Only in the Abstract

It spite of the fact that the economic social theories that sound nifty never just never seem to work out – like communism, which appealed to half the world for a good part of a century – we do like our notions of how things should be. But communism was never going to work. People should share, for the common good, and everyone will be better off. That makes sense. But people like their stuff, and they want to keep their stuff. Someone else should do the sharing. And the idea that each receives according to his or her need did depend on each contributing according to his or her ability, and that didn’t account for the freeloaders who didn’t contribute, because they had no incentive to, and the skimmers, who got rich as bureaucrats administering the distribution of goods and services, taking a hefty cut in carrying charges and living large. And the apparatus necessary to decide just who needed what, and who should get cracking and contribute right now, damn it, had to become oppressive, then brutal, then outrageous, then corrupt – because such an apparatus, because of its nature, naturally attracts the busybodies, the power-mad and the gleeful sadists. Things went sour, as one would expect. And, when things get really nasty, the people rise up and say, well, the whole thing seems to have been a stupid idea and let’s be rid of it – unless the system has already collapsed under its own bureaucratic weight, saving them the trouble. But it was a cool system, in the abstract – and it was moral and good and fair, for the other guys, the rubes. George Orwell explained it all in a pleasant little fable about farm animals. Actually that wasn’t pleasant at all.

And there is the whole other matter of the counter to communism – lightly regulated, or unregulated, free-market capitalism. Marx was wrong and Adam Smith had been right all along – let people buy and sell what they want and don’t bother them, and private capitalists, who own the means of production and want to get rich beyond the dreams of avarice, or remain so, will vie with each other to provide the best quality goods and services at the lowest possible price, to corner the market and drive their competitors out of business. But as a result the rest of us get good stuff – the best stuff – as cheap as dirt, because of this. And things will regulate themselves, really. If a product is unsafe, and kills people, folks will stop buying it. And even if it’s only useless and doesn’t really work, the same thing will happen. No one will buy it, or they’ll stop buying it soon enough. The free market will take care of the crap. And of course people will get what they need, and want, easily, as the Invisible Hand of the Market – pure selfish competition among those who want to get rich – provides the greatest good for the greatest number at the lowest possible cost, because that’s the only way anyone can get rich. Greed is good, as in the famous Oliver Stone movie.

That’s also a cool theory. That too makes sense. It’s just that it too makes sense only in the abstract. That’s what Stone’s movie was about.

And we should have known. The unregulated securities market of the twenties, where you could buy shares in a thriving concern on margin – put up two percent and you own part of the company – was wonderful. You could sell your share of the shares anytime, when the stock got hot, to someone else who was also using margin, and make big money – or hold your stock as it skyrocketed, and see your little investment make up the other ninety-eight percent and then more. You’d be rich. And then in September 1929 the market collapsed, and the guys who sold you the shares in whatever had to liquidate, quickly, before things were just worthless, and the margin calls came in. They wanted the other ninety-eight percent from you, now – you had to cover that, as you said you would. You assumed the value would rise and rise and rise again, and you could trade up and out of the obligation before you had to pay the rest, rolling things over, flipping all sorts of stocks and pocketing the accrued value and buying more. And then you couldn’t, and you were holding something of little value, owing far more than it was now worth, or would ever be worth – and no one would buy it at any price. You were ruined. There was a window nearby.

And thus we developed regulations – there would be no more buying on margin, there’d be a Securities and Exchange Commission so no one would be selling shares in what wasn’t real, and with the Glass-Steagall Act banks and investment firms would be separated – speculation was separated from banking operations, to make sure the banks, the folks who held the money and issued loans to businesses and made home loans, weren’t taking all their money wheeling and dealing in what might rise and what might not in the securities markets. Adam Smith was cool, but he hadn’t been right. Greed was not entirely good. The greedy gamed the system, hoping to turn a profit and get out before what they sort of owned started falling in value, and buy something else, sort of, and do the same thing over again, and again and again – and the very nature of all the transactions, the volume of everyone doing this, would drive prices up, as everyone wanted in, and everyone would get rich. And of course the issuers of the stocks, the thriving companies, took the money for stock in their company – it was capital they could use to grow, or use to just have cool parties out on Long Island, like in the Gatsby book. It was wonderful, until it wasn’t.

