“Okay guys, one more thing, this summer when you’re being inundated with all this American bicentennial Fourth Of July brouhaha, don’t forget what you’re celebrating, and that’s the fact that a bunch of slave-owning, aristocratic, white males didn’t want to pay their taxes.” Sound familiar? It’s a line from Dazed n’ Confused, delivered by “Ms. Stroud,” the bleeding heart liberal history teacher – a bit of silly dialogue capturing some of the naive philosophizing in fashion at the time.
It’s a joke, of course, mocking the idealism for idealism’s sake that materialized in the country’s post-sixties hangover. But as I watched the movie the other night (it’s on an HBO rerun loop this month) it struck me – Ms. Stroud sounds like a lot of stuff we’re hearing today. The populists, the protectionists, the redistributionists… A fair number of people are offering the same criticisms of this country made in the seventies.
Look at any magazine, paper or twenty four hour news channel and you’ll see a piece on why or how excessive risk created this economic crisis, and why we may want to move back to the temperate habits and goals of the “company man.” How we might be returning to the safety and comfort of traditional, long term employment and putting aside the entrepreneurial mindset and hyper-capitalism of the last few decades. Resigning ourselves to a future of lowered expectations and greater structure and giving up our love affair with risk. And that somehow this would be a good thing.
A highly impressionable swath of the public, and the media that serves them the red meat populism they want, seem to be reaching a consensus our society was far too enamored with the concept of risk. We’d be better served to work steadily, loyally at a job “producing something” than attempting to front load ourselves an early retirement using leverage or striking out in entrepreneurial ventures. That’s a shame, because risk – sensible risk – bears none of the fault for our current financial mess. It’s maligned for no good reason, confused with the actual causes. And this is a dire concern, because right now, sitting in the shithole we’ve dug for ourselves, risk is our only hope out.
As with any large event, a million smaller, finite causes led to the disaster that started last September. But they can broadly be boiled down to three simple categories, each of which might sound and look like “risk” but in reality is something entirely distinguishable.
On the corporate side there was opportunism, exploitation and fraud. Opportunism in that the people who were involved in creating and selling mortgage-backed securities and the people who brokered mortgages to home buyers both worked under “heads I win, tails you lose” bargains. Bargains so one-sided only a fool wouldn’t have abused them. By as early as 2005, economists were warning that the housing market was overheating and would inevitably bust. At this point, the mortgage brokers on Main Street and the securities packagers and salesmen on Wall Street had two options. Suck all the profits they could out of the bubble before it burst, ballooning it even higher in the process, or pull back. Neither had any real skin in the game. Both knew they’d be laid off or see drastic decreases in income after the bubble burst, and that if they didn’t push the market even further, someone else would. They did what any opportunist would – bankrolled as much as they could and waited for the walls to come down.
This led to the exploitations and frauds. Bankers pimped what they had to have known were garbage securities to all sorts of investors while brokers pushed liar’s loans to any buyer with a heartbeat. Even the smaller local and regional banks got in on the deal, writing mortgages for people who clearly couldn’t afford them, taking fees and flipping the paper to the larger securitizing banks. Everybody was incentivized by short term income structures and nobody faced any responsibility. Everything done at the banks was under the corporate umbrella, every actor one of thousands. The same went for the mortgage pushers. If countless other brokers were writing up garbage notes all over the country and every transaction was plausibly honest on its face, what chance was there any single malfeasant would ever face charges?
On the consumer side there was profligacy, envy and stupidity. Profligacy and envy in that people bought homes they couldn’t afford and sucked cash out of them via home equity lines to buy “stuff” Madison Avenue trained them to think they needed or deserved. Stupidity in that they actually believed the housing market was immune to gravity. They needed only recall the wreckage of friends’ and family members’ finances when the Nasdaq cratered in 2000 to grasp where the market would inevitably go. They needed only consider the raft of articles on the business pages of every newspaper warning years in advance that housing was a time bomb. They needed only apply common sense where status obsession and the fleeting respite from reality that comes with buying shit ruled their brains.
