Saturday, August 23, 2014

Complications

No sooner do I run into (and begin reading) one book on the 2008 financial crisis than I run into another, contrasting one: How Markets Fail by a New Yorker writer named John Cassidy.

As a reporter of facts Cassidy is streets and streets ahead of Matt Taibbi . . . Wall Street seems to be his beat (he also wrote a book on the prior Wall Street fiasco, the tech bubble) and he actually understands a bit of what lies behind the alphabet soup of financial offerings (RMBS, CDOs, etc.).

He also understands a lot of the economic theory and mathematical work behind the new Wall Street. To Taibbi it's easier just to write it all off as fraud, but to anyone who knows anything about the recent history of risk analysis, the 2008 debacle is a fascinating mixture of error, fraud, greed, negligence, mystifcation, arrogance and incompetence.

But untangling all these strands doesn't make for quick and easy propaganda, and elicits more mixed emotions than Taibbi's righteous anger.

Cassidy does a very good job of both explaining each strand, and giving us a good sense of the motley fabric they made when woven together.

I've read a number of books about Wall Street and its changing culture: from the establishment, WASPy, "white shoe" firms to the emergence of the Jewish up-and-comers, to the macho "big swinging dicks" who emerged in the 1980s, to the rise of the quants in the 1990s. One thing that struck me is reading Cassidy's book is the fundamental vulnerability Wall Street firms suffer from as remnants of several of these cultures fail to come together. Wall Street these days is built upon the foundation of mathematical analysis, but is run by people with big dicks--which is why Wall Street has suddenly taken such an avid interest in politics--those swinging dicks don't have much when it comes to finding new bits of margin to work, but they can create new ones by initiating government actions that work to their advantage.

The irony of our situation today is that government, far from being irrelevant to economics, has become one the last means of manipulating the outside world to gain particular advantage. (Though I condemn this sort of manipulation, I don't think the solution is to get rid of the government. With a mediocre system of oversight and a lot more transparency & openness, this would be a minor problem.)




A curious sidelight to Taibbi's take on the Wall Street disaster . . .

For Taibbi, the big thing about the financial crisis is that it provides an opportunity to stoke the rage of the lower orders. His expression of sympathy for the Tea Party is based first on the fact that they are dissatisfied enough to utter the word "revolution," but also on the fact that they are a force for instability, which he hopes some sort of revolution from the left could take advantage of. "The worse things get, the better" for revolutionaries.

And, at first, it seemed he might have it all his way--no one could explain how the financial crisis could have happened, no one could explain the financial instruments involved. But this was mainly because the American press corps is almost incredibly stupid. When you laugh at the malapropisms on Tea Party placards, or the fact that Americans can't do math, or the fact that they can't find a foreign country on a map. you should realize that journalists come from these people, and in terms of native intelligence they by no means leave them in the dust. As someone who has worked directly with folks from a journalism school which was, by a long stretch, the worst at the university (the warehouse for not-bright athletes and not-bright wanna-be athletes), and as someone who covered a fairly specialized beat for a while (science) I can tell you: I'd much much rather teach a scientist how to get a story and write than teach a journalist how to think critically about a science story. The first is possible. The second, generally, is not. Whenever they are told an issue is too complicated to allow for a snap judgment, they are certain you are covering something up. Complexity simply does not exist for the well-trained doltish journalist. Complexity is the new opiate of the masses as far as they are concerned.

Taibbi isn't dumb, but the fact that most journalists are was very convenient for someone who would have liked to boil down the financial crisis to mere criminality. Bad things happened, and those people were there, those people are bad, let's get 'em.

But trying to string together Taibbi's story--what motivated these evil people to crash their own money making machine? Certainly not robbing the poor. Given the choice what greedy robber robs the poor? You rob the rich when you can, because as Willie Sutton said about banks, "that's where the money is."

But Taibbi's half-story wasn't the only one out there. Adam Davidson of Planet Money had a story which hung together a bit better as to how the financial debacle happened:

Over the course of the 1990s and early 2000s the amount of capital in the world went up a great deal--more than doubled. A lot of this money was sovereign capital, pension funds and other really big individual pools of cash. A lot of the directors of what to do with those big pools of cash were under instructions both to get some interest for it and to keep it almost absolutely safe. The usual recourse for these folks was the US Treasury Bill. But after 9/11 the US central bank had been keeping interest rates quite low and T-Bill rates were pathetically low. This combination of circumstances: lots more capital and the low rates offered by the traditional obvious resort made for a huge demand for alternative AAA-rated investments. This huge demand meant that Wall Street stood to make loads of money placing this excess capital. But they needed places to put it. There were plenty of options for that portion of the money that could go toward riskier investments, but not so for the money that had to go to AAA-rated investments.

