A Puritan View Of The Crash

Commentary

If the Puritan superego were alive and kicking in the American psyche, which it isn't, we'd be racked by shame and guilt today. That's because we would believe our economic misfortune was caused by a binge of covetousness, hubris and moral sloth.

I don't believe homeowners, unemployed autoworkers and Madoff investors are being punished for their sins, quite. But I do not believe that this Prozac-era depression can be fully explained by the economists and technocrats. There is an unquantifiable force field of moral habit and sociological inclination that steers how groups act and guides the economy's invisible hand.

Exploring the soft causes of financial immolation won't yield a unified field theory of modern money, much less a to-do list for regulators and legislators. But there may be some small insights to be had. I am struck by three trends that coincided with the early 21st century crash.

One is that this golden age for the financial sector ended with a crash, as it did in the 1920s. Contrary to what we are inclined to think, financiers don't always dominate the money world: Sometimes real estate developers, manufacturers or oilmen do.

Floyd Norris, the extraordinary financial reporter for The New York Times, recently cited a paper by Thomas Philippon of New York University and Ariell Reshef of the University of Virginia that found, "Financial jobs were relatively skill intensive, complex, and highly paid until the 1930s and after the 1980s, but not in the interim period. ... Wages in finance were excessively high around 1930 and from the mid 1990s until 2006."

The authors said these two boom periods for finance were primarily caused by the need to fund rapidly growing businesses making new technologies — electricity in the 1920s, information and computer technology in the 1980s. This inspired both widespread "innovation" in financial products and a greater use of debt and leverage. That makes for risky business. Additionally, the exaggerated flow of capital and educated brainpower to finance doesn't have the same kind of trickle-down benefits to the rest of the economy as booms in manufacturing, technology or construction do.

The prosperity of the modern investment banker, importantly, had a domino effect on the social psychology — and the moral compass — of America's commercial class. Top executives at regular publicly traded corporations got jealous. In the 1950s and 1960s, the presidents of big companies that produced cars, toothpaste and life insurance didn't make as much money as most successful entrepreneurs and business builders. That seemed to be OK.

But it wasn't OK when midlevel, 30-year-old workers in big, corporate investment banks were routinely making over $5 million a year. It wasn't OK when the top hedge fund operators could make a billion a year.

"In 1960, the ratio of CEO pay at large companies to that of the president of the United States was about 2 to 1. In 2007, it was more than 20 to 1," wrote Harvard scholars Rakesh Khurana and Andy Zelleke in The Washington Post. "In 1980, executives at large companies made about 40 times what the average worker made. Last year, CEOs made about 360 times more than the average worker."

Rinse and repeat: 360 times more than the average worker.

"On the NYSE today, the average share is held for less than a year, as compared to about five years in 1960 and two years in 1990," the authors wrote. "What matters isn't what the companies are actually doing but the expectation that the shares can be unloaded to a 'greater fool' at a higher price. In the prevailing business culture, little has been meaningfully valued by either executives or shareholders beyond the short-term accumulation of wealth."

The rise of both the financial services sector and executive compensation contributed to a deeper and more important shift in the economy: the growth of income inequality.

Economists gauge differences in income using a measure called the Gini index. According to the U.S Census Bureau, the index went from 0.38 in 1968 to 0.47 in 2006, a rise in income inequality of 24 percent.

In 2004, the top 10 percent of earners made 42.9 percent of all the income Americans earned, accorded to a well-known study by Thomas Piketty and Emmanuel Saez. The top 1 percent alone swallowed 16.2 percent of total American income. By the way, to get into that top 1 percent in 2004, you needed to earn $20 million a year or $385,000 a week. Good luck with that.

A trend this sustained and this deep has to be supported by many forces, including government policies on taxation and regulation, corporate governance, investor behavior and the distribution of education. Income inequalities, and indeed the wretched excesses paid to financial workers and corporate leaders, are not simply caused by the greed of the rich.

So what's the moralism of the story? A Puritan interpretation of modern economic history might conclude that an ethical softness and lack of respect for thrift and modesty gave tacit social permission for a 20-year bender of promiscuous debt, conspicuous consumption and coveting thy neighbor's Maserati.

Perhaps a reasonable response would be to require Pilgrim hats and shoes with big, square buckles on Wall Street and in "C level" suites. Just a thought.

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