Instead, they spent. Bought the $699,000.00 home with 2% down and a family income of $70,000.00. Whacked the HELOC to make the house look like the ones they saw on Home and Garden TV, pick up a Range Rover Sport and take the family to Disney World. Their wealth was fantasy, of course, and in the end, as often happens, the foolish brought down the foolish. Thousands of the most extended “homeowners” defaulted, and that started the chain reaction collapse that cost many of their brethren jobs. Left to consider their mistakes, some have manned up and moved on. But a lot of them haven’t. They blame the bank. They blame the broker and the “Wall Street fat cats.” And in a few limited cases, some have a point. But they’re also refusing to admit what anyone who’s been there understands – that it takes two defective minds to have a fraud. If a mortgage broker can hustle you, you should have known enough about your severe limitations to realize you didn’t belong at the table in the first place.
Separate from those interlocking causes, but possibly the fattest roots of the debacle were hubris and “Institutional Autism.” Hubris coming from academic absurdists who believed they could make the business of insuring bad loans profitable with mathematical models. Sounds silly in hindsight, that fluctuations in something as clearly irrational as our housing market could be predicted and countered by a computer program. But then it was entirely rational. Why check the street – actually go out and see what’s happening in the mortgage brokering business – when you have mathematical formulas? What does a guy like Andy Beal know? Probably a gut investing caveman.
Working hand in hand with that was Institutional Autism, a cancer afflicting corporations far beyond Wall Street. The larger an organization is, the more hierarchical it is, and the more its managers live in a virtual reality divorced from the actual one outside its doors. The CEO speaks only to certain executives who get their information from upper middle managers who cobble that together from politically sanitized reports they get from underlings. The data gets massaged by every hand in the grapevine to suit his purposes, and by the time it reaches the top, it’s diluted and convoluted enough that somebody like Stan O’Neal thinks, “Fuck! We’re missing a golden opportunity! We ought to go deeper into this mortgage backed stuff.” Few in a position of power to make the important decisions ever get the pulse of what’s really taking place in the industry in which they’re investing. Couple that with the false comfort of a risk manager claiming the models have everything under control and you wind up with a completely clueless organization.
How could so many brilliant people make so many bad decisions? The question’s asked again and again, and it’s the wrong one. The real questions are, How could so many brilliant people’s bullshit detectors fail them? Why didn’t a guy like O’Neal send undercover agents into the field, like Bill Gross did, to examine the mortgage markets up close and get the hell away from those investments? Why, when they get to the corner office, do so many of these masters of the universe become autistic, only able to deal with what’s served to them on a platter by subordinates? Might the real concern with allowing companies to become too big too fail not be that they might implode, imperiling the economy, but that their implosion is all but inevitable, a mere matter of time? That when anything reaches a certain size, through inertia, impossibility of management and internal sabotage by self-interested employees, it necessarily regresses to imbecility?*
These are the causes of our current financial problems, and none of them – not opportunism, exploitation, fraud, profligacy, envy, hubris or “Institutional Autism” – have to do with risk. If anything, they’re anathema to the concept, futile attempts to create impossible “sure things.”
Risk is, simply, making a well thought out gamble on something with the intention that it will return a profit. And stepping away from the usual goal of money, how you define “profit” can be any number of things. Satisfaction with your work, making a difference, whatever it is, risk is taking a chance on losing something you have to gain something better. It’s not a device to be shunned or discouraged. If a pack of greedy landowners didn’t embrace risk two centuries ago, we wouldn’t have the extended holiday we do this weekend. Risks sits at the base of everything good and correct in the American character, a bedrock of individual dignity – the right to strike out on your own and succeed. Or fail.
To personalize it a bit, risk is the guy who sent me an email noting that, due in small part to something I wrote, he left a lucrative cubicle farm job to pursue a career in medicine because, though it was a costly gamble, he always wanted to be a doctor. Risk is the guys who told me they quit their comfortable corporate positions to open a start-up brokering concert and sporting events tickets online, and how it’s scary not having regular checks and living hand to mouth, but if given the option, they’d do it all over again. Risk is the person who started the Rudius Media platform you’re reading – someone who chucked a career at one of the better law firms in the country to write a book. Which just now happens to be a major motion picture.