Thus the intense pressure bankers put on the ratings companies to rate the top tranche of CMOs AAA. While this was perhaps justified when there were loads of low-risk mortgages in the pool, it certainly wasn't when they were all subprime--all high-risk. There was a great deal of money to be made in offering a more AAA-grade investments, the bankers and the ratings companies would benefit from the fees of these transactions.

And once the bankers had achieved the acquiescence of the ratings companies, they basically had there hands on a AAA-making machine. They just needed mortgages to serve as the basis of the bonds, and once reasonable legitimate mortgages weren't enough, the pressure came down to get anyone they could into a mortgage. They just needed a counterparty.

Brokering crap mortgages would not have been a big business unless there was somewhere for the originator to dump them and get out from under the risk. Wall Street was providing that dumping ground and were screaming for more crap mortgages to put into it, because they were selling them on and making plenty of money doing so.

The crucial motivating factor in this whole equation is the opportunity to profitably absorb that capital glut. The lack of anything like ethics all up and down the process--from the pure borrow, buy and flip artists who were just riding the real-estate price bubble, to the brokers seeking warm bodies to put at the other end of Shylockian mortgages, to the originating banks, to the Wall Street bond builders to the ratings companies to the supposed masters of that glut of capital--there's very little to see here that makes one feel good about being human.

Eventually, the firms that had moved those AAA tranches easily found it hard to sell some of the riskier ones, where demand wasn't as strong, particularly toward the end of the real-estate bubble. So they held on to them--warehoused them in hopes they could eventually move them to less risk-averse investors.

Unfortunately for them, that day never came: real estate prices began to decline, default rates turned those lower tranches into worthless holdings, and heavily leveraged firms were suddenly in a world of financial hurt. Hence Lehman and all the dominoes that fell afterwards. So even *some* of the banks ended up believing their own bullshit to far too great an extent. Not, however, Goldman Sachs.

Not that there wasn't criminality here. There was. But this is a richer explanation, both in terms of a variety of factors coming together--capital glut, greed, criminality, highly leveraged companies, naive or complicit borrowers, etc.--and in the range of behaviors it explains fairly well.

Taibbi says he makes a villain of Goldman Sachs because villains bring readers, but he also does it because his story won't hang together without some villainous figure who more or less crashes the ship of state out of pure malice. The alternative provided by Adam Davidson doesn't require the cartoon character: all you need is the normal run of human failure and vice.

But Davidson would not go unanswered. A couple of Taibbi's associates, Yasha Levine and Mark Ames, with whom Taibbi had wrote and edited The eXile in Moscow, took Davidson to task for some ethical conflicts, some of which were not really his. That Planet Money had a single underwriter in the financial industry (Ally) is a matter for NPR, not Davidson personally. The underwriting is through NPR, not through Davidson or the production company. It's an issue, but it's not an issue with Davidson.

Davidson's on-air "mugging" of Elizabeth Warren sounds very much like a rising star getting a bit too in love with his own press clippings. And it does sound as if he's getting a bit too close to his Wall Street sources, absorbing not just their information, but their sensibilities as well. But that was about a year of press clippings after he introduced the theory I sketch out above.

Credit to them, Levine and Ames don't make any bones about why they dislike Davidson:
Although Davidson's segment was praised for making the murky world of finance easier to understand, his framing of the subprime housing debacle served another purpose: It let Wall Street off the hook for its role in rampant criminal mortgage fraud and predatory lending.
"This was a crisis that was caused by willing participation of every single person. Nobody was coerced," said Davidson's co-producer and partner in Planet Money, Alex Blumberg. "And there was fraud. But that was not what caused the crisis. What caused the crisis was something bigger and more systemic that required the involvement of everybody at every step."
This evasion-by-exaggerating-the-complexity strategy is one that Davidson and Planet Money have deployed often to whitewash and deflect the role of criminality in the housing crisis. . . . Davidson provided a narrative frame that comforted the American Establishment at a time when it badly needed comforting, and was duly rewarded for his services [with a Peabody, among other things].
I'm not at all sure I'd have used Blumberg's phraseology to describe the crisis, but he did so in an interview with the Chicago Tribune not on the show. Having listened to much of the actual series at this time, I don't think that attitude is very important to their narrative. Far more important were the tales of out-and-out fraud and hearing from some of the victims, for instance, an African-American family who were robbed of the home they had nearly paid off by a predatory second-mortgage vendor. I think what Blumberg is getting at with the Tribune is that bubbles, by their nature require broad participation--everyone in the housing market has to assent to the huge spike in housing prices. A LOT of people participate in and condone the fraud in one way or another. But there is no lack for folks in the series who went well beyond assent and condoning--they ripped people off, they victimized people and spent the money on five-figure nights out with "B-list celebrities." And of course there were those a bit higher up who enables, and even commanded those men. We hear from them as well.