But we do like our economic social theories that sound nifty, and around 1990 we began to stop really enforcing regulations, and then repealed the Glass-Steagall Act. It was time to let the lightly regulated, or unregulated, free-market do its thing, and provide the greatest good for the greatest number at the lowest possible cost. What could go wrong? Adam Smith just had to have been right. It was such an elegant theory.

And the same thing happened again, this time with the housing market, where, like before, everyone was buying on margin, assuming the value of the house would rise and rise and rise again, and thus you could trade up and out of the mortgage obligation before you had to pay even a part of the balance due, rolling things over, flipping the first house and pocketing the accrued value and buying another – on margin, with little or next to nothing down, and with payments that wouldn’t really kick in – in any serious way – for five or six years. And by that time you’d have moved on and up. You could do that over and over again and make big money. But that was just the housing market. The banks, which were now free to engage in any speculation whatsoever, bundled all these mortgages no one intended to hold, really, and on which no substantial payments would be due anytime soon, into what they called collateralize debt obligations and got the rating agencies to say they were as good as gold, and traded them to each other, everyone taking their profits as they changed hands every day and every minute and every second in dizzying volume, everyone getting out of one and buying another bundle of hypothetical debt obligations before they had to decide what the previous one was really worth. And the value of these bundled packages rose and rose and rose, as one would expect. They made big money at that, and then started trading insurance policies on the bundles of odd debt with each other – those credit default swaps – creating a secondary market where you could make big money too. No one was doing that boring old banking stuff anymore. That’s not where the money was.

And that too was wonderful, until it wasn’t. Everyone knows the story. High-level investors decided this was too risky and wanted out. The margin calls came. Pay what you owe, now. And the investment banks were leveraged thirty or forty to one and couldn’t pay up, and no one would buy what they were left holding at any price. And AIG, which had written all the credit default insurance policies, had set aside no funds at all to pay claims – the day would never come when people wouldn’t be trading these policies with each other so no one would actually have to make a claim, as they always could unload something smelly for something that smelled a little different. But the day came. And down at the initial level, in the housing market, no one could pay their mortgages, as the real payments due started to kick in before they could trade up and out – and there was no up left, as they now owed far more than that asset that they now held would ever be worth. And there were no buyers anyway. You couldn’t even sell at a loss. They were in the same boat as the big boys far above them. The economy collapsed.

But no one wanted to blame Adam Smith. Free markets, where no one tells anyone what not to do, should work just fine. Sure, in the midst of all this there was the Bernie Madoff thing – he built his own individual house of cards that collapsed spectacularly, and ruined thousands to the tune of many billions of dollars. But you could argue he shouldn’t have gone to jail. Sure, he ran a kind of Ponzi scheme, but think about it. The market would have taken care of this with the law – people would have figured out sooner or later that he was a crook, and stopped parking their money with him so he could grow it for them. They should have known better. And some people did know better. The market works just fine.

But it doesn’t. And someone has to take the blame. Maybe it was the folks who bought those houses they couldn’t possibly ever afford. They started this, after all. And maybe they got what they deserved, which is what the social Darwinist would say – “ferocious, mercilessly competitive conditions weed out the weak while preserving and enhancing the strongest members of an institution, a market, or a civilization as a whole,” so let them sink – “the more cutthroat an organization’s culture, the more hardened it is to adversity and tougher the people who emerge from its hallowed halls.” Adam Smith had to be right. Sure, people said that about Karl Marx, but he wasn’t Adam Smith.

For your daily dose of that sort of thinking you need to tune to CNBC, the nation’s default business network, where you’ll hear just who is to blame. Consider what is said at the five-minute mark of this video – Janet Tavakoli is debating Rick Santelli about predatory lending, and the whole panel is saying that never happened – the 2008 crash was caused by individual homeowners borrowing beyond their means.

And Matt Taibbi takes it from there:

My favorite part of this comes roughly at the six-minute mark. Tavakoli has just deftly explained how a lot of the predatory practices worked – people with limited financial literacy were presented with long and complicated mortgage deals, and told they would have a fixed payment in perpetuity or a guaranteed re-finance, or were nailed by fraudulent appraisals. Then she mentioned the big one, the fact that investment banks then took all these mortgages and with eyes wide open securitized them and sold them off as worthy investments to suckers on the other end of the chain.

