Wednesday, February 10, 2010

On the Financial Meltdown and Liberals

Do you ever click through to the other blogs that BlogHer, purveyor of my oh-so-tasteful-but-nevertheless-annoying-advertising, lists on the sidebar under More from BlogHer? There are some wonderful writers out there in the blogosphere, and all it takes is a click to bring you directly to them.

Karoli, who writes at odd time signatures, waxes eloquently
on the miserable nature of the left's response to the conservative reaction to our financial crisis. If you click through to her post on the Language of Financial Reform (either here in the text or to the right in the sidebar) you'll see that she has a very simple solution - Talking Points.

Talking Points - what a novel idea! The Tea Party-ites have it down cold, and we on the left have allowed them to hijack the agenda because we can't agree on anything, and if we do agree, we can't figure out how to talk about it. Running scared because they lost one Senate seat, there is no one in the Democratic universe who speaks to us. No one. They are ducking for cover instead of leading the charge.

I don't agree with all of Karoli's points, but the notion of having a set-piece to use makes my heart sing.

I'm not suggesting a round of right-bashing. Far from it. While the AIG bonuses were/are offensive and Goldman employees complaining about less-cash-more-stock-bonuses are offensive (why shouldn't their compensation be tied to the long term health of the firm?), we on the left also have to take responsibility for our part of the problem.

Contrary to Bill Clinton's point of view, home ownership is not a right. The push to expand home ownership (Barney Frank was a big part of that, too) led to mortgages that weren't sound. Granted, there were unscrupulous lenders scouring the bottom of the economic barrel to make a buck, but there were plenty of people who could have been expected to look askance at a financial offer too good to be true, and who did not. We may be the most anal people alive, but TBG and I read through every page of the stacks of documents presented to us before we closed on any of our homes. I'm a recovering-social-worker who chose institutions of higher education based, in part, on the absence of number-related courses required; deciphering the documents did not come easily to me. But I knew that I would be held responsible for the words contained therein, so I struggled and I read.

I'd like to think that, no matter how unsophisticated a consumer might be, asking "how much will this cost me?" ought to be the first question asked when purchasing a home. And people who can't make an educated guess regarding the likelihood of being able to continue to make those payments over time gets what they deserve. I know, my credentials as a certified bleeding heart liberal are being revoked as I type this, but I know what I feel and what I feel is that you have to be responsible for your actions. That's the main thing about being a grown up. And kids don't own homes. Grown-ups do.

Or that's the way it ought to be, in my world-view.

The financial chicanery on Wall Street resulted, I think, from a combination of Karoli's "greedy gamblers" and computing power and lots of money..... the "credit default swaps" only became possible once the numbers could be crunched. I just picked up a book at Barnes and Noble - The Quants by Scott Patterson, staff reporter on the WSJ, which is subtitled: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. I'm obviously not the only person who's thought of this notion.

There were young, high-energy, highly intelligent people on The Street who were faced with technology that they understood and the powers-that-were did not. With credit freely available, there was lots of money around to be dispersed, so the loans were made. But they were risky loans which were somehow magically-mathematically-it's-all-the-same-to-me bundled together by these wizards into instruments which were, again, magically-mathematically, transforming dross into gold.

Or that was the plan, anyhow. Neither TBG (who is qualified to make pronouncements on these issues) nor I (who am not) can understand or explain to you how they were able to combine a bunch of crappy loans together to create a product with a higher rating. Without regulatory oversight and without the steel curtain which used to exist between the research and the sales arms of investment banks and with the growing realization at the too-big-to-fail-banks that there would be no sanctions for playing foot-loose and fancy free with their depositors' dollars the big banks were free to invest in these fantastic offerings. And I use fantastic in the sense of fantasy.

Banks used to be solid. They were careful. Bankers were not known as flashy dressers. You could feel safe, once the FDIC was in place, that your money would be there when you needed it and that, in the meantime, it would be used to help your neighbors start businesses or improve their homes or send their children