But the trouble that Taibbi, Levine and Ames have with Davidson's story is not whether it is true, it is whether it is useful. And for some reason ANY complication to the story vampire squid of Wall Street is to be extirpated.

Monday, August 18, 2014

Simplicities

I'm way behind (beyond, even) the curve on this next book, but I've never worried too much about contemporaneousness (see, for instance, my review of The Culture of Narcissism from 2004).

I'm reading Matt Taibbi's Griftopia. You'll be relieved to know I won't be going into the history here too much, except to say I am surprised at how much praise Taibbi's reporting got back in when the crisis was on. He often tells us how mind-bendingly hard it is to understand many of the financial transactions he mentions, but his mind seems pretty well-ironed: he hasn't really tried to understand them. Instead he seems to assume that any financial transaction whose workings are not immediately transparent is "a Ponzi scheme." Much like "savages" in old movies assume any complex technology to be witchcraft.

It doesn't have to be this way. While a lot of math goes into some of these hedges and insurance schemes, they can be absorbed and explained by regular humans. Planet Money (a nice bit of work here) did far far better than Taibbi does. Taibbi doesn't really even try.

As several folks have noted, Taibbi is pissed off and writes that way, which is occasionally refreshing, but he often uses the visceral to cover up the basic lack of content--the vacuousness of a simplistic text dealing with a subject he readily acknowledges is deeply complex.

And the book isn't really empty. It's full of intent. Taibbi is writing propaganda--his goal is to elicit what he considers to be the appropriate reaction to this situation, not to explain it to you and let you do the reacting.

Which brings me to an irony I savored while reading Taibbi's book. The opening chapter is about the Tea Party, which Taibbi is, of course, largely contemptuous of, though he tries to seem like he's on the side of the more-or-less little guy, as most Tea Party rank and file are.  But nearly everything Taibbi says about the Tea Party, can be turned around and said about Taibbi just as truthfully.
Common sense sounds great, but if you’re too freaking lazy to penetrate the mysteries of carbon dioxide—if you haven’t mastered the whole concept of breathing by the time you’re old enough to serve in the U.S. Congress—you’re not going to get the credit default swap, the synthetic collateralized debt obligation, the interest rate swap, etc. And understanding these instruments and how they were used (or misused) is the difference between perceiving how Wall Street made its money in the last decades as normal capitalist business and seeing the truth of what it often was instead, which was simple fraud and crime. 
For the Tea Party, common sense; for Taibbi, truth. Because his truth doesn't involve actually understand (or at least not conveying an understanding of) synthetic collateralized debt onligations. It just involves evaluating them properly by Taibbi's lights: as theft. But really that's not much better than the Tea Party's blind heroization of the capitalist.
Our world isn’t about ideology anymore. It’s about complexity. We live in a complex bureaucratic state with complex laws and complex business practices, and the few organizations with the corporate will power to master these complexities will inevitably own the political power. On the other hand, movements like the Tea Party more than anything else reflect a widespread longing for simpler times and simple solutions—just throw the U.S. Constitution at the whole mess and everything will be jake. For immigration, build a big fence. Abolish the Federal Reserve, the Department of Commerce, the Department of Education. At times the overt longing for simple answers that you get from Tea Party leaders is so earnest and touching, it almost makes you forget how insane most of them are.
Well, the world may be about complexity, but Taibbi certainly isn't about explaining it all to us. Just throw some real leftist populism at a problem and everything will be copaesthetic. For Wall Street, just arrest some people and make everything else simple again. In place of experts who actually might understand all that complexity, let's impose populist answers.
What voters don't realize, or don't want to realize, is that the dream was abandoned long ago by this country's leaders, who know the more prosaic reality and are looking beyond the fantasy, into the future, at an America plummeted into third world status.
In place of immigration and cultural decay, we have Taibbi's To Third World  in a Handbasket crisis.
The engine for looting the old ghetto neighborhoods was the drug trade, which served two purposes with brutal efficiency. Narco business was the mechanism for concentrating all the money on the block into that Escalade-hungry dealer's hands, while narco-chemistry was the mechanism for keeping the people on his block too weak and hopeless to do anything about it.
In place of the vast, decades-long Kenyan Obama conspiracy, we have the elitist conspiracy for each and every sociological problem.