Not everyone will succeed, and not everyone can take risks, and they should only be taken when they make sense, but win or lose, they answer an important question for everyone who’s made the effort – What if? That can drive some people mad, gnaw at them day and night. It’ll make a person cynical and half-assed in his approach to the thing he’s toiling at in place of the work he wants to be doing.** And generally, whatever the outcome, a well taken risk benefits us all. For every one that’s attempted, vendors and suppliers get paid, and somebody learns something about running a business. For the one of ten that succeeds meteorically, a whole industry attached to the endeavor’s production, marketing, accounting, etc… is created.
Now, at this moment, if instead of embracing it we vilify risk and run toward the comforts of collectivism, populism and protectionism – try to recreate a safer time when “company men” had guaranteed long term jobs and benefits, or a brave new world where Uncle Sam acts as “Handicapper General” – we’ll have snuffed the only hope we have to climb out of this mess. As crazy as it sounds, we need to create a new, stabilized bubble to float us out, and we can only do that with some radical new technologies, inventions or markets that cause a massive inflow of investment. That only happens with innovation, and we can’t innovate or invent anything substantial enough for the task if we employ draconian regulatory structures discouraging entrepreneurs and enormous redistributive spending initiatives on the backs of the investor classes.
So when you’re watching the fireworks this weekend and the talk turns to where the country’s going, as it easily tends to these days, and a “Ms. Stroud” starts talking about how capitalism and “risk” culture brought us down, cut her off. Tell her yes, we are celebrating a bunch of aristocratic males who didn’t want to pay their taxes. And there’s absolutely nothing wrong, and everything right, with doing exactly that. Because without that gambler’s ethos – the guy who gets up every day and says, “I’m going to get more out of my life” – none of what we have would have ever existed. And remind her that no, “risk” didn’t cause this crisis. But its absence – our stifling of it or hesitance to embrace it now – will play a huge part in things getting a whole lot worse.
______________________________
* See: Congress.
** Which explains why half this country “phones in” its work and the quality of a lot of what we do, from production to service, veers from “mediocre” and “commoditized” to “defective” and “incompetent.”
I have been trying to convince people of several of these points ever since this whole party started. Of course people threw money at the mortgage bubble, because it was easy money. If I sat down with you and said I could give you a massive return very quickly, but that in the future someone else might pay for it, but you probably don’t know them, what would your reaction be?
You’d take the damn deal, and to hell with the nebulous future stranger. Blaming the ones who made money comes hard to me, because I’m hard pressed to say I wouldn’tve indulged were I in a position to. That’s why it’s a bubble.
But that’s not the main thrust of this, is it? It’s this new culture summarized best in a comment I read on a news site:
“We’ve already seen that capitalism fails, we need to start taking a more structured route before it’s unsalvageable.”
It’s just a foolish, reactionary position that is gathering support at an alarming rate. It was risk that got us where we are today. Risk and embracing the capitalist ideal of ‘everyone CAN get rich, you probably won’t, but take the chance anyway.’
The fact is, the western world owes it’s place to the industrial revolution, which owes it’s existance to rampant, delicious capitalism. And the primary tenant of rampant, delicious capitalism is knowing when to take that risk, and when to keep the safe money.
Also, what the hell kind of mindset convinces someone they can afford a million dollar house on a fifty thousand dollar income? Sounds like brain damage to me.
PL: Oh, Christ, the pitch economic liberals sold to voters is such a steaming pile of shit. You can’t can stop people from preying on each other. Put rules in place to make capitalism “fair”? It’s madness. The whole system is predicated on somebody besting somebody else, and winning is defined in ths system by separating someone from his money and putting it in your bank account. There’s no way to police the opportunism I described. It defies all attempts at regulation. To get rid of it we’d have to adopt an entirely new system. Oh, wait… There are none better. Shit. That kind of causes a problem now, doesn’t it?
