the times we live in is that the best brains are going into managing greed, the economics is reduced to gamble at stock exchange (stock exchange is no longer place to raise capital for business). Perceptions are created on daily basis, companies plan for short term take, employee bonuses and perks are based on year end results. What incentive is there not to invest in something that makes money today but will likely implode three years from now?

Michael Lewis (the author of “The Big Short”) who left Wall Street at a time when the big investment banks were turning from partnerships into publicly-traded companies (which placed the ultimate risk on a new and remote participant- the public shareholder) writes “There was a very clear sense that we were behaving in ways with this money that we would not behave if it was our money.”. He further points “People on the trading floors could be sitting two desks away from each other, and not have the first freaking clue what the other guy was doing. That the places had become so big and so balkanized that nobody had a really clear overview of their own firms.” He concludes “It took four years before any serious reform passed through Congress after the crash of 1929, I think the endgame here, and what's likely to happen, is that these big firms are going to become much less profitable businesses and much less interesting places to work. Saner, duller. The political winds are so clearly blowing in the direction of changing the way these places operate”

I guess last few decades were about Wall Street making billions of dollars at the expense of Main Street. Time for change the Americans voted for is now. What happens in America will significantly impact the world.