The G Spot

Irrational exuberance

Kathy G.

I've long been a huge Barbara Ehrenreich fan, for many excellent reasons. The latest piece of evidence that justifies my love is this New York Times op-ed, which is one of the shrewdest things I've read thus far about the financial meltdown:

GREED — and its crafty sibling, speculation — are the designated culprits for the financial crisis. But another, much admired, habit of mind should get its share of the blame: the delusional optimism of mainstream, all-American, positive thinking.

As promoted by Oprah Winfrey, scores of megachurch pastors and an endless flow of self-help best sellers, the idea is to firmly believe that you will get what you want, not only because it will make you feel better to do so, but because “visualizing” something — ardently and with concentration — actually makes it happen. You will be able to pay that adjustable-rate mortgage or, at the other end of the transaction, turn thousands of bad mortgages into giga-profits if only you believe that you can.

Positive thinking is endemic to American culture — from weight loss programs to cancer support groups — and in the last two decades it has put down deep roots in the corporate world as well. Everyone knows that you won’t get a job paying more than $15 an hour unless you’re a “positive person,” and no one becomes a chief executive by issuing warnings of possible disaster.

[. . .]

The once-sober finance industry was not immune. On their Web sites, motivational speakers proudly list companies like Lehman Brothers and Merrill Lynch among their clients. What’s more, for those at the very top of the corporate hierarchy, all this positive thinking must not have seemed delusional at all. With the rise in executive compensation, bosses could have almost anything they wanted, just by expressing the desire. No one was psychologically prepared for hard times when they hit, because, according to the tenets of positive thinking, even to think of trouble is to bring it on.

The roots of the current financial crisis

By Kathy G.

Chris Hayes has a very interesting post explaining the roots of the current financial meltdown. He says it has two basic causes: one is too much leverage, i.e., making investments where the amount of borrowed capital far exceeds the amount you have in assets. That seems fairly obvious.

The other explanation he gives is much more counterintuitive: too much capital. He explains:

This insight isn't mine. It comes largely from an episode of This American Life called The Global Pool of Money (an absolute can't miss episode, the best explanation of the whole crisis I've encountered.) This is a strange way to think about the problem, perhaps, but it's illuminating. The entire amount of capital that needs to find a home in the financial markets is roughly $70 trillion (in fixed income securities). But here's the thing, the size of this pool in 2000 was just 36 trillion. As Adam Davidson says in the TAL: "It took several hundreds years to get to 36 trillion and then it took six years to get to another 36 trillion."

Much of what's gone so wacky is simply that there's too much money chasing too few good investment opportunities and that's led to lots of risky schemes. Now, there's a lot of reasons for all this capital suddenly appearing, but at least one thing to consider is that the distribution between labor and capital is totally skewed, and if labor were capturing more of profits, they'd be consuming, and saving in (relatively safe) commercial enterprises. Which is to say, broadly distributed economic growth is more stable and better over the long-run, than sharply unequal growth.

I'm still working on getting up to speed this stuff myself, and I'm not certain that this explanation is correct. But it's intriguing, and it definitely bears looking into.

Must-read of the day: Dean Baker on progressive conditions for a bailout

By Kathy G.

(Update on the bail-out: Paul Krugman says no deal).

As they say, read the whole thing -- it's an important post. There are two points, however, that seem especially critical to me. First, there's this:

The government can set whatever conditions it wants on participating in the reverse auctions. One of the conditions it should set is that executive compensation be severely constrained at any financial firm that participates. For example, it can set an absolute limit of $2 million in total compensation for any executive at any firm that takes parts in the reverse auction.

Since participation in the auction is completely voluntary, this would make the cap voluntary. Furthermore, there need be little fear about losing good talent, because well-managed firms would not have to participate in the reverse auction.

Restraining compensation on Wall Street will be incredibly important in reversing the pattern of inequality that has developed over the last three decades. The exorbitant compensation packages on Wall Street distorted pay structures throughout the economy.