First!!!1
Focus:
While perusing one of the fine publications at 12431 Unit E on Astoria Dr. in San Fernando over some beef tacos in the adjacent restaurant, I decided to purchase some Euro K2 – an excellent strait-sativa and it got me thinking, how much tax revenue would the government generate by growing pot as a cash crop and using the revenue to finance arts and science? Then I thought about it some more and realized that bridging the gap between church and state along policy lines would be amoral. Really, really amoral.
PL: Amoral’s better than immoral. You get a pass for that – for not knowing any better.
“That only happens with innovation, and we can’t innovate or invent anything substantial enough…”
Should have ended the sentence there. Greater effect and all that. Modern American bureaucracy has doomed the modern American entrepreneur. Or something similar.
I like how you constantly imply that the reader should do as you do and think as you think, though I’m certain – deep down – you’d never wish that. Adds extra force.
PL: I have hope the bureaucrats are inevitably going to collapse under their own weight. See: California.
You’re right. I wouldn’t want everyone to think like me, or at least exactly like me. That’s how religions start.
I have a recipe for the new, successful Democratic Party that currently controls congress.
1 part old, flawed Democratic Party.
100 parts painful compromise
1 part Obama.
Stir until mixed.
The ideology of the liberal wing of the Democratic party hasn’t changed since the Great Society programs fifty years ago. Mrs. Stroud and her beliefs have been there for the past eighty. What changed was Mrs. Stroud’s role in the Democratic Party, which was slowly reduced due to political necessity. Her role was effectively destroyed by the 1990’s when Bill Clinton accepted welfare reform. The problem now is that the Democratic Party now has power and, with the advantages of incumbency, doesn’t have to make as many sacrifices anymore. Mrs. Stroud now has a role in how the nation is run.
The good news is that Mrs. Stroud, along with all of the other fringe elements of the Democratic Party, are as unlikeable as they ever were and will turn voters off as they implement their ideas in reality. The problem is that the Republican party is such a mess that they wont be able to make a serious challenge as long as Obama is President, and possibly for much longer. America can probably handle eight years of left wing nuttiness with Obama there to make sure the course is center-left rather than far left. If the Democrats hold power for a decade or more? I’m not so sure.
PL: We can’t afford Ms. Stroud anymore. If Congress keeps writing bills like that stimulus thing, larded with mindless spending that will not produce anywhere near enough jobs, and we’re still saddled with the cost of Bush’s aggressive spending, and we slap a universal health care plan on America, we are going to simply bankrupt the country. I could get into complicated shit about how we’re not Sweden, how the French solution of inflating ourselves out of the debt is near equivalent evil and unlikely to succeed anyway, but it’s easiest just to focus on the broad numbers, and they don’t make any sense. I don’t blame Obama or the Democrats for this. It was a two party effort. But if Congress steps in now and focuses its powers toward creating more of a “my brother’s keeper” environment instead of letting individuals and businesses go through a long overdue period of real creative destruction, we’re going to go through ten years of now a “W shaped recovery,” but a “reverse plateau.” Sure, the market will do what it does and keep older people with pensions and investments and people in the financial industry comfortable, but the rest of this country – the wage earners, and particularly the lower skilled ones – are going to live as debt serfs, with no economic security.
Hey Phila. Your point is well taken. However, Vonnegut always believed that ‘Harrison Bergeron’ was failed satire. The Handicapper General is not an argument against socialism. Vonnegut believed that he had drawn the characters ridiculously enough that no one would consider his portrayal of the Handicapper General as an accurate depiction of what happens in an equitable society. ‘Harrison Bergeron’ is actually criticizing the way patriotic capitalists exaggerate “leveling effect” of socialism.
I, and I believe most people, miss the point of the story, conclude that socialism and a fair society are bad ideas, and go on down the road–hence the failure of the satire.
Regardless, I think we both love Vonnegut and capitalism. Keep it real.
