Blaming crisis on greed is naive.

Byline: The question that needs to be answered now is how global financial sector collapsed.

The global financial sector has collapsed, taking with it the global economy and all but ensuring a deep and protracted recession. Now begins the collective hand-wringing and endless soul-searching that compel us to examine the question: What caused this to happen? A clue to the answer can be found in the question itself. Most pundits debating the failure of the global financial system have presumptively refined the question to: How did capitalism fail?

The transition from inquiry to foregone conclusion for such an important question is unsettling. The social left has seized upon this non sequitur, remonstrating that unfettered capitalism has allowed rampant greed to destroy the world's economies. Greed + unrestrained capitalism = ruin, goes the righteous cry. Not surprisingly, demands to severely curb capitalism, or even scrap it in favour of a different, supposedly more altruistic economic system, are gaining momentum.

Anyone pointing to greed as the source of the current financial market meltdown is being naive. Greed is part of human nature, and it is here to stay. In a market system, we need to realise that greed can be a serviceable human trait and arguably a main driver of progress.

The beauty of free market capitalism is that it accepts human greed, and is designed to channel it in productive ways. In economic terms; the system is designed such that if people act greedy locally, it will result in a more globally optimal market. The current failure is not with the capitalist system, but rather in understanding what "globally optimal" means. Global optimisation in markets has to do with efficiency in the use of resources. Individuals who are allowed to freely employ their capital in local industries, with a goal of maximising personal revenue, will create a highly efficient system of production and distribution, promoting the interests of society as a whole.

What globally optimal does not mean is that the system will be fair according to whatever definition of fair you may have. Financial systems that rely on humans acting toward the overall social good, such as some communist and socialist based systems, have ended in disaster. However enticing the idea of a fair and benevolent, centrally based system directing the economy might seem, history has repeatedly proven it a failure. This does not mean that the human race is doomed to a life driven solely by greed it is simply that a social agenda should be implemented as a separate system from the system that allocates resources.

If greed is not what caused capitalism to fail, then what did? The answer is that capitalism did not fail. It is government policy that failed. In an attempt to avoid the hangover brought about by the bursting of the dot com bubble, central banks worldwide ensured the availability of cheap credit. Just as the markets were busy teaching investors the cost of being too greedy, the central banks interfered with this painful, but natural, and indeed necessary, market correction, and gave investors a get out of jail free card. Governments around the world were suddenly teaching investors to ignore the lessons of the free market and by implication, that limitless greed was good. This phenomenon became so entrenched in investors' minds, that it got a name of its own: the Greenspan Put. This mistake is being repeated today, with the bailout not only of the financial sector, but now the US auto sector, and undoubtedly other sectors worldwide will follow. Hence, the Bernanke Put is born. If politicians are going to create the largest case of moral hazard in history, they should not grumble when they are asked to clean up the mess.

Adam Smith's invisible hand is alive and well, and just slapped the world's investment bankers for being overly greedy. The fact that governments are intervening again and bailing out not only the banks, but also the bankers, is a failure of the governments, not of the capitalist system. Introducing yet more regulation and oversight will not help. A perfect example is Bernard Madoff, who recently admitted to perpetuating a $50 billion scam. Madoff, and the corporations he ran, were highly regulated, and yet he still managed to break several major laws, on a consistent basis, for many years. Further regulation will only hamper the larger market forces, not prevent perpetrators from committing their fraud.

It is far too tempting for politicians to jump in during a crisis and "do something" to get us out of the mess we are in. They must be seen as active and useful, but it is just this kind of government activism that has led us to this disastrous state. The first lesson we need to learn is to not meddle with free market capitalism. Only then can the healing begin.

Aa

- The writer is a Principal and Chief Investment Officer of Saffar. He also serves as Director of the Board of ABQ Investments and Chairman of ABQ Zawya.

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