Warren Buffet talks about a “natural progression“:
First come the innovators, who see opportunities that others don’t and champion new ideas that create genuine value.
Then come the imitators, who copy what the innovators have done. Sometimes they improve on the original idea, often they tarnish it.
Last come the idiots, whose avarice undermines the very innovations they are trying to exploit.
This kind of message may have some truth to it and it is deeply comforting. After all, no one likes to think of themselves as idiots. And as long as we keep the idiots out, we will be okay. But disasters don’t occur just because of stupid and avaricious people. Paul Krugman said it best in his article about how recessions happen in economies. He uses the example of a baby-sitting co-op to explain how simple actions taken independently, but at the same time, can lead to problems.
Think of a very non-greedy person. Someone who doesn’t spend on luxuries and saves as much money as they possibly can. Now imagine the entire population starting to do that overnight. Suddenly you have a nation of savers and consumption is down. All the people (employers and workers) making those luxury goods are out of a job. Because they don’t have an income, they reduce spending even on essential items. More people lose their jobs and so the circle goes. While greed, at the personal level, is a detestable trait, it seems to be essential when you start looking at large groups of people.
What about the sub-prime crisis and the famed CDOs? Here there was significant fraud/ignorance involved. At the basic level, it was people buying insurance at rates that were too low for the actual risk involved in sub-prime mortgages. But the risk as determined by the credit agencies was set at a low level to enable this to happen. Michael Lewis’s “The Big Short” covers a lot of this ground. There were quite a few people who understood what was happening and positioned themselves accordingly by taking short positions in the market which they then turned to huge amounts of money. As for the actual sub-prime loans, there were, of course, greedy real-estate investors. But quite many ordinary people who took loans because they were afraid of being priced out of a house, considering the steep rate at which house prices rose.