PL: I’d say to Vonnegut what Rodney’s teacher did in “Back to School”: http://www.youtube.com/watch?v=tQnAhSzb4gY
Harrison Bergeron is a mockery of a lot of things, one of them undoubtedly, I think, the culture of “making everyone equal.” Though similar, that’s not exactly socialism.
I have always taken the story for the simple proposition that any system seeking to “even out” people so that one’s abilities are tempered to keep him at the same level as another is doomed to failure. Even Communists and Socialists have had systems that allow those with talent to vault to positions of power, fame or enhanced material success. The Handicapper General is the embodiment of a foolish belief some have that an intervention exists which would undo the varieties of natural selection that creep into every element of our lives. I’m all for screwing with the sacred, but you can’t fight scientific fact. Try to set up a system where all succeed at the same rate and none will.
I agree with what you are saying, but I think this mainstream media faux-liberal/populist/strawman that you have constructed is by no means comprehensive of all the liberal viewpoints on this matter.
Plenty of liberals would agree that the concept of risk needs to be preserved in our laws/policies, but I think that it is also important to remember that the market runs on fear–fear that if you don’t innovate, you die–rather than on sheer belief in human progress or anything altruistic.
For instance, I think a lot of liberals–not necessarily the comical ones who certainly exist outside of your article–would be less hostile to free trade if there were more protections for workers so that when they lose their job because their skill is no longer needed, they can have opportunities to be retrained in another sector, or to go back to school. This way, companies wouldn’t be forced to hang onto unnecessary workers, and workers would have something to fall back on and wouldn’t feel the need to fight free trade as harshly.
PL: Free trade’s either free or it’s not. We either compete with the workforce of emerging economies or we don’t. I think it’s better to let one generation of our workers suffer horribly than to let two of them suffer moderately while our protectionist policies keep the cost of foreign labor artificially low for an extended period of time. In time, India and China’s labor costs will increase, but not if they’re economies are hobbled by lack of access to lucrative foreign markets. Let the pain come hard and fast. We’re going to face it one way or another, so we might as well take the lumps now.
As to setting up a system where companies could lay people off easily, we already have that, I think. They’re doing quite a job of it right now.
As to the strawman thing, every argument in an essay is a strongman, particularly where you take on something as broad as the ethos I was chiding here. Save writing an entire book on the subject, there’s no way to address each finite group of liberals making up the whole in 1000 words.
You put ideas into words in a way I can only dream of. I went to B&N to pick up the book after reading this…and they didn’t have it.
PL: Thank you. As to the book, get it off Amazon. Borders usually has it, but B&N pulled back all its purchases last fall when the economy fell last year. Mine was one that got clipped. If you’re in B&N, you can order a copy and they’ll ship one to the store. I know they stock a lot of them around Philadelphia, Jersey and Washington DC, so they’ll have one there in a day or so.
You kind of forget to mention how some of the actions taken by the government and the federal reserve had for a large part contributed to this.
Yes, there was stupidity on the custumer side for falling for teaser rates and the notion that prices would continue to rise forever even if renting was cheaper. And if you look at all those finance/economics/trade people at all levels from a while back, most actually believed their own euphoria induced bullshit too.
But in all those groups, it was the government who took a fundamental role in distorting that risk by doing some of the lending and packaging of derivatives with Fannie and Freddie. On the private lending side, there were also a number of incentives offered by the federal reserve (low interest rates and encouraging lending) and government regulations/incentives for bad loans to be made and houses to be bought.
So really, there was no such thing as a free market in the first place. If left alone, maybe the bubble would have occurred anyway, but it surely wouldn’t have reached such epic proportions that it has. The problem is that none of these bubbles are allowed to self correct, so the current bubble is largely a continuation of the last tech boom and the attempt to fix it.
Now the very fact that many of these huge banks need so much money via the TARP bailout program and that they are refusing to lend after a doubling of currency into the system, means that they should be bankrupt. Japan did the same propping up of “zombie” banks which contributed to a 10 year downturn.
