If your local baker confessed to you that he secretly topped his cakes with cheap, crummy-tasting icing, would you think that he was an evil exploiter of the masses, and that his scheme was an indictment of capitalism? Or would you think, “This guy is destined for bankruptcy”?
Most of us would agree that, in the words of one commentator, it’s “a basic truth: If clients don’t trust you they will eventually stop doing business with you.” Not when it comes to Wall Street, though.
Last week Greg Smith, one of Goldman Sachs’s 12,000 vice presidents, very publicly resigned from the firm, declaring in a New York Times op-ed that “I can honestly say that the environment [at Goldman] now is as toxic and destructive as I have ever seen it.” The company, he continues, puts making money above the interests of its clients.
Now, it’s certainly possible for a company to operate this way (I know nothing about the actual culture at Goldman). But the “basic truth”—I was quoting Smith’s own op-ed—would imply one of two things: either Goldman is going to be punished by the market as it loses the business of once burnt, twice shy customers, or it is somehow being insulated from market forces by the government (or some combination of the two).
What it wouldn’t imply is that the company is “too focused” on profits. To the extent a market is free, the only way you profit in the long run is by creating value. The baker only profits if he makes good cakes, and the banker only profits if he helps his clients profit. A market punishes anyone who isn’t focused on value creation: he may get away with cutting corners for a while, but ultimately he’ll go broke. It’s as simple as that.
But Smith wants us to see Goldman’s focus on money-making as corrupt, leading it to take short-sighted actions at the expense of customers. He speaks of employees wanting to “make the most possible money off” (why not from?) clients, and of employees “ripping their clients off” (he offers exactly zero examples). He wants us to see Goldman engaging in bad business as a result of the profit motive. But if Goldman is acting badly—and that’s far from obvious—it’s because it is failing to abide by the profit motive.
Smith’s op-ed—and the reaction to it—illustrates the way in which a certain moral view underlies the push for bigger government. Viewing money-making as amoral (and even immoral) and money-makers as greedy and selfish, many Americans are led to conclude that the profit system itself has to be restrained in the name of “the public interest.”
Robert Reich, for instance, says that Smith’s critique of Goldman is “way too narrow,” that it applies to Wall Street as a whole, and that the best policy is not for Goldman to reform its culture but for the government to ramp up financial regulations.
As Wall Street hedge fund manager Barry Colvin has put it, “What Mr. Smith alleges is not just an accusation against Goldman Sachs, but a back door attack on capitalism as well. ‘Goldman Sachs is bad. Goldman Sachs represents capitalism. Ergo capitalism is bad.’”
There is an important debate that needs to take place about government cronyism on Wall Street. I am the first to condemn special favors doled out to firms such as Goldman Sachs. But whatever their sins against capitalism, there is no sin in earning money and being proud of the money one has earned.
UPDATE: Yaron shares his thoughts on PJTV.