Posts Tagged ‘Rolling Stone’

Theories of the Financial Crisis: Greed

Thursday, May 21st, 2009

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you could try these out George Will may seek to defend greed (Or maybe not – it’s actually kind of hard to tell.) – along with Ayn Rand and other market fundamentalists.

But just about everyone else lists it as a fundamental cause of the financial crisis. Will tries to make the case that free markets punish greed. But what Will presumes is that an unregulated market is a free market – and on this fundamental point he is wrong. The market Will describes is not one heavily regulated by the government – but it is regulated by ebay which in this instance takes on the role of the government for this small market. The financial markets on Wall Street though were largely unregulated – especially the shadow banking system (which was created in such a way as to be unregulated) – and they were in this sense free from government interference. But they were controlled by a small number of individuals – and in this sense were part of a world where freedom was available only to a princely few. Will makes the point that greed is an immutable human characteristic – and thus does not account for the booms and busts of our business cycle (and of financial crises such as this.) But what does is the combination of perverse incentives for short-term profit (indeed a form of legal fraud), a relaxation of the regulations designed to keep the markets stable that tends to occur when Republicans have power, and greed.

There has always been an historical wariness in America about the combination of greed and concentrations of wealth – focusing on a national bank, on various financiers, on “the malefactors of great wealth” and indeed, on Wall Street. The people, in their wisdom, could see that this concentration of financial power undermined the democratic distribution of political power. But by the 1980s, there was an additional reason to be wary – as Ronald Reagan unleashed a money revolution. This money revolution – like all revolutions – was the commingling of many forces – globalization, the ad-hoc Bretton Woods II agreement, and the relaxation of regulations and reduction of taxes. This revolution helped to concentrate an increasing percentage of the world’s wealth in the hands of a small number of Wall Street (and also London) bankers. The function of these bankers – their expertise – was to balance risk and profit to their customers’ satisfaction – to maximize profit for themselves and their customers while minimizing (or controlling for) risks. As a small percentage of individuals accumulated more and more wealth around the world, these individuals entrusted more and more of this wealth to Wall Street bankers – and the more money the bankers controlled, the bigger their cut. As Michael Osinski explained in a piece for New York magazine:

When you’re close to the money, you get the first cut. Oyster farmers eat lots of oysters, don’t they?

This closeness to the money created an easy money culture – in which enormous sums money were distributed whether they was deserved or not and the culture began to prize attempts to satisfy the bottomless desire that is greed. Wall Street bankers took on the culture of gamblers – except with the market going up, everyone made money. The long boom began to create perverse incentives – as risks began to seem safer, as luck and a rising tide and short term profits made everyone seem like geniuses, they all became accustomed to a certain lifestyle. Financial innovations sought to overturn many of “the fundamental rules of banking” including “that default risk is an inevitable liability of the business.” The combination of innovation and the culture of greed and gambling led to greater and greater risks being taken.

As steady foundations of banking – both as a business and as a culture deteriorated – and as the cautionary tales of Oliver Stone’s Wall Street and Liar’s Poker morphed into guides – a new culture of excess developed – excessive greed, excessive pay, excessive drinking, excessive spending, excessive personal risks, and eventually excessive professional risks. Wall Street bankers began to betray all the symptoms of the easy money culture – like gamblers whose knew their earnings were ephemeral and that every up would be followed by a down to be followed by an up – as long as they could stay at the table. But as Matt Taibbi wrote,  “this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires…”

Osinski tells a story of how this easy money culture affected the individuals:

Now that I was spending more time on the floor, I wondered why the men’s room always stank. Then one afternoon at three, when I was in there taking a leak, I discovered the hideous truth. Traders had a contest. Coming in at eight, they never left their desks all day, eating and drinking while working. Then, at three o’clock, they marched into the men’s room and stood at the wall opposite the urinals. Dropping their pants, they bet $100 on who could train his stream the longest on the urinals across the lavatory. As their hydraulic pressure waned, the three traders waddled, pants at their ankles, across the floor, desperately trying to keep their pee on target. This is what $2 million of bonus can do to grown men.

This easy money culture warped the incentives at Wall Street firms as well – as they were structured in such a way as to generously reward short-term success (without controlling sufficiently for long-term failure.) Rather than being paid large salaries, most of a banker’s income was handed out in enormous bonuses based on yearly performance. As long as fees were generated, as long as this quarter’s profits were growing – bankers would be rewarded with enough profits to last a lifetime. This alone is enough of an incentive to cause massive fraud. But at the same time, the culture of Wall Street ensured that money would be spent ridiculously, ostentatiously, and quickly. 