Just recently though, I’ve seen a video of Obama stating that “Japan didn’t do enough” to bail out their banks and other institutions. Man is sucks to repeat history. Well, they were probably better off in one aspect… they didn’t have an economy based on consumption.
PL: Agreed. Citibank and BofA are insolvent. AIG is nothing more than a secondary channel with which to send another $200 billion in TARP money to Wall Street banks via CDS.
And yes, absolutely, Barney Frank is a grade A screaming hypocrite. That he has the balls to grill bankers when his own policy initiatives during the Clinton years helped to create the atmosphere for this debacle amazes me. I guess he gets away with it because he’s one of the few Democrats in Congress – hell, one of the few people in Congress – who has an inkling of how banking works.
Good stuff Page, as usual.
Looking forward to that second book!
PL: Thanks as always.
Caveat emptor would do a lot of good for our society. Instead a policy of – “go ahead a buy regardless”, and someone ’should’ help you out when the shit hits the fan.
While at the time unfathomable, the best option was to let Bear go, because that would’ve sent such a shock to the system that we would’ve been purged very quickly. It would’ve hurt a lot, but hell, now it’s death by a thousand cuts. From my perspective, instant shock is preferable than the waiting for Uncle Sam “will they or won’t they get involved, and if they do, what will the entanglements be.”
Everything at this point is 20/20, but it’s clear the future here is sub-par/mediocre at best. High taxes, massive debt load, inflation, stationary wage growth, etc. etc. East asia will be putting up the growth numbers for the foreseeable future, and we’ll have to suck off their teat for any benefit. My firm is a traditional money manager, heavy in domestic, dividend paying stocks. Our entire allocation has shifted and we are heavier in emerging markets than we could have ever imagined because the U.S. outlook is deplorable.
Enough for now, time for more Bluecoat.
PL: I don’t know if letting Bear go wouldn’t have just accelerated Lehman’s collapse on it’s heels, and Morgan Stanley’s shortly thereafter. Both Bear and Lehman tanking in short order would have been a systemic disaster. The spacing between the collapses allowed for a period of adjustment (after Bear went, all eyes focused on Lehman, and people prepared for its demise as best they could).
I hope you’re wrong about the future, but I’m hard pressed to find an argument against you right now.
As to “caveat emptor,” there’s nothing an American claims to support in theory, but loathes and will cry, scream, run from or sue to avoid in actuality than “assumption off the risk.” Everybody here has a mommy and daddy to run to. “Have you fallen on someone’s sidewalk? You should call 1-800-SHYSTER now!!!” “Did you buy a house you couldn’t afford? It’s the bank’s fault!” “Did you cash a check from Beneficial for $10k thinking it was ‘free money’ and are now being sued by the company for payment? You might have a case against them for ‘PREDATORY LENDING’!” We’re a ridiculous country that thinks every slight, every injury – every mistake – should be compensable. From Wall Street to the trailer park, nobody’s responsible when their decisions turns out to be idiotic, or a confluence of unexpected events hurt them. Somebody else is always “liable” somehow.
You mentioned “The populists, the protectionists, the redistributionists…” from the past now have resurfaced again with “a pitch [that] is such a steaming pile of shit.”
There’s someone from not too long ago who handled all of these people at one time and he might be recognizing an opportunity to take them on again:
http://www.truthvmachine.com/?p=11019
PL: He’s unelectable. Too much “moral” baggage. Turns off the Fundamentalist Trash constituency of the GOP. He’s also way too pragmatic, way too rational, and way too mean.
I owe you thanks as well, both for making it blindingly obvious that the soul-sucking culture of bureaucratic government life extended into the private sector as well, and also for how your writing helped influence me to leave that world and try to chase the writing dragon.
If anyone out there hasn’t caught it already, this video’s a pretty solid explaination of where the current financial crisis is coming from:
http://www.vimeo.com/3261363?pg=embed&sec
PL: Thank you. I view bureaucrats as a “life tax.” Can’t live with them, can’t deport them. Hopefully, computers will get rid of more and more of them in the future.
