Financial Crisis Foreign Policy Politics The Media The Opinionsphere

Sympathizing with AIG, Peace with Islamists, Senator Al Franken, Jay-Z, the Newest Lost Generation, and the Future of Journalism

1. Sympathizing with AIG. Michael Lewis has another piece plumbing the depths of the financial crisis. Except this time he is somewhat strangely sympathetic to AIG. His piece is a useful counter to Matt Taibbi’s angry screed on the same subject – but the lack of outrage in Lewis’s piece is discomfiting – like a writer who begins to sympathize with his serial killer subject. Still – worth reading – as Lewis concludes:

And yet the A.I.G. F.P. traders left behind, much as they despise him personally, refuse to believe Cassano was engaged in any kind of fraud. The problem is that they knew him. And they believe that his crime was not mere legal fraudulence but the deeper kind: a need for subservience in others and an unwillingness to acknowledge his own weaknesses. “When he said that he could not envision losses, that we wouldn’t lose a dime, I am positive that he believed that,” says one of the traders. The problem with Joe Cassano wasn’t that he knew he was wrong. It was that it was too important to him that he be right. More than anything, Joe Cassano wanted to be one of Wall Street’s big shots. He wound up being its perfect customer.

2. Peace With the Islamists. Amr Hamzawy and Jeffrey Christiansen have a thought-provoking, and somewhat discomfiting piece, in Foreign Policy suggesting that America make peace with non-violent Islamist groups – pointing out that many of them actually rely on America’s support for democracy for their success in a region of the world dependent on America and filled with dictatorships, and pointing out the signs that many of these groups are open to such a peace offer.

3. Senator Al Franken. John Colapinto profiles Al Franken in a typically humorous and in-depth New Yorker piece. More important than the piece is that this man is a Senator. Congratulations Senator Franken.

4. Jay-Z, Hegemon. Marc Lynch has written a few pieces this week applying principles of hegemony in international relations to Jay-Z and how he maintains power in the hip hop world – including specifically how he is responding to The Game’s recent attacks on him.

5. Europe’s Newest Lost Generation. Annie Lowrey discusses the problems that are facing Europe’s youth.

6. Shirsky on the Future of Journalism. Clay Shirsky has an excellent post over at Cato Unbound discussing without really predicting the future of journalism. As always with Shirky, thought-provoking and worth the read. He makes a point that I have been ruminating about in a number of posts recently (here and here) – that:

[J]ournalism is about more than dissemination of news; it’s about the creation of shared awareness.

In my posts, I labeled this “shared awareness” the “conventional wisdom.”

[Image by me.]

Economics Financial Crisis

Theories of the Financial Crisis: Hubris of the Bankers

[digg-reddit-me]No list of theories of causes of the financial crisis that almost destroyed the fabric of the world economy (as opposed to the slow-motion disaster unfolding now) would be complete without listing hubris, that most Greek-mythical of faults.

Hubris clearly isn’t the only reason. There was greed – we all know that. There were various incentives that distorted the system as a whole. There was an enormous imbalance between East Asian countries and America that assisted in producing unmooring our financial industry. There was government intervention. There was a shift in the animal spirits. There was a profound miscalculation of risk. There were assets bubbles, Goldman Sachs, deregulation, new financial instruments, and a subservience of politics to finance.

But how can one explain how far out on this limb all of these venerable institutions went – how they thought they would be able to leverage themselves 33 to 1 – how they took on so much risk they almost brought down the financial system built over centuries in a week. Bankers didn’t take to calling themselves “Masters of the Universe” because they were being ironic. No – at the heart of this crisis – and reasserting itself now as they try to restore “normalcy” to their profession – was hubris.

Michael Lewis – who worked on Wall Street as a young man – described this hubris brilliantly in an essay published in the immediate aftermath of the financial collapse for Portfolio. He described how countless warning signs were ignored – because the money and the success had gone to the heads of these titans of Wall Street. (He steers away from the more high profile Cassandras from Nassim Nicholas Taleb to Nouriel Roubini to Brooksley Born.) After all, how had they gotten so much money if they didn’t know what they were doing? Lewis, unable to make that “logical” leap himself, had left Wall Street in the late 1980s, expecting the whole house of cards to fall at any moment:

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue…

In [the past two decades], I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

At some point, I gave up waiting for the end. There was no scandal or reversal, I assumed, that could sink the system.