Executives at non-financial companies looked at the pay on Wall Street and used this as a basis for demanding outrageous pay packages for themselves as well. Presidents of universities often get over $1 million a year, and even top executives at private charities can often earn near $1 million a year. These salaries seem low when compared to their counterparts in the corporate world, but they are outrageous when compared to the pay checks of typical workers. If we can bring about voluntary pay restrain on Wall Street with this bailout, it will be a very big step toward reversing the pattern of inequality that has developed over the last three decades.

John McCain has just achieved new levels of awesomeness

By Kathy G.

With this just-published comment:

Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.

(H/T: Paul Krugman)

Forget Wall Street -- what we need is massive debt relief for individual households

By Kathy G.

As the financial meltdown continues apace, one thing we're bound to be seeing a lot of are articles like this one, inviting readers to join the pity party for the real victims -- all those former Master-of-the-Universe investment bankers whose investment portfolios have taken such a rude hit of late, and who are now forced to make such heartrending decisions as the following:

Who can they let go from the staff? Most would rather do without the nanny than without the cleaner. With any luck the cleaner likes children anyway and will help out in a pinch. If there is a cook, she goes before the nanny. The cleaner also knows how to roast a chicken and wash up. Forget the garden altogether - expect to see a lot of weeds as the crisis worsens - although the unemployed may take some comfort in doing the gardening themselves. 

I'm crying as I type.

Even more tragic are the breathless reports informing readers that "one tumbling titan after another" is being forced to give up his high-end mistress. "I can't afford her anymore!" they plaintively wail.

To which I say  -- cry me a river, bitchez! You were the geniuses who engineered this fiasco, in spite of more than a few credible warnings that a financial disaster of epic proportions was in the making. If these dudes are, in effect, being killed by their own swords -- being economically wiped out by the insanely complex and wildly unsound investment strategies and financial instruments that they themselves invented, refined, and foisted on the rest of the world -- well, that would be poetic justice now, wouldn't it?

But they aren't the only ones who will be hurting, of course. My brother, a middle manager at Merrill Lynch with a mortgage to pay and a wife and three kids to support, is very worried about his job. And he's one of the lucky ones, given that the acquisition of Merrill Lynch by Bank of America has at least allowed that firm to survive.

And there's no question that the turmoil on Wall Street will be reflected on Main Street, as credit becomes much harder to come by for businesses and individuals alike, and the entire economy contracts as a result.

As we've seen thus far, when it comes to the suffering of their buddies on Wall Street, Bush, Paulson, and company have been the milk of human kindness itself, engineering lavish, taxpayer-funded bailouts for Bear Sterns, Fannie, Freddie, and AIG. But when it comes to the suffering of middle Americans, that same milk abruptly turns dry, sour, and very curdled indeed. We've seen precious little help, for example, for individuals overwhelmed by debt and in danger of losing their homes. Yet, according to economist Nouriel Roubini, the most effective way to deal with the current crisis would be a program that brings relief to distressed homeowners in danger of defaulting on their mortgages.

The financial crisis, as explained by lolcats

By Kathy G.

I agree with Ezra that this post provides one of the best brief explications I've read so far of the dynamic behind the current financial meltdown.

But if we're talking "Financial Crisis for Dummies"-type explanations, I have to admit that I like the following one (which I found on the gay gossip site, Datalounge) even better. True, it misses some of the most important features of this crisis, such as the way the proliferation of derivatives dramatically increased financial risks, and how deregulation-mania got us into this mess in the first place.

But it is way, way funnier.

Lower Middle Class: OH HAI! I CAN HAS HOUS?

Bank: I HAS A SUBPRIME MORTGAGE OFFR 4 U. LET ME SHOW U IT.

Lower Middle Class: KOOL. LOL!

Couple years later...

Lower Middle Class: U MEANS I HAS TO PAY MORE EVERY MONTHS? FAIL

Bank: OH NOES!  WE WERE COUNTIN ON UR PAYIN US

Lower Middle Class: NO, THEY BE TAKIN' MAH HOUS

Bank: ALL UR HOUSES ARE BELONG TO US. BUT NO ONE BUYIN'! FAIL

Re: the fall of the house of Lehman and other related matters

By Kathy G.

