A Culture That Embraces Leverage

When the course of civilization takes an unexpected turn -- when, instead of the continuous progress which we have come to expect, we find ourselves threatened by evils associated by us with past ages of barbarism -- we naturally blame anything but ourselves. Have we not all striven according to our best light, and have not many of our finest minds incessantly worked to make this a better world? Have not all our efforts and hopes been directed toward greater freedom, justice, and prosperity? If the outcome is so different from our aims -- if instead of freedom and prosperity, bondage and misery stare us in the face -- is it not clear that sinister forces must have foiled our intentions, that we are the victims of some evil power which must be conquered before we can resume the road to better things? However much we may differ when we name the culprit -- whether it is the wicked capitalist or the vicious spirit of a particular nation, the stupidity of our elders, or a social system not yet, although we have struggled against it for half a century, overthrown -- we all are, or at last were until recently, certain of one thing: that the leading ideas which during the last generation have become common to most people of good will and have determined the major changes in our social life cannot have been wrong. We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected. -- F.A. Hayek, The Road to Serfdom

I had originally set out to write on the whole Goldman(GS)/SEC complaint, which although it sounds titillating and salacious I believe has very little merit, but instead started thinking about this rush to find a culprit for the whole financial crisis. Shouldn't we be thinking a little more broadly?

So we have a 1,300-page piece of legislation that is supposed to cure all our ills (and don't get me wrong, I argued over a year ago that what we needed was not necessarily more regulation, but certainly more thoughtful regulation), but will it be any different if we fail to acknowledge the real elephant in the room?

Round One: SEC 1, Goldman 0 (Forbes)

I use the following quote from Hayek's The Road to Serfdom, not as a comment in defense of individual liberty (although I am sure it can be interpreted as such), but because of the point it makes with regards to looking within some of our most cherished ideals to truly get a better understanding as to how we got here.

It feels good to pin the blame on someone for all our problems, but the fact is we all share some culpability. I have long argued that Wall Street was one link in a very long chain -- from real estate agents to mortgage brokers to appraisers to nonbank financials to rating agencies to ABS buyers who needed yield to the home buyer who bit off a little more than he or she could chew. But rather than focusing on a single link, maybe we need to stop and ask: How did this chain come into existence in the first place?

The answer is that we not only have a culture that embraces leverage, but we have a tax and accounting regime that further incentivizes leverage. This isn't a particularly inventive thought on my part, for example, my good friend Michael Lewitt at HCM has spoken about this for ages, but maybe it's time has finally come. We have created a monster that shapes all of our lives. Corporations deduct interest payments, but dividends are double taxed. We have the mortgage interest deduction to promote the "American Dream" (nightmare?) of home ownership.