J.P Morgan is reeling from an investment scheme that backfired. The fallout from its greedy investment in “credit default swaps” is likely to reach $4 billion dollars. If this sounds like “déjà vu all over again” it is. Congress has set hearings to sort out the truth regarding what the bank did. The more important point, however, is why! The answer can be found in a deep seated get rich quick psychosis whose roots date back two decades to the start of the Internet era.
Since the dot-com era began, a pervasive psychology among emerging entrepreneurs in the US has been the belief that there is an instant path to wealth. The notion that a company can become a global leader in less than a decade is fueled by the success of organizations like Google and Facebook.
Gone is the expectation that one should labor for years developing and perfecting new innovative ideas and putting those ideas to work on a day-to-day basis until success is achieved. The legendary tales of how billionaires were created overnight through dot.com ventures or stock investments are too seductive.
The prevailing belief is success is based on a novel idea or luck, rather than hard dogged labor. When the.com bubble burst, real estate investment became the new scheme. Standard practices involved flipping houses, pushing subprime mortgages on unsuspecting home buyers, creating exotic investment instruments such as mortgage-backed securities, and guaranteeing them with even more complex forms of insurance such as credit default swaps.
The housing bubble burst just as the Internet bubble before it did. This time the fallout was the second-worst recession in the history of the country. To prevent the situation from occurring again the government proposed new financial regulations such as the Volker Rule. However, financial institutions lobbied against it because it sought to prevent them from indulging in the same old or get rich quick schemes.
J.P. Morgan Chase’s debacle is proof that financial institutions were successful in their lobbying effort and evidence that the psychosis remains –despite the wrenching recession the economy is attempting to recover from.
While the US indulges in these superficial forms of wealth creation, other rapidly emerging economies (e.g. China, India, Brazil, Korea, etc.) have pursued wealth the old-fashioned way. They are working harder, smarter and for longer hours. This is why they are now the fastest growing countries in the world.
To achieve market leadership the newly emerging economies have invested heavily in improving their domestic educational system, placed their most promising scholars in leading academic universities of America and Europe and spending enormous sums on improving transportation and communication infrastructure.
Often their tactic for achieving industry leadership centers on copying or sometimes illegally appropriating the most innovative ideas in the US and elsewhere. Their governments support this approach and even work with private industry to secure the country’s competitive advantage. They erect trade barriers or manipulate their currency. Such practices violate international conventions; however, one should not forget that behind the wall of illegal behavior, the countries still worked harder and smarter than does the US.
J.P. Morgan chase would not be in this situation had it behaved like General Motors. GM is once again one of the world’s most dynamic automobile manufacturers because it finally decided to focus on quality and innovation. Compare its behavior today with that of a few years ago. It was like many American manufacturers. That is, it had become so stagnant it lost its leadership and identity as a successful auto company and flirted with permanent closure.
If J.P. Morgan Chase were not so large, it would certainly be closing its doors forever. Its indulgence in this latest get rich quick scheme would have sent a historic company into obscurity. We keep assuming that corporate leaders will learn a lesson and turn away from scheming. Unfortunately, J.P. Morgan’s situation is proof that deep-seated psychoses die hard.