Who’s to Blame: Washington or Wall Street?

Think about the airline industry in the U.S. You can count the number of jet crashes this decade on one hand. And I don't think that's because the FAA is a better regulator than the SEC, I think it's because there's a commitment in the airline industry to safety. Now, whether they define that as a moral issue or a practical issue, I don't know, but the airline industry in the U.S. is extremely safe. Compare that to Wall Street, which appears to have been run by a bunch of greedy children for the last 10 years. When you can make a million, or $10 million or $100 million for a year's work, you don't have very much incentive to manage for the long term.

John Steele Gordon: Wall Street is not an institution, it's a collection of individuals, inherently susceptible to the madness of crowds. Blaming Wall Street is like blaming the atmosphere for thunderstorms. It's going to happen. Washington is supposed to be the guys with the striped shirts. They make up the rules and enforce them. And then they sometimes change the rules to accommodate some of their friends.

The regulatory apparatus is a total shambles. We have the Comptroller of the Currency, the SEC, the Office of Thrift Supervision, the FDIC, the banking regulatory authorities of the states. All devoted to protecting turf far ahead of actually regulating anything.

Now, politicians also are subject to human nature. If Wall Streeters are in the business of making money, politicians are in the reelection business. They want the good headline tomorrow, and if that produces dreadful policy two or three or five years out, that's after the election, we'll worry about it then.

Jim Chanos: In 1998 Business Week put out a survey, after canvassing the chief financial officers [of the S&P 500 companies] anonymously. They were asked if they were ever asked by their superiors to materially falsify financial results. And the answer was stunning. Forty-five percent said they were asked to do so, but didn't, 12 percent said they were asked and did, and 33 percent said they were never asked. So at the time, 10 years ago, two thirds of CFOs had been asked to cook the books. It's the main reason I have a business [shorting stocks] that I feel will continue to prosper no matter what the markets do.

Nouriel Roubini: I agree that Wall Streeters are greedy. Sometimes they are stupid, arrogant, incompetent. But we've had the worst financial crisis since the Great Depression, so we have to ask ourselves, are bankers and investors more greedy and more immoral than they were 20 years ago? I expect Wall Street to be greedy but I expect good policy-making to control the behavior.

It's been pointed out, the job of the Fed is to take away the punchbowl when the party gets going. Not only did the Fed not take away the punchbowl, it added vodka to it. Greenspan was the biggest cheerleader of this kind of financial innovation—zero down payment [mortgages], no verification of income, interest-only mortgages, negative amortization, teaser rates, all this toxic stuff. The Fed had the power to control it, but they didn't do it. There was an ideology for the last decade in Washington that was critical to this financial crisis, of laissez faire, Wild West unregulated capitalists, that financial institutions will self-regulate. And as we know, self-regulation means no regulation.