Perhaps no one has been more articulate in his visceral disgust for the excesses of Wall Street than Matt Taibbi of Rolling Stone

[I]t’s time to admit it: We’re fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we’re still in denial – we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream.

The story of AIG – in its way – symbolizes better than anything else what this culture did to Wall Street. Back to Taibbi:

AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders – people who wear seat belts and build houses on high ground – and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people’s money would make his dick bigger.

A culture of greed and excess – a lack of respect for tradition – a market free only to a princely few – negligence bordering on fraud with regards to the evaluation or risk – and an increasing percentage of the world’s wealth concentrated in the hands of a few. Together, these were the recipe for this financial disaster. 

The problem with greed is that it is unsustainable. It exists in a cycle, like all unsustainable desires. Government regulation, like morality, seeks to control and channel greed in less destructive ways – to mitigate the effects of this cycle. The true cause of this financial crisis was not greed – but the ideology that held that finally the immutable human vice of greed had been overcome with clever financial innovation and the magic of the market.

(more…)

Illegal Drugs and the War on Terror

Sunday, December 21st, 2008

In researching a post I was working on, I came across a Congressional report from 2004 that I was surprised I hadn’t heard about. Entitled “Illicit Drugs and the Terrorist Threat: Causal Links and Implications for Domestic Drug Control Policy” [pdf], it lists five potential links between drug trafficking and terrorism:

  1. Supplying cash for terrorist operations;
  2. Creating chaos in countries where drugs are produced;
  3. Generating corruption in law enforcement, military, and other governmental and civil-society institutions that either build public support for terrorist-linked groups or weaken the capacity of the society to combat terrorist organizations and actions;
  4. Providing services also useful for terrorist actions and movements of terrorist personnel and material, and supporting a common infrastructure, such as smuggling capabilities, illicit arms acquisition, money laundering, or the production of false identification papers;
  5. Competing for law enforcement and intelligence attention.

The report focuses on how drug trafficking undermines the War on Terror – but it makes clear both the current quagmire that is the Drug War and the ways in which the incentives created by the War on Drugs undermine the War on Terror.

Now at first glance, it may seem as if the War on Terror and the War on Drugs should be benefit one another. After all, a successful policy that made heroin production and trade less profitable or more difficult would deprive the Afghan Taliban from one of their primary sources of cash. A successful anti-smuggling policy would make it harder for drugs to slip across the border as well as terrorists and weapons.

The Bush administration meanwhile has sought to conflate the two wars – for example, by running ads immediately in the aftermath of 9/11 claiming that drug money paid for terrorism1 and by repeatedly using measures from the Patriot Act and other anti-terrorism measures to go after drug offenses.

But looking more closely, one can see that the War on Drugs has often impeded the War on Terror in these very areas. For example, critics of the Bush administration’s drug policy in Afghanistan believe we are in fact driving poor farmers to seek the protection of the Taliban. By using laws designed for the War on Terror in the Drug War, it undermines claims that the War on Terror is “different” and should unite all of us. By using these new powers more often, law enforcement undermines it’s credibility. It’s a vicious cycle.

    1. At the time, the Taliban and Al Qaeda were not making money from the heroin trade however, so this was rather misleading. The Taliban in fact had prevented poppy-farming until they needed it as a source of revenue after they were ousted from power. The commercials based their claims on FARC in Columbia. []

    McCain in a Plane over Spain

    Wednesday, October 15th, 2008

    While I work on a few posts, here’s an excellent profile of John McCain from Rolling Stone. There’s no attempt to appear fair and balanced – but the piece gets a number of people who knew John McCain to talk on the record.

    In this piece, Tim Dickinson blows up the myth of the maverick John McCain who grew from a reckless youth to a mature and seasoned patriot while in prison in Vietnam.

    Plus, there are some interesting tidbits – like the fact that a young navy pilot named John McCain caused a major diplomatic incident when he deviated from his flight path for a joy ride just above the ground and cut some power lines causing a blackout in much of Spain. Normally, that’s enough to get your wings clipped – but neither that nor the two planes McCain crashed previously seemed to affect his career path – as his father and grandfather were important admirals.

    Perhaps this incident helps explain why McCain still apparently bears a grudge against Spain.

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