Watching the televised questioning of Goldman Sachs bankers about their role in the economic downturn of 2008 was as entertaining as it was thought-provoking. Even if it was shrouded in a veil of democratic opportunism to pass financial reform, it was hard not to enjoy seeing Goldman chairman Lloyd C. Blankfein and his colleagues have to respond to some difficult queries.
The event also inspired me to reflect upon big questions, such as: What should real estate economics look like in the wake of the crisis of 2008? Can we still trust in the same principles that bolstered the actions of companies such as Goldman Sachs?
In the first edition of his classic economic textbook, published in 1948, economist Paul Samuelson questioned the wisdom of accruing personal debt in order to purchase a new home. Quite presciently, Samuelson cautioned that “owning one’s own home is not always a good investment” and warned of the possibility that housing prices would fall, not rise. There is, he wrote, “an ever-present risk of depression in real-estate values as a result of business slump, overspeculation, or overexpansion of building.”
But in discussing housing, this Keynesian economist was somewhat of a solitary figure. Until recently, economists rarely, if ever, analyzed the subject of “housing” on its own. Throughout the 20th century, it was usually discussed within the context of more general topics, such as interest rates, consumption, and personal wealth. Housing was thought of as just another commodity within the economic system, and as such was subject to trends in economic thinking.
For much of the late-20th century, economic thought was dominated by a brilliant figure with a friendly face: Milton Friedman. Trained during the Depression of the 1930s in Keynesian economics, Friedman changed his views in the aftermath of World War II. Instead of emphasizing the role of individual psychology in the development of economic trends, Friedman argued that markets were largely self-regulating. The market was a somewhat autonomous force that ran according to its own rules. From this perspective, government regulation was potentially detrimental because it would interfere with the market’s ‘natural’ operation.
Alan Greenspan’s famous statement, during a Congressional hearing in 2008, that his ideological assumptions about the benefits of an unregulated free market were “flawed,” accelerated a return to Keynesian economics that was already underway some time ago. Housing specialists have called for more government regulation in real estate transactions, and there has been a renewed interest in transparency.
The questioning of Goldman Sachs executives reflected this trend. But it also raised an important issue: Will additional government regulation solve the problem? Clearly, it won’t: Bankers like Blankfein will surely find a way of getting around any new regulatory devices. They did for years before the crisis, and they will for years to come.
The only way to ensure change is to instill a stronger sense of ethics into the entire process. If social justice was a priority, it would make people think twice about their actions; even if Blankfein and others could take advantage of their clients, they would choose — on their own — not to do so.
With luck, this will constitute the meaning of “self-regulation” in the 21st century.