Comments on: In Defense of Risk (Happy Fourth of July)

By: John

John — Mon, 13 Jul 2009 10:25:25 +0000

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.

By: Kevin

Kevin — Tue, 07 Jul 2009 01:02:21 +0000

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.

By: Nate

Nate — Mon, 06 Jul 2009 14:54:48 +0000

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.

By: Tim

Tim — Mon, 06 Jul 2009 10:06:02 +0000

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.

By: TrembleTheDevil

TrembleTheDevil — Mon, 06 Jul 2009 07:10:45 +0000

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.

By: Evil Conservative

Evil Conservative — Sun, 05 Jul 2009 21:41:15 +0000

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.

By: Tim

Tim — Sat, 04 Jul 2009 14:34:59 +0000

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.

By: long time reader

long time reader — Sat, 04 Jul 2009 03:58:14 +0000

Good stuff Page, as usual.
Looking forward to that second book!
PL: Thanks as always.

By: Gorillaz

Gorillaz — Fri, 03 Jul 2009 22:29:19 +0000

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.

By: Mike

Mike — Fri, 03 Jul 2009 21:19:21 +0000

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.