On the eve of a holiday that celebrates the best in human nature, it's worth pausing to reflect that humans have spent the past 2,000 years struggling to live up to these lofty standards of the Golden Rule: "Do unto others as you would have them do unto you."Is the Golden Rule suspended when it comes to money and investing and wealth? Surely, you'll answer with a resounding no. But that is not the way we behave. Perhaps because when it comes to financial decisions, human nature is ruled by two powerful emotions: fear and greed. As economic events have recently displayed, those two powerful emotions can overcome both the good sense and the moral compass of even the most sophisticated, intelligent and responsible people. How else can you explain the mortgage mess? At every level, greed held sway over the judgment, principles, and intellect of ordinary, moral people:
- Ordinary, moral people believed they deserved to own a home without having either the money for a deposit or the income to repay the loan.
- Ordinary, moral people believed that home prices would continue to rise, so they could always repay those loans.
- Ordinary, moral people (bankers) believed it was all right to make those loans in spite of predictable consequences that violated the principles of sound banking.
- Ordinary, moral people (investment bankers) believed they could "spread the risk" of those underlying mortgages by packaging them up, getting ratings agencies to evaluate them, and then selling slices of these packages to investors.
- Ordinary, moral people at the ratings agencies gave some of these securities triple-A ratings, without looking closely at the underlying assets, while they earned fees for doing this work.
- Ordinary, moral people running mutual funds purchased these securities because the higher yields made their performance look better to attract the retirement accounts of ordinary, moral investors.
- And, ordinary moral investors never asked about risk, because they liked the higher yields in a time of low interest rates.