Ethics or systems?

In the spring of 2008, I attended the University of Denver's graduation cermonies, at which former chancellor Dan Ritchie delivered a blistering tirade against the investment moguls who seemed to be undermining our economy with their greed. Some of us were surprised to hear such a screed by such a congenial, relatively conservative businessman. But his target was interesting. He wasn't blaming America's regulatory laws or policymakers for the eroding economic conditions. He was claiming that there were simply too many unscrupulous people in charge of too much money. A new ethic could fix that, he argued.

Similarly, note David Brooks' article from the other day:

In the three decades between 1950 and 1980, personal consumption was remarkably stable, amounting to about 62 percent of G.D.P. In the next three decades, it shot upward, reaching 70 percent of G.D.P. in 2008.

During this period, debt exploded. In 1960, Americans’ personal debt amounted to about 55 percent of national income. By 2007, Americans’ personal debt had surged to 133 percent of national income.

What's the cause of this?

These numbers are the outward sign of a values shift. If there is to be a correction, it will require a moral and cultural movement.

For Brooks, as for Ritchie, the problem is one of morality. People with money simply aren't using it properly. Investors are becoming reckless. Households are spending themselves into credit card debt because they're not being careful.

I don't buy it. Brooks notices that something seems to have happened around 1980. Well, yeah, it's called deregulation. There was a Supreme Court decision in 1978 and some changes in lending laws in the early 1980s that allowed credit card companies to set higher lending rates. This, combined with the decline in interest rates in the early 80s, made credit cards a hugely profitable industry, and they started giving out cards to pretty much everyone.

In 1988, I was covering the student senate at UC Berkeley for the Daily Californian. There was a small hubbub for a while because Citibank was giving out credit cards to college students, but only to those with certain majors -- computer science, chemistry, etc. -- that were likely to feed into profitable careers. A bunch of senators representing humanities majors got angry about this and, as I recall, wrote a stern letter to Citibank about it. To their credit (heh), Citibank sent a representative to the next student senate meeting (the guy looked like Gordon Gecko) who apologized and said that they've decided to end that form of discrimination. And the humanities majors rejoiced and got cards.

Of course, what was going on there was that the bank was loosening its standards. Granting cards to everyone seems like a very democratic thing to do, but it tends to lead to more poor people going into debt.

My point is that borrowers didn't become less scrupulous. They only used to seem scrupulous because no one was handing them credit cards with ridiculously high ceilings. Similarly, Wall Street investors haven't become more reckless. Washington just stopped policing them.