I approve this message.

Quote of the day

By Kathy G.

From Mark Schmitt's must-read piece on the identity politics that dare not speak its name: the identity politics of the right:

If it [i.e., Republican identity politics] works, it will be in part because we--by which I mean the media and many Democrats--believe it will. We are easily spooked by the confident swagger of the Republicans, who not so long ago were plotting permanent world domination. But then, so was Bear Stearns.

Btw, for those of you out there who, like me, are not such a fan of Late Capitalism*, I highly recommend this Wall Street Journal article about the last days of Bear Stearns. I promise you -- you'll have a Schadenfreud-gasm. And the best thing is, it's the first of three parts!

Finally, a word to the wise -- for anyone who cares about labor, capital, or inequality, about the Wall Street Journal is essential reading.  It's the best map ever as to where all of corporate America's bodies are buried.

*"Late Capitalism" is a term I use ironically. It's one of those strange concepts I remember from back when I was studying lit theory. The idea is that capitalism is in its final, decadent phase, soon to be replaced by -- I don't know what, but something. However, in reality, I'm quite sure capitalism is here to stay. Though it is in a rather decadent stage at the moment, which is why I described it as "Late."

The mortgage crisis: laissez-faire gone wrong

By Loewemaus

The Wall Street Journal notes that Americans---particularly those in areas where house prices have plummeted--are piling on debt by tapping home equity lines. Takes me back to a time not so long ago when, doing a brief turn in a certain corner of financial services, we used to sell HELOCs (Home Equity Lines of Credit) in this way:

"You know that you are not going to get a raise this year to cover the rising cost of living. What are you going to do when Christmas rolls around or a birthday and you don't have a dime to spare? Your current Debt to Income ratio is well above Fannie's acceptable 60% grossed up threshold. While paying all of these lines individually (House, Car, Plastic) is $1640.00, I can make this all add up to $1125.00. How would you like a $515.00 dollar a month raise? This is the only way you are likely to get one."  

Options:   

1)   Blame the stupid consumer who swipes their card compulsively or treats their 401K/House like an ATM. Silly working American who has to jeopardize our banking system with such trivial things like Milk, Bread and Gas. Crazy parent who hasn't a penny left over to buy their kid a modest Christmas so that they don't spend the commercialized holiday shamed for the only true, punishable crime left in our country: Poverty.

2)  Blame the banks for wanting to aggressively lend in order to play in the big boy game. Banks love to sit on money as the Fed takes an axe to the rates.

3)  Blame Greenspan for giving poor people cheap money. For allowing everyone to afford super inflated home prices because they could afford the payment much more reasonably than even tenement rent on artificially low rates.

4)  Blame our regulatory bodies for completely neglecting to help people protect their biggest investment and allowing them to fall prey to horrendous lending practices with artificial rates advertised as low as 1.5 percent. No homeowner was impervious to the range of lending "products" on the market. Every feasible borrower fit into a matrix somewhere exploiting their weak spots. From introductory Adjustable Rates that barely allowed the borrower to clear the debt to income threshold of 60% of monthly gross income (not withstanding debt that does not appear on the credit report), to reverse mortgages for the elderly playing high stakes roulette based upon mortality odds and perceived equity, the traps were set without a game warden.

I have no sympathy for any of the devils here. My heart goes out to people who don't have the luxury of prudence. Not everyone who takes out a HELOC or swipes their card is purchasing Dolce and Gabbana or rolling over their Escalade note. I would venture, based upon hundreds of first-hand accounts, that desperation drives the credit market. Yes, to some there is this Orange County sense of entitlement (which is, of course, non-existent among conventional borrowers) that drives them to swipe. For many, it's akin to stealing a chicken in the Depression, it's a matter of survival when no one else is willing to help.   

I think that the Mortgage Crisis is a prime example of Laissez-Faire gone wrong… But perhaps I speak to soon, aid is on the way… for the banks.