Nearly all news coverage has expressed the shock and outrage of the American people at corporate greed. But, to be honest, I really don’t see much outrageous about the actions of large companies, before or during the current economic crisis. AIG in particular has been publicly criticized, rightfully I would argue, for giving out $165 million in bonuses it gave out after receiving $170 billion in bailout money. I should add a caveat to my criticism: as XKCD pointed out a few days ago, $165 million is a very small percentage of $170 billion (less than a tenth of a percent).

There are a few more things it is important to remember before you pull out the pitchforks and torches, as Stephen Colbert threatened to in tonight’s Colbert Report. First and foremost, it’s important to remember that AIG was simply an insurance company that insured banks and other financial institutions that didn’t do proper research when buying bundled mortgages (in the form of mortgage-backed securities) from lenders such as Countrywide. The banks and financial institutions purchased these securities because they had been given top ratings by respected evaluators such as Moody’s, who were paid by the lenders to evaluate these securities. If the banks and financial institutions had done their own research they would have found out that lenders had been making more and more loans to customers who wouldn’t be able to repay them. Likewise, if the insurance companies had looked into exactly what the financial institutions they were insuring were buying, they most likely would have been far more hesitant to back them. However, neither investigated exactly what the lenders where doing, and, ergo, the banks and financial institutions continued to buy mortgages from lenders and the insurance companies continued to back the banks financial institutions that bought the risky mortgage-backed securities simply
because they always had.

If anyone is to blame for our current situation, it’s the lenders that issued a great number of risky mortgages. Unsurprisingly, these companies were among the first to affected by the fallout from the various forms of trickery they had employed, from using unfair terms in mortgage rates that started low and then suddenly got higher to the bundling of these risky mortgages in securities that spread the risks throughout the market.

The only mistake made by the banks and financial institutions that bought these mortgage-backed securities and the companies that insured them is not doing the legwork that would have exposed the deep flaws in what they were buying and insuring. The banks and financial institutions should have been smart enough to do this research, considering the relationship between the lenders that sold mortgage-backed securities and the evaluators that rated the risk in purchasing these securities.

If the government can be blamed for our current mess, it’s because it did not put greater regulations on lenders (in terms of who they could issue mortgages and lend to or how they could bundle and sell these mortgages to banks and financial institutions), or the raters who failed to give accurate evaluations of these securities because they were in the employ of the lenders. However, you can only blame the government if you believe it’s the government’s job to provide that kind of regulation. The government did not think it had to heavily regulate the lenders, rating agencies, banks, financial institutions and/or insurance companies because it felt that the kind of crisis we’re now in could happen.

Therein lies the root of the problem: our current economic crisis developed because the lenders, raters, banks, financial institutions, insurance companies (including AIG) and government all assumed that the sort of crisis that has occurred could not possibly happen. In some ways it reminds me of the (famous last) words of a brilliant financially conservative professor (one of my favorites here at Wesleyan)–“the market is far less likely to fail than the government.” If I remember correctly, he was referring to social security reform (creating 401K-esque pockets for people who wished to invest some of the money in their social security accounts), but the larger point, that the market is very, very unlikely to fail, (even more likely to fail than the US government!) in a way reminiscent to the Great Depression, has now been proven incorrect.