While she’s saying all this stuff, Santelli, who is one of the fathers of the Tea Party movement, is shaking his head furiously, video-scoffing at everything she’s saying. When he finally does get a chance to speak, this is what he says: “Here’s my problem with this. It takes two to tango. You can’t cheat an honest man.”

You can’t cheat an honest man? What the fuck does that mean?

That’s a good question, and it’s tied up with Adam Smith’s Greed is Good notions merged with what social Darwinism has become, our new political phenomenon:

This whole scene sort of encapsulates what’s wrong with the Tea Party movement. The movement, and let’s admit this, has some of its roots in legitimate grievances about government waste and some not-entirely-inaccurate observations about what’s left of the American welfare state. Of course what resonates most with the suburban whites who mostly make up the Tea Party are stories about minorities and immigrants using Section 8 housing, food stamps, Medicaid, TANF and other programs, with the Obama stimulus being for them a symbol of this ongoing government largess. The heat of the Tea Party movement comes from the racial frustrations that actually exist out there, in the real world outside New York and LA, as urban expansion and immigration increasingly throw white and nonwhite communities together, with white Tea Party types more and more often blowing gaskets over increased crime rates, declining school standards, and mislaid or wasted tax revenue.

Smith is better than Marx and the apparatus necessary to decide just who needs what, and who should get cracking and must contribute right now, damn it, has become oppressive, and brutal, and outrageous, and corrupt – because such an apparatus, because of its nature, naturally attracts the busybodies, the power-mad and the gleeful sadists – like Obama and his crew. There’s a reason for the Obama-as-Communist and Obama-as-Nazi placards. Adam Smith had to be right.

But Taibbi sees this as oddly racist, but really, basically dumb:

That this perception that minorities are the prime or sole consumers of government entitlement programs is absurdly inaccurate – white people, for instance, are overwhelmingly the largest nonelderly recipients of Medicaid, making up 42.8% of the program’s rolls nationwide, compared to 22.2% for blacks and 27.9% for Hispanics – is beside the point. The point is that the Tea Party is built largely on this narrative of “personal responsibility,” where the central demons are unwed black and Hispanic mothers and absent black and Hispanic fathers, who are, let’s face it, not uncommon characters in the American melodrama.

He has links if you want to dig down for confirmation, but the large point is that, caught up in a nifty theory, you can go blind:

The Tea Party movement contains a lot of people who are far more impressed by what they can see with their own eyes than with what, for instance, they read about. I’ve been to Tea Party events where global warming was dismissed by speakers who, without irony, pointed to the fact that there was snow on the ground outside. And while very few people have ever actually seen a CDO manager or a Countrywide executive, or were aware if it when they saw them, the Tea Party folks sure as hell have seen who their neighbors in foreclosure are.

The Fox/CNBC types have very cannily latched on this narrative to rewrite the history of the financial crisis. They know that Tea Partiers will go for any narrative that puts blame on poor (and especially poor minority) homeowners, because the idea of poor blacks and Hispanics borrowing beyond their means fits seamlessly with their world view.

But this is a situation where poor minorities were really incidental to a much larger fraud scheme that culminated in a welfare program – the bank bailouts – that dwarfs the entire “entitlement” infrastructure. But the millions of people who are actually in the Tea Party movement seem to have absolutely no idea that their so-called leaders, the Santelli’s of their world, are shilling for tax cheats and crooks and welfare bums of the sort they would despise (perhaps even more than their black and Hispanic neighbors), if they could actually see them.

Sure, some took out home loans they couldn’t afford, and some of them were minorities – and were lied to, or foolish, or dumb, or trying to pull a fast one. And some were moderately well-off white guys with a plan to flip this house, and then another, and get rich and get out of each before the hammer came down, selling to some other sucker who would take out a mortgage that sucked, that that was their problem. But the damage from that could have been contained. The real damage took place in the world of Rick Santelli – where wealth, such as it is, is created out of nothing much and finding suckers who think there’s something there, the world of investment bankers and those who enable them.

