Fourth Ghost of Christmas Past

In last night’s debate, Sarah Palin was demonizing Wall Street for their corruption and greed. Wall Street investment banks have no doubt had some involvement in the current financial situation we are in today, but probably stop short of corruption and what does greed have to do with anything anyway?

I’m not really sure what greed is, although many people give it the negative connotation associated with A Christmas Carol and Ebenezer Scrooge. In the play, Scrooge hordes all of his profits and resources, seemingly to the detriment of his workers and acquaintances. Unfortunately the fourth ghost of Christmas past never visited Scrooge to tell him what a good deed he was doing these people. By accumulating these resources and allocating them in a very efficient manner, he was likely able to provide opportunities to more people in his town that may not have been available otherwise.

What did Wall Street do that was so greedy? They came up with innovative ways to carve mortgage securities into different tranches with similar risk profiles and apply leverage so investors could efficiently and effectively allocate capital to this market. The result of their so called greed was that the mortgage backed securities market grew from nearly nothing in the late 1970’s to a $10 trillion dollar market today. As a result home ownership reached record levels.

Who was greedy? Politicians were greedy in that they continually applied pressure to Fannie & Freddie to continually expand this market which resulted in lending to unqualified buyers. These politicians were simply telling Scrooge to give away the farm in hopes it would be returned in pristine condition 30 years later. It’s not the markets failing that caused this; it’s the government’s intervention in the markets that has led us to where we are today.