CUSTOMERS - April 29, 2010

The cities, pension funds, universities, and other charities that have been ruined by the fall in the stock market (also called the economy) are looking for a place to put their anger. As in all such exercises, no one wants to acknowledge any fault for himself. As in the subprime mortgage mess, the easiest place to put it is on the borrowers, since they own no TV stations, newspapers or magazines. Even the fact that they were misled, or even lied to, does not erase all of their own participation in their losses. But the roots run deep. It is a fundamental belief of the brand of civics and economics we take in as children that the pursuit of self-enrichment by the rich and powerful will make us all into prosperous citizens. It is amazing how much contrary evidence there is to that creed, but it remains a pillar of the18th century movement called The Enlightenment. The Free Market, we are told, is what has made us rich in the XX Century, and can be relied upon to continue to do it. An extreme case is seen in Goldman Sachs. Many of their customers thought that they would never betray them for their own profit, even though the charter of The Enlightenment had no evidence for the belief that honesty is the best policy and Goldman would do best by being best. Actually, the Chicago school of economics claimed that Game Theory had proved that unbelievable statement. Still, it appears that many of us believe that the smoothest road to riches lies in being a junior partner to a successful crook. Every con man knows that the royal road to a scam lies in convincing the mark that they will together cheat a third person or, better yet, a company or a state. And so it was with the marks who bought the toxic assets, and in a sense that applies also to those who were induced to believe that they could buy without risk into a rising tide of house prices, based on lies about their ability to carry the loan. Goldman’s customers learned otherwise, to their cost.