It’s true that the financial crisis was rooted in part by unethical behavior on the part of Wall Street’s leaders. When someone creates and/or sells a financial instrument–whether a mortgage-backed security or anything else–that he knows is destined to fail simply because the eventual problem won’t be his to deal with, something’s wrong.
Nevertheless, we will not avoid such problems in the future by naively expecting Wall Street (or anyone else, for that matter) to simply hire more “ethically evolved” people. One ex-Lehman trader was quoted in the New York Times this past weekend as having said you cannot expect people at one firm to avoid selling financial products that their counterparts at other firms are profiting handsomely from selling. He’s right.
The answer lies not on Wall Street but rather at the intersection of Pennsylvania Avenue and North Capitol Streets. Congress must strengthen our financial regulatory system so that someone is looking out for “systemic risk,” so that those deemed too big to fail are not allowed to take the same chances as those whose failures will be accepted, and so that those who rake in big bonuses in good times will see them clawed back if they turn out to have been premised on a house of cards.
The perhaps uncomfortable truth is that most of us respond to the incentives we face, financial and otherwise. Wall Streeters may focus especially sharply on the paychecks they receive, but if we want them to behave differently, we have to see to it that those paychecks depend in part on behavior that is good for all of us, not just for them.