Michael Osninski – who wrote programs creating derivatives – explained his rationalization for why he was able to make so much money:

[E]ven then, I was wondering why I was making more than anyone in my family, maybe as much as all my siblings combined. Hey, I had higher SAT scores. I could do all the arithmetic in my head. I was very good at programming a computer. And that computer, with my software, touched billions of dollars of the firm’s money. Every week. That justified it. When you’re close to the money, you get the first cut. Oyster farmers eat lots of oysters, don’t they?

Everyone seeks to claim credit for the successes that they benefit from – so, as the money flowed into Wall Street and all together people who didn’t quite understand what they were doing worked together and together inflated the prices of assets they didn’t know enough about to value – everyone got rich.

Contributing to this sense of unreality – and this hubris – was the culture that grew up around these people. They learned how to manipulate the programs written by the lowly programmers that created derivratives and other complex assets – and created a language that was opaque to those outside the club – of super senior risk, of CDS, CMS, and sundry other financial products. They sealed off their world from outside inspection, blocked regulation at every turn – and came to believe they understood the system. Though many must have understood their ignorance going in – as Lewis did – their success washed away their concerns. A gambler doesn’t need to know how roulette works if everyone who is playing the game is winning.

But hubris always leads to a downfall – and so, in the fall of 2008 2009, the house of cards created by these “Masters of the Universe” collapsed – and with it, the life savings of millions who trusted the brash bankers.

In the end it seems, no rational analysis or argumentation could convince these titans of Wall Street that their success was based on luck rather than knowledge or skill. And they ignored or marginalized who demonstrated otherwise – until it was too late. Too many seemed to have believed their own hype. It was as if they truly thought they were “Masters of the Universe.”

And now that the financial system has gotten back on its feet – and as the rest of the economy is still suffering – this hubris, which seemed to have fallen with the stock market, has reinflated. As a top Goldman Sachs official said commenting on the high levels of risk the firm was taking on – and the best-ever profits they were generating from that:

Our model really never changed, we’ve said very consistently that our business model remained the same.

The near-collapse of the financial industry is apparently no match for the hubris of bankers.

Economics Financial Crisis

Someone Who Predicted the Financial Crisis

“There is nowhere to hide,” Roubini, an economics professor at NYU’s Stern School of Business who predicted the financial crisis, said from Zurich in an interview with Bloomberg Television. “We have for the first time in decades a global synchronized recession. Markets have become perfectly correlated and economies are also becoming perfectly correlated. This is not your kind of traditional minor recession.” [my emphasis

Nouriel Roubini was one of the economists whose analysis I latched onto in the immediate aftermath of the collapse of Lehman Brothers. His writing makes a lot of sense, especially recently. But I’m sure I’m not the only person tired of hearing people identified as someone “who predicted the financial crisis.”

Many of these people who “predicted the financial crisis” have been predicting the financial crisis we are now seeing every year since the 1980s. Specifically, I’m thinking of Michael Lewis and Nassim Nicholas Taleb – both of whom were in the finance industry in the 1980s and got out while the going was good – and then went on to write about it’s unsustainability. They were right that the Wall Street boom was unsustainable and built on shakey foundations. But they obviously missed something in what was going on as the boom continued for many years. In other words, they were right in the end, but wrong for quite some time. Their insight allowed them to see moral problems that would come back to haunt us but had little practical effect in terms of predicting the future – including this crisis.

All this is less true of Roubini though who famously did predict with some precision what has happened – and did so in a timely fashion. As the New York Times described his 2006 presentation to the IMF:

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

What Michael Lewis and Nassim Nicholas Taleb did was correctly point to an unsustainability in our system – but their insights haven’t had the same predictive value as Roubini’s.

Economics Financial Crisis

Reflective Policy-making

Michael Lewis, in a decidedly mediocre follow-up (with David Einhorn) to his excellent initial piece on the Wall Street collapse, has at least one good suggestion:

Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them. An absurd number of the official crises have been negotiated and resolved over weekends so that they may be presented as a fait accompli “before the Asian markets open.” The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission — indeed, the Federal Reserve sometimes seems more concerned than the average Wall Street trader with the market’s day-to-day movements. If the policies are sound, the stock market will eventually learn to take care of itself.