And in place of "the constitution" as a shibboleth we get the "ponzi scheme" as our empty, but hopefully inspiring signifier.
[Michelle] Bachman has a lot of critics, ut they miss the genius of her political act. Even as she spends every day flubbing political SAT questions, she's always dead-on when it comes to her basic message, which is that government is always the problem and there are no issues the country has that can't be worked out with basic common sense . . .
There's more than a little admiration in this description, and, in fact, the Tea Party is more than a little bit the model for this chapter as much as its subject.
 . . .thirteen million Tea Partiers [believe] the Obama health care plan . . . is the first step in a long-range plan to eliminate the American free enterprise system and install a Trotskyite dictatorship.
And funny you should mention Trotskyites, because they were much on my mind in portions of this book--the contempt for small truths in the face of and to bring home the big one (class warfare); the need to create a sense of crisis and deep wrong to mobilize the revolution . . . Taibbi seems to be using the same propagandistic methods of the right to advance a (to him) more revolutionary, but also blinkered and manipulated movement to the political fore.

I'm not red-baiting here: I think socialism and communism are pretty much normal parts of the political spectrum. There's no dishonor in believing in them. What I do like to point out, though, is the complex and deeply disingenuous game revolutionary parties play in heightening crises rather than seeking solutions to them. And the truth (what Taibbi claims to stand for) is usually an early casualty in the drive to revolution. And I think that Taibbi knows the complex truths as well as Planet Money or Paul Krugman does. He just finds it inconvenient to his activism.

Vodka Party anyone? Stronger stuff than tea, yes, but I'll not be joining.


Saturday, August 02, 2014

American Foreign Policy Nonsense Syndrome



We'll call it FoPNoS or Fopnos for short.

Americans seem to think of the area of foreign policy as a realm of voodoo where arcane masters can ensure that every outcome is our preferred outcome.

And it isn't just Americans who can't find Syria on a map who think that turning Syria into a Utopia of liberal, western-sympathizing Arabs is just a matter of moral courage on the part of the President. It is supposedly informed sources as well. Like the editorial page editor of the Washington Post: "We have witnessed as close to a laboratory experiment on the effects of U.S. disengagement as the real world is ever likely to provide," says Fred Hiatt in a recent editorial (here).

The narrowness of perspective and the shortness of memory here are almost charmingly naive, until one considers how uncharming and hopefully un-naive an editor at the Washington Post ought to be.

If we start unpacking some of Hiatt's statements in this editorial it quickly becomes apparent that naive is actually just the word for his view on what foreign policy is and what it can hope to accomplish and what it has and has not accomplished in the past. First, to argue that Obama's foreign policy is one of "disengagement" is to say "my perspective runs as deep as the administration immediately prior to this one." From a historical perspective, Obama has been more or less normally engaged with the rest of the world. 

Yes: He won election on the promise that he would disengage us from the essentially pointless war the prior administration had blundered into. And that means some things--essentially he ran on a platform that said "It is more important to get out of Iraq than to stay there for several decades while they try to puzzle out how to govern themselves."

That is an attitude the American people fully endorsed. Why? Because they don't really care about Iraq qua Iraq, and they never have. And let us consider the alternatives here . . . the clear implication of Hiatt's piece is that American military presence in Iraq would ensure that, much in contrast to today, all would be well. And we can't help but grant that things were pretty stable after the surge.

But when we consider what has become "The Legend of the Surge" we should remeber that the surge was exactly that--it was a temporary increase in troop levels. Without increasing the capacity of our military (i.e. a draft), troop levels were bound to decline back to the levels more like we saw in 2005, when Iraq was pretty much on the road to where it is today. American troops were useful in keeping things from getting completely chaotic, but the country was clearly on a path to out-and-out civil war . . . and what effect would THAT have had on our domestic political situation?

