Friday, January 25, 2008

David Brooks on the Economy

Today's column from David Brooks looks at the economic situation we face in the coming year.

There is roughly a 100 percent chance that we’re going to spend much of this year talking about the subprime mortgage crisis, the financial markets and the worsening economy. The only question is which narrative is going to prevail, the Greed Narrative or the Ecology Narrative.

The Greed Narrative goes something like this: The financial markets are dominated by absurdly overpaid zillionaires. They invent complex financial instruments, like globally securitized subprime mortgages that few really understand. They dump these things onto the unsuspecting, sending destabilizing waves of money sloshing around the globe. Economies melt down. Regular people lose jobs and savings. Meanwhile, the financial insiders still get their obscene bonuses, rain or shine.

The morality of the Greed Narrative is straightforward. A small number of predators destabilize the economy and reap big bonuses. The financial system is fundamentally broken. Government should step in and control the malefactors of great wealth.

The Ecology Narrative is different. It starts with the premise that investors and borrowers cooperate and compete in a complex ecosystem. Everyone seeks wealth while minimizing risk. As Jim Manzi, a software entrepreneur who specializes in applied artificial intelligence, has noted, the chief tension in this ecosystem is between innovation and uncertainty. We could live in a safer world, but we’d have to forswear creativity.


He concludes that the ecology narrative is not to the liking of many people, so it won't be the story that is told. But he believes it is true.

The lesson of the Ecology Narrative is that, in most cases, the market corrects itself. Maybe this year banks will change their pay structure so there’s not so much emphasis on short-term results. Maybe companies will change their boards to improve scrutiny over complex new instruments. In short, markets adapt.

People who embrace the Ecology Narrative don’t like the offensive bonuses that get handed out on Wall Street. They just don’t see any way the government can curtail them without rending the fabric of the ecosystem. They don’t like the periodic crises, but don’t see how government can prevent them without clamping down on innovation. The challenge is to give people the means to withstand the perturbations.

The Ecology Narrative is not morally satisfying. I wouldn’t bet on its popularity as a backlash against Wall Street and finance sweeps across a recession-haunted country. But the Ecology Narrative has one thing going for it. It happens to be true.


I agree that the ecology narrative is true as well, but I also recognize that within this version of the system, there are few if any checks to prevent the greed narrative from becoming the subtext.

Brooks is a pretty sharp guy most of the time, but in this case he is seeing the world in rather simplistic terms. Human nature, when unchecked by moral constraints or legal constraints, will often become attached to greed, especially in a "kill or be killed" environment like Wall Street.

There are no easy answers to solve this problem, but we should at least tell the truth about it.


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