A big issue with Lehman was essentially what we are facing now – it was unknown what the government would do, but assumed they wouldn’t let Lehman fail. Everybody knew Lehman was insolvent, but they weren’t bracing for bankruptcy because they expected the gov to save them or bridge the gap. You can’t value assets if you don’t know what the rules are and especially if the rulemaker, uncle sam, is acting unpredictably.
A lot of the chaotic market action after Lehman’s failure was due to the fact that they were a huge prime broker, and tons of hedge funds suddenly had their book locked up and being liquidated by Lehman. There were huge swaths of positions being dumped, en masse, and everything became more correlated. Terrifying times to be on a trading desk….
Per the U.S. outlook, check out Bill Gross’ latest commentary…always good stuff – http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Investment+Outlook+July+2009+Gross+Appetit.htm
PL: In fairness to the government, how is one supposed to send signals to the market on the fly in the midst of a “never been there before and if we get this wrong we might fuck the entire economy up” situation unfolding at a rapid pace? I’m amazed they were able to come as close as they did with the Barclay’s deal. if the European regulator hadn’t scotched that, Lehman might have survived, and who knows what today would have looked like. But still, even in that confusion, I recall Paulson being very clear in the months preceding Lehman’s collapse that there would be no bailout. If the street thought he was bluffing, they should have checked the political headwinds a little more closely than they did their numbers (they ought to check a lot of things more closely than their numbers – the arrogant belief math trumps all is a lot of what got people into this mess in the first place). Looking at the fallout in digits no doubt convinced them Paulson would never let Lehman go, but the political will to rescue another bank wasn’t there. And hell, any super-cynics would have looked at the past relations between Fuld and Paulson’s firm and assumed no bailout was coming.
Bill Gross citing Bob Herbert is amusing as hell. Herbert knows nothing about the economy, but even he has had the wisdom to see through the bullshit and realize, “No employment = no consumer spending = no recovery.” Until the cost of producing something in emerging economies meets the cost of domestic production, we are going to lose jobs in the worst case scenario or have stagnant job growth in the best. It’s just that simple. And just watch – the service industries like consulting and law? The unit price on that stuff is about to fall through the floorboards. I don’t predict shit, but I have been involved in running a business. When you’re stretched, the first things you cut are non-revenue producing costs. That equates to a clear-cutting of a huge swath of the upper middle class in this country. Think I’m being hysterical? Just watch. Yesterday’s $250k lawyer is next year’s $175k lawyer. And I’m just using law as an example. In all the “white collar welfare” jobs people like me took (accounting, law, consulting, etc…) we’re going to see a reset for the all but the uniquely talented or “wired” (rainmakers). And even their future is going to be rather flat.
But out there somewhere, we both know another Angelo Mozillo is getting backing to create a new credit vehicle of some sort to start some new, smaller version of the mess up again. Micro-lending, perhaps? I think we’re too dishonest for that to work here culturally, but something like it could make a pile of money. Who knows.
In addition to what you mentioned most of Washington’s army consisted of the lower class adventurer type people who signed on against the most well trained military force the world had ever seen to that point in the hopes of striking it rich. If that’s not risk I don’t know what is.
PL: I often wonder how I’d react if I were alive in times like that. Our lives are so soft compared to what people went through in those days. But then, I guess when you have nothing to lose, the risk isn’t that great. Except for that whole being hanged as a traitor thing. That’s kind of frightening.
Risk is great and awesome and wonderful, you’re right, but risk must have an upside and a downside. The problem is that in these large corporations, there is no downside for the decision makers.
If “Joe the Plumber” takes 50K of his savings and starts a business, he’s taking a huge risk. He will work hard, educate himself, and otherwise do what it takes to succeed. He could succeed or lose HIS money. Because there is a downside, he will bust his ass to make it work.
For the executives at the AIGs of the world, there is very little downside and plenty of upside. Consequently, their behavior is more careless. They have no stake in the risk, even though they are the ones approving it. This is the problem.