Iraq is not now a potential stable democracy. Full stop. At no point in the recent past has it been, in spite of the bullshit spouted by neo-conservative Kool-Aid tipplers. By toppling Sadaam Hussein, we set in motion a process that more or less left us with a dog's breakfast of options. Handing power to the Shiite thugs and getting the hell out was probably one of the better ones from our perspective. Staying there and suppressing any Sunni opposition the Shiite thugs might engender for the next several decades really seems an inferior option to me, and, certainly, the American people made it quite clear that wasn't an option they were interested in pursuing.

Are things going to go badly in Iraq? Yes.

But that's kind of like asking if the human rights situation in Iran is going to be dismal. Of course it is. But how, exactly, do you propose to improve on this situation. Things go badly in the world. Sometimes things go badly in the world and it's your country's fault because the prior administration was run by morons. But things going badly in Iraq isn't an argument against policy there--it is simply a consequence of the situation there. Critics are either delusional or deeply dishonest to think that merely pointing to Iraq's difficulties as enough in itself: they have to sketch out their alternative, and what their alternative does is put us in the middle of that civil war. As a participant. One should keep that in mind.

When ordinary citizens in Tunisia, Egypt, Syria and elsewhere in the Arab world unexpectedly began agitating for democracy, the West might have responded as it did after World War II (with the Marshall Plan) or the fall of the Berlin Wall (with a commitment to a Europe whole and free). If the United States had taken the lead, Europe and America together could have offered trade, investment, exchange and cultural opportunities to help bring the region into the modern, democratic world.
But for Obama the tumult in Egypt and elsewhere was a distraction, not a once-in-a-generation opportunity. The West responded timidly and inconsistently, and the moment was lost.
This is almost laugh-out-loud funny. The so-called "Arab Spring" is, no doubt about it, a historic moment. But the idea that stable, western-leaning, democratic governments could easily be built out of these street protests is, frankly, beyond absurd. The liberal element was important to these protests, but expecting the liberal element to be a central part of any democratic government in these areas is akin to expecting the United States to bring to power a political party dominated by transvestites in 2016.

Liberals in these countries represent a small, exotic-seeming, and in many quarters, hated, minority. They aren't going to be the basis of your political status quo without massive and continuing outside intervention. Not just monetary intervention either. I'm talking about shock-and-awe violence followed by occupation followed by a long, bloody, popular insurgency against the foreigners and their domestic sympathizers, who will all be rounded up and executed en masse the minute we withdraw support. Anyone who believes otherwise is, to be frank, an idiot.

The model behind Hiatt's assumptions here seems to be Poland or the Czech Republic. These countries did indeed represent a great opportunity when the Berlin Wall came down. Why? Because they had spend decades under actual or de facto occupation by the Soviet Union. The focus of their nationalist aspirations was the hatred of our traditional enemy. Running into our arms was the natural and popular strategy to ensure the end of oppression at the hands of the Russians. But what happened in Russia, where there was a considerable force of Western-leaning liberals (certainly a more considerable one than in Syria, say), but where WE were the popular, traditional enemy? The liberals and their "foreign values" were marginalized and a confrontationalist regime emerged.

The "Arab Spring" will naturally release a period of power struggle and score-settling, and one of the great figures against whom scores must be settled is . . . us. The Arab Spring is not going to result in the Tunisian version of the Polish government, no matter what we do. Where "The Arab Spring" manages to overthrow the last vestiges of the old oppressive regimes, we can expect chaos. Bloody chaos. Where it doesn't, we can expect, at best, an ugly and slow evolution toward a new status quo that is less dictatorial. We can't expect a whole lot of love from any regime that reflects the feelings of most people in those Arab Spring countries.

Any expectations or hopes for the Arab Spring countries that are more sanguine (as in hopeful, not bloody) that this are hopelessly naive. Libya shouldn't be judged against Poland. Libya should be judged against reasonable expectations for Libya, which frankly can't be very high from a domestic tranquillity standpoint and can't be very high from a fulfilling American national interests standpoint. There WERE no opportunities on those fronts. If you thought differently, you really have been wasting your time and privileged access down there, Mr. Hiatt.

Or, maybe he hasn't been. Maybe he's more or less returning the favor of all that privileged access by parroting whatever bullshit his neo-con friends choose to feed him while they're picking up the bar tab.

Now THAT seems like a more realistic scenario.