Don’t Go for the Blonde

by

“If we all go for the blonde, we block each other and make the other girls mad at us.”

That’s how John Nash’s great insight into “governing dynamics” came to him, according to the movie A Beautiful Mind.  His insight was that Adam Smith’s fundamental model — the one capitalism is based on — was flawed.  Contra Smith, the best outcome doesn’t come from every individual acting purely on rational self-interest; it comes from every individual acting rationally in the interest of both self and the group.

That’s the lesson our Wall Street bankers need to learn.

As this article details, the banks receiving billions of taxpayer dollars under TARP are not lending that money out, as congress had hoped (maybe even intended); instead, they’re hanging onto it.  Why?  Because that’s what maximizes each bank’s own individual interests: in an unstable, recessionary economy, you hang on to the money you’ve got; you don’t put it at risk.

Looked at strictly on an individual level, that is the rational thing to do.  It’s what best serves your bank’s shareholders.  However, looked at on a collective level, it’s ultimately devastating to all the banks’ shareholders, along with the rest of us.  A continuing credit crunch further weakens demand.  Weakened demand causes a shrinking GDP.  And that, ladies and gents, is a recession.  Which causes banks to be even more tightfisted and risk-averse.  Which makes the recession still worse, and so on.  And that, ladies and gents, is a recession spiraling into a depression.   Everybody loses, including — maybe especially — banks and their shareholders.

It’s a textbook collective action problem.  The thing that’s best for the group as a whole is not the thing that’s best for each player individually.  As long as everybody is acting purely on rational self-interest, the thing that would be best for everybody never happens.  In fact, everybody will end up in the crapper.

So how do we get the banks to do what’s best for everybody, instead of what’s best for each of them individually?

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9 Responses to “Don’t Go for the Blonde”

  1. alsturgeon Says:

    Maybe we could offer them free checking?

  2. Michael Lasley Says:

    What are the banks saying they’re doing? Do they think they are loaning out plenty of money? Or do they admit they are hanging onto it? (Maybe that’s covered in the link….apologies, I’ve not had a chance to read it.) Just curious if they think maybe they’re holding up their end of the bargain and not going after the blonde?

  3. urbino Says:

    Or do they admit they are hanging onto it?

    Readily. They were all asked in their last appearance before congress. They all said their job is to look out for their shareholders, which is true, and the best thing for their shareholders is to not make loans in a high-risk environment.

  4. Michael Lasley Says:

    So not to be too silly here, but since it’s our money they’re using….can’t we actually put stipulations on it? Can’t we actually say: loan the money we’re loaning you?

    Or are we operating on trust? Trusting that they know what to do so that they won’t go bankru….nevermind.

  5. urbino Says:

    We could. We didn’t. What stips we’ll add to the 2nd half of the money, if any, nobody knows.

    Some of the bank CEOs have already been complaining — they wish they hadn’t taken any of the first handout. Even with no stipulations, it seems they don’t like people feeling entitled to know what they’re doing. How dare we?

  6. urbino Says:

    This — the stuff in my post — may be the best reason, yet, to forbid any privately held institution from getting too big to fail, by the way.

  7. unicorntx Says:

    JU
    You have a gift for stating simply and clearly even the most complex issues. Thanks for the post.

    Also, good link to great (although disheartening)article.

  8. Michael Lasley Says:

    Yeh….they can say the wish they hadn’t taken the handout, but where would they be if they hadn’t?

  9. urbino Says:

    Why, thank you, unicorn. It rarely feels that way when I’m writing them.

    I’m not sure anybody knows, Mikey. I know some of them were basically forced to take some money, very early on, when the banking crisis was still just developing. Paulson didn’t want to paint a big target on the troubled banks by giving just them money, so he sat down the 6-8 biggest banks — healthy or not — and made them an offer they couldn’t refuse.

    Whether or not the banks that were healthy then are still healthy now, or would be if they hadn’t taken the money, I dunno.

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