In keeping true to form, the Dems believe more regulations are needed. Republicans, predictably, blame the problem on too much regulation, high taxes, and the teaching of evolution. Both parties are clueless and are only really interested in getting re-elected so they don’t end up in the unemployment lines with the rest of the country.
In my mind, the public is to blame. Like you said to another commenter, we are soft. We are also lazy, gullible, and ignorant.
How do these companies get away with taking such horrible risks? Shouldn’t shareholders be more aware of what’s going on? Yes, but stock ownership has become more like gambling than investing, and as long as that mutual fund is producing a decent return, most people won’t bother doing their due diligence, and those that do probably aren’t savvy enough to understand what’s going on.
So, while risk is great, there needs to be downside, and until the pain gets unbearable and people get tired of losing money, we won’t take it upon ourselves to create that accountability and punish execs for those bad risks. We will continue to whine and complain and expect the government to fix it.
PL: …Until the government runs out of money to fix it. Obama is not going to be able to pull off his spending initiatives without taxing people under $250k per year. When he moves to do that to people on the coasts, he’ll find himself out of office.
Everybody’s his brother’s keeper. Till it comes to tax time. Then we’re all Republicans.
I think Philalawyer your trying to have it both ways – people should have a strong sense of personal responsibility yet at the same time throw themselves wholeheartedly into the risk culture of American capitalism. I don’t think this is possible; the much cited ‘creative destruction’ which unfettered capitalism brings about is not confined to the physical destruction of old industries; it rips up the communities which ultimately form the moral foundation of a society. Without this foundation the idea of a personal morality is meaningless.
Of course no economic system, no matter how harsh, will completely destroy a community but the mobility which modern American capitalism imposes upon workers, along with the destruction of civil institutions and drop in real wages can come damn close – just look at the four stark pages of membership graphs at the end of Robert Putnam’s Bowling Alone charting the decline of almost every voluntary association in America during the neo-liberal age. Or is it just a coincidence that neo-liberalism has gone hand in hand with an explosion of crime rates, the rise of the religious right and the highest rates of childhood suicide, homicide and firearms related deaths of any country in the world’s 26 richest countries?
Furthermore, I think in light of Americas dependence upon therapists and anti-depressants to cope with the stress of modern society you’ll be hard pressed to argue that the radical individualism which you idealise is part of the ‘American character’. Like gambling, American capitalism is a game for young men- the vast majority of the population want far more stability in their lives. And who are we to argue against this? The case for a particular economic arrangement should rest on their contribution to individual well being.
Nor do I share your view that risk is the ‘bedrock of individual dignity’. Prudence is a virtue, courage is a virtue, but risk- reckless material accumulation in pursuit of individual happiness? Where is the room for personal responsibility in such a carp diem philosophy? I think at the heart of all this is Hayek’s nihilistic and characteristically candid statement ‘Progress is movement for movement’s sake.’ Such a spiritually bankrupt philosophy I believe would have been unrecognizable to the American constitutionalists.
That said I think your probably right about the recovery aspect- any government needs to get the ball rolling before making any fundamental changes to the system. Anyway your a funny guy and I really enjoyed the book.
PL: Yeah, many people over the years have feared that our decoupling from religion, community organizations, etc… threatens society’s fabric. I’m not a historical anthropologist, so I can’t comment on the broad waves that sort of thing creates historically. What I can say is, we need to recognize that survival of the fittest can’t overcome. We can’t keep an “everybody wins” society, and yes – sticking somebody else’s health care costs on the back of someone more successful, or any policy of that ilk – is trying to trump Darwin. Doesn’t work. We need a radical removal of government in our lives, and replacement of it with whatever people create in the vacuum, which, I assume, will be a number of social organizations not unlike those whose loss is lamented in “Bowling Alone.”
Yes, liberalism is partly at fault, but the answer to the problems created by capitalism and liberalism hand in hand is not a more robust form of liberalism focused on protecting workers. It’s leaving people to fend more for themselves and develop the frameworks that support them in their own communities. And ultimately this is what they’ll have to do because, as you and I know, we cannot afford to pay for the liberal entitlements we’re promising.