What happens when greed runs rampant?

John W. Schoen Senior producer • Profile • E-mail

With Christmas upon us, many readers turn to thoughts of generosity, kindness and good will. Shane in Alaska is wondering: what happens if a society is guided by greed?

Why is the destiny of a society guided by corporate greed?
— Shane L.  Wasilla, Alaska

We’re not in the “greed is good” camp, but we’ve yet to see an economic system that can run entirely without it.

Greed is really just an extreme form of ambition for material wealth. If we had no incentives to reward ambition, not much would get done. State-controlled, planned economies — in which a government leader or party decides who gets rewarded for what kind of work — generated a pretty poor track record in the 20th Century.

It’s not as if American corporations are completely unrestrained. Labor laws in the U.S., for example, offer better protection for workers’ rights than in much of the developing world. Securities laws protect investors from the most egregious forms of stock market greed by unscrupulous companies that sell shares to the public. (On the other hand, the unfettered rise in CEO pay seems to have no limit.)

So the question, as we see it, is: how should greed be restrained, and who should set the restraints? In theory, we elect a government that acts on our behalf, setting limits based on an ongoing conversation with voters. In practice, the system is broken because of the way campaigns are financed. When companies and industries write their own rules, it’s a lot easier for excesses to creep into the system. The regulation of credit card rates and fees comes to mind: Congress has held hearing after hearing on abusive lending practices but has yet to create real restraints.

Even when elected officials are more responsive to voters than to contributors, Congress has a history of getting it wrong. The Alternative Minimum Tax, for example, was originally supposed to make sure the wealthiest paid their “fair share.” Because the law is flawed, it threatens to gouge tens of millions of middle income taxpayers unless Congress puts it back in its cage. In the meantime, no one has figured out how to make up the billions in lost revenues that repealing the tax will cost.

That leaves the markets as a mechanism for keeping greed in check. The recent collapse of the mortgage market, for example, was fueled by greed on the part of investors and other intermediaries who looked the other way when loans were approved that stood little chance of being repaid. On the other hand, the huge demand for loans that were unsustainable was also made possible by some home buyers who bought more house than they could afford.

Those who overreached are now paying the price with rising foreclosures and tens of billions in losses being reported by banks and other lenders. The market is “correcting” the excesses brought by greed. Unfortunately, such corrections are blunt instruments that often don’t differentiate between those who deserve to lose and those who are collateral damage.

Still, the current effort by the government to provide relief is a reminder of how difficult it is to set broad rules to govern a human behavior as complicated as greed. We all know excessive greed when we see it. But how do you write a set of rules to prevent it?

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