Greed, sloth, envy, gluttony, lust or wrath didn’t spawn the country’s financial crisis. In this case, our deadliest sin was pride.

It’s tempting to see our deepening economic crisis through the prism of the culture of greed that flourished under the let-markets-run-wild ideology of the Bush administration.

To be sure, any administration that lets private companies rip off the military in wartime and exploit the environment in the name of environmentalism deserves at least a special citation for chutzpah. But George W. Bush is by no means unique among modern U.S. presidents in embracing a greed-is-good approach to financial oversight and regulation.

It was, after all, former Federal Reserve Chairman Alan Greenspan (a Ronald Reagan appointee), former Treasury Secretary Robert E. Rubin (a Bill Clinton appointee) and former Securities and Exchange Commission Chairman Arthur Levitt Jr. (another Clinton appointee) who banded together in 1998 to shut down attempts to regulate the explosive trafficking in derivative investments.

And it was Clinton himself in 1999 who signed into law the Gramm-Leach-Bliley Act, tearing down protective barriers that had kept commercial banks separate from investment banks, insurance companies and securities brokerages. The move created wondrous new possibilities for financial mischief and conflicts of interest on a massive scale.

True, the Bush administration brought with it a deep contempt for government, a certain deregulatory fanatacism and, of course, spectacular incompetence, but its faith in greed was nothing new.

Greed being what it is, I suspect that serious prosecutors will discover that smooth-talking (alleged) financial con man Bernie Madoff was only one of scads of hustlers in recent years who took advantage of lax enforcement and money lust to find easy pickings among true innocents and look-the-other-way victims.

All that said, I still wouldn’t put the deadly sin of greed at the center of our economic crisis.

I’d pick pride.

Recently, a brilliant three-part investigative report in the Washington Post deconstructed the fall of American International Group. The once-respected, old-line, multi-billion-dollar international insurance conglomerate failed in September and nearly triggered a world financial collapse before the U.S. Treasury intervened and took over the company.

At the center of AIG’s fall from grace was its Financial Products unit. It was created in 1987 by three very smart, young Wall Street traders and math whizzes who came to AIG with an idea: They believed they had devised a way to use computers to track simultaneously a wide range of changing variables in elaborately constructed financial deals and precisely identify and offset shifting risks.

In other words: They’d figured out how to reduce risk to virtually zero. They’d discovered the new Sure Thing.

Maybe it was, at least for a while. By the time the trio left AIG in 1993 – long before any problems were apparent – the operation they’d created out of thin air was pumping hundreds of millions of dollars into AIG and the pockets of its executives, including the three young innovators.

But as one the men, Randy Rackson, recently told the Washington Post, “The excitement of it wasn’t the money. The money was the scorecard. The drive behind it was creating something new.”

Something new, however, isn’t always something good or even something better. In Vanity Fair, Joseph E. Stiglitz, the Nobel Prize-winning economics professor at Columbia University, described the losing struggle he waged against other Clinton administration economic advisers over the danger of derivatives.

“For all the risk,” he wrote, “the deregulators in charge of the financial system … decided to do nothing, worried that any action might interfere with ‘innovation’ in the financial system. But innovation, like ‘change,’ has no inherent value. It can be bad … as well as good.”

The increasing complexity of the deals concocted by AIG, Bear Stearns, Citigroup and countless other competitors and imitators put greater and greater distance between the financial products being bought and sold and the real things on which they supposedly were based: residences, commercial land and buildings, bonds used to finance business expansion and public infrastructure projects, student loans and so on. When the long, twisted chains of payments-due started to break after real estate prices started falling, it became impossible to tell which pieces of the deals still held value and why. Essentially, everything had to be regarded as worthless.

It’s fair, I suppose, to blame the alleged geniuses of the financial industry, government and academia for not realizing how interdependent the latest “innovations” really were: how even private financial deals were connected to the worldwide public financial system, how failure in what was believed to be a small fragment of a deal could resonate through those connections and crack the foundations of gigantic institutions. In other words, for failing to understand just how risky what they were doing really was.

But that is the essence of pride. The innovators believed they had discovered how to eliminate all practical risk. They thought they had used the power of mathematics and computer processing to take everything into account – past, present and future – allowing them to control the way variables affect wildly complex financial deals. They thought they had outsmarted the system, history and human nature.

In the afterword to his latest book, “The Ascent of Money,” historian Niall Ferguson hails the positive impact that evolving financial systems have had on society.

“From ancient Mesopotamia to present-day China,” he writes, “the ascent of money has been one of the driving forces behind human progress … as vital as the advance of science or the spread of law in mankind’s escape from the drudgery of subsistence agriculture and the misery of the Malthusian trap.”

But he also warns, citing some of the great economists of history, of the danger of mistaking knowable risks, which can be estimated based on historical data, for matters that cannot be anticipated at all. More than 70 years ago, Ferguson notes, John Maynard Keynes addressed the issue of what he called “uncertainty” in his “General Theory of Employment, Interest and Money”:

“I do not mean merely to distinguish,” Ferguson quotes Keynes, “what is known for certain from what is only probable. … The expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain or … the rate of interest 20 years hence. … About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.”

The human quality that has brought the world financial system to its knees – and brought with it the potential for untold hardships for millions of men, women and children – is pride: the belief that we had discovered the secret of knowing the unknowable.

Eric Mink is commentary editor for the St. Louis Post-Dispatch. E-mail him at [email protected]

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