22/10/2008 - 22:00

Don’t forget the fear factor

22/10/2008 - 22:00


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AS the global economy reels under the shock of the credit crisis, it's interesting to see how the blame game transpires, especially those voices quick to condemn capitalism as the root of the problem.

AS the global economy reels under the shock of the credit crisis, it's interesting to see how the blame game transpires, especially those voices quick to condemn capitalism as the root of the problem.

Prime Minister Kevin Rudd did much to improve his political stocks with his move to guarantee bank deposits and international lending by Australian banks, but some of his actions since then have been questionable.

Among them is labelling banking leaders as excessively greedy, as he called for tighter control of executive salaries in Australia and overseas to prevent risky behaviour.

His voice is just one of a growing din seeking to address the problem using simplistic concepts.

Corporate greed, we are told by many, is the result of extreme capitalism.

There is no doubt that greed causes all sorts of problems, but to suggest greed and rampant capitalism are intertwined and can be reined in is simply failing to understand the problem or, more fundamentally, the human psyche.

As the great US investor Warren Buffett implied with his views on timely investment, greed and fear are closely linked. When combined, they can contribute to excessive behaviour, such as panic and manipulation.

At its most simplistic, the argument about the global crisis goes like this. Greedy bankers extended cheap credit mixed with financial wizardry to enrich themselves at the expense of everybody, including the very system they used and the companies they ran. When discovered, panic brought down the system.

Of course, it's easy to blame a few.

Greed is often a relative thing. Some banker on a pay packet of $30 million seems greedy to most of us, but what about the business manager who feels the need to buy two houses, or the plumber who trades his dinghy for a fancy new speedboat, or the train driver getting paid $210,000 a year and yet demands more?

Almost every one of those examples could be classified as greed, yet, through a different prism, they could be seen as simply individuals striving to better themselves.

The truth is probably somewhere in the middle. Most of us are very comfortable, yet we want more. It is the human condition and to suggest it was more prevalent in bankers or corporate high fliers is wrong; it's just more obvious. Who are we to label anyone greedy?

And is greed really the root of this behaviour anyway?

Is it our fear of the future, fear of being left behind and fear of failing to use our talents that drives us to want more?

Sure, certain corporate executives have used our fear to their own ends. We fear we can't live well enough in our retirement so we seek out higher returns on our investments. We fear the risk of those investments so we protect them with all manner of insurances.

But doesn't everyone do this? Politicians play on our own fears to help them win elections. Are they just being greedy for power? Or do they fear letting power go to others greedier than they are?

So capitalism is not the only place where greed exists. It simply has the transparency to allow us to see it more readily. We know who earns what.

That transparency will allow us to redirect our investment to where it can work best.

Of course, capitalism works within rules that are not necessarily of its making. For instance, there is much criticism of the short-termism of institutional investors that drives our companies to reward their leaders for short-term performance.

Is short-termism a natural phenomenon? No, it is driven by a tax system that works on a 12-month cycle, designed to suit governments with greedy needs of their own.

Rather than blaming executives for doing what the they were encouraged to do, perhaps it's time to look at the way we regulate corporate activity, including through the tax system, to find a way to encourage longer-term thinking and more sustainable outcomes.

However, as a final note, for all capitalism's faults I note there was much fanfare when governments sought to bail it out of trouble. I don't recall any bailouts for communism when the wall was falling, or for fascism when Berlin was a smoking ruin in 1945.

As economist Milton Friedman reputedly said: "The problem of social organisation is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system."


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