Taibbi adds this:

But thanks to people like these CNBC goons, they don’t see them, and probably won’t. The further we get from the crisis, the muddier all of this stuff is going to get.

But Taibbi is okay with the eyes-wide-open economic theorist like the strict libertarian, who had his own tea parties before they were popular, Ron Paul:

I actually like Ron Paul and have said nothing but nice things about him. I talk to people in his office regularly. But the Ron Paul tea parties and these post Feb-2009 Tea Parties are two different things. Certainly the current Tea Partiers see it that way. While these folks may have lifted some of the Paulian themes, they’re just physically different people. They’re mainstream Palin supporters, and the reason I find them ridiculous is because I was covering these people while the bailouts were happening and remember what was actually on their minds back then. Does anyone remember what the cause of the day was when the AIG bailout took place? It was the uproar from Palin supporters about Obama’s “lipstick on a pig” comment.

But he says he has always respected the Ron Paul people even though he doesn’t always agree with them, because “they’re intellectually consistent and motivated by actual policy issues.”

Not the new crew:

These Teabagger types on the other hand are just a giant herd of video sheep being jerked around by snickering DC-New York types, who are very skillfully playing on their cultural paranoia and their economic and racial frustrations. When they were told to flip out about Obama’s “lipstick” comment, they did. When they were told to flip out about the bailouts, they did. I’m not saying that some of these people weren’t frustrated about the bailouts, to the extent that they even knew about them, before Obama got elected. But they did not coalesce into a mass movement against them until Part II of the bailout was passed under Obama’s watch, and one should note also that their keynote speaker in Nashville a few weeks ago, Palin, was a bailout supporter.

The Paul people were upset about deficit spending and Fed corruption throughout and ardently opposed Bush’s policies throughout his presidency. These Teabaggers did not. They were the people inside the rope-lines at McCain and Romney and Rudy events, complaining about “those people” consuming social services money, while the Paul people with their protest placards were physically barred from coming near the events. I must have seen that dynamic a dozen times during the campaign.

And Digby adds this:

Unfortunately all the elites, political and otherwise, have a vested interest in keeping the rubes focused on the blacks and browns so it’s hard to see the mechanism by which they will be revealed. And that’s the whole purpose of right wing populism.

Geez, if you’re going screech about a nifty economic social theory, and say it’s the final word on how things work, or should work, at least get it straight – and actually believe in it. On the other hand economic social theories that sound nifty, in the abstract, just never seem to work out in the particulars. You’d think we would have learned that by now.

About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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1 Response to Only in the Abstract

  1. Rick says:

    Another good column, although I think it’d work better if structured more to demonstrate the chronology, with the repeal of Glass-Steagall leading us into the quicksand, followed by mortgages being granted by people who no longer cared if these were good loans or not.

    Hey, Santelli, it also took two to tango in 1980, when my wife and I had to fight to get our first mortage, nor could you cheat an honest man back in 1991 when we struggled to prove our credit worthiness again — so why is it that everything waited until 2007 and 2008 to fall apart?

    Given the fact that history and facts are not on your side, one could conclude that you’re a bit too anxious to blame the victims for the crisis, rather than the more likely culprits, who also are more likely to be viewers of your network.

    Although it’s been pointed out before, the Santelli crowd still ignores the fact that, back when markets were tightly regulated, banks wouldn’t give you a loan unless they were pretty sure you were going to be able to pay it back. If, as some claim, the government’s pressuring banks to make risky loans was at the heart of this, than it would have been those government-backed Community Reinvestment Act (CRA) loans that would have been the first to default. The truth is that, from the beginning of the crisis, the heavily-regulated CRA loans have been defaulting way below average.

    In fact, it’s more than likely that the drastic relaxing of loan standards by banks early in this decade — hell, a cocker-spaniel could have qualified for a mortgage in 2005! — is what accounts for the bubbling up of housing prices about the same time. And no matter how many “instruments” they invent on Wall Street as a way of separating Bush tax-cut recipients from their money, at some point the real estate bubble was bound to burst.

    And that’s just what happened, bringing down not only all those silly “Collateralized Debt Obligations” and “Credit Default Swaps,” but the entire world economy with it.

    Rick

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