What is Infectious Greed?

Infectious greed is a concept first discussed by Alan Greenspan, then chairman of the Federal Reserve Bank of the United States, in 2002 testimony before Congress about breakdowns in the financial regulatory system, including breakdowns in self-regulation by members of the financial community. Greenspan suggested that one of the causes of breakdowns in regulation of the governance system used for the financial industry in the United States was “infectious greed” on the part of investors and others, who rapidly expanded operations in an attempt to get as much money as possible during a period when the market was trending up and appeared to be headed still higher. The reckless nature of that expansion proved dangerous when the market started to correct itself and began trending back down.

According to Greenspan, as more and more people profited from financial exuberance and some financial excesses, it had an effect akin to the spread of infectious disease, as other people took note and engaged in similar behaviors. A market bubble was created through a frenzy of investment, while businesses expanded operations, increasing production to take advantage of a swell in consumer interest. Failure to anticipate the effects of infectious greed left government regulators behind, and resulted in increased exposure to risks for many smaller investors and companies.

Breakdowns in regulation were also accompanied with failure to comply with regulatory stipulations. People engaged in creative accounting and a variety of other illegal or shady activities to take advantage of the developments in the market. Consequently, when the investment bubble began to burst, it did so dramatically, because investors had essentially built a house of cards that could not support itself under pressure. Failures of major companies triggered investor panic and resulted in magnified financial problems.

There has been some dispute over whether Greenspan's diagnosis of “infectious greed” for the regulatory lapses of the late 1990s and early 2000s was accurate. While this era was marked by a number of notable scandals that should have been caught by regulators, some critics suggested that what he identified as greed was simply a national outgrowth of capitalism. Investors tend to flock to sources of money and will expand operations to take advantage of profitable ventures, thus making it unsurprising that investors seeing others making a profit will take steps to make a profit themselves.

Greenspan's testimony occurred before the global financial crisis that began in 2008, plunging several national economies into recessions and triggering large-scale job loss, as well as the failure of a number of companies. Viewed in retrospect, some of his testimony about infectious greed appeared to include warnings about the future direction of the market and regulatory inability to confront potential causes of recession and economic collapse.