Ben Stein wasn’t all wrong about Goldman Sachs. Yeah, the “humble hypothesis” in his NYT column on Sunday that Goldman economist Jan Hatzius’s bearish stance on the housing market “was a device to help along the goal of success at bearish trades in this sector and in the market generally” was typical half-baked Steinian nonsense. (If Goldman’s traders really are still that bearish on the mortgage market, the last thing they need is some economist blabbing their strategy to the world.)
But his other main point, “that Goldman Sachs was injecting dangerous financial products into the world’s commercial bloodstream for years” and ought to be called to account for it, doesn’t seem so crazy. So far it has been the firms that stuck with subprime for too long and lost lots of money that have been catching all the flak: Citigroup, Merrill Lynch, UBS. Goldman appears to have done a brilliant job of getting out early and even making money betting on the collapse of the subprime market, and for that CEO Lloyd Blankfein and his colleagues deserve lots of applause from shareholders.
That doesn’t change the fact, though, that Goldman was one of the major co-creators of the mortgage debacle. Goldman bankers pocketed big bonuses for behavior that is now driving people out of their homes and threatening the economy with recession. And Hank Paulson, Goldman’s CEO until July 2006 and now the Treasury Secretary, owed some small share of his bonuses to the firm’s dodgy mortgage deals.
So it’s not crazy for Stein to wonder if Paulson really is the appropriate person to be managing the administration’s current rescue efforts, and it’s not crazy for Chris Dodd to demand explanations from Paulson for Goldman’s past behavior. It’s grandstanding, sure. But it’s not, as Felix Salmon put it yesterday, “complete and utter idiocy.”
The reason is that we’ve shifted over the past 30 years from a financial regulatory regime that tried to ban every possible form of excess to one that mostly just hangs back and cleans up the mess after excess turns to bust. The shift happened for a good reason: The old regime had proved incapable of adapting to a changing financial world and by the end was causing more problems than it was preventing. But now we’re stuck with these ugly cleanup operations every few years in which all sorts of guilty people get bailed out with the innocent.
I’m sure that “sensible regulation” could put an end to all this, but that’s an awfully hard thing to achieve in this less-than-sensible world. So what we get instead are after-the-fact efforts to find someone to blame, like Dodd’s demand and New York Attorney General’s Andrew Cuomo’s current crusade. My point is that these blamefests are now an essential part of our financial regulatory process. They result in the punishment of a few wrongdoers, and more importantly scare others away from wrongdoing in the future.
Now I get Felix’s point that Paulson seems to be making a serious effort to keep the mortgage crisis from getting even worse. But he can still do that while taking potshots from Ben Herb Stein and Chris Dodd.
Update: Thanks to commenter Ken Houghton for pointing that I had swapped Ben Stein with his dad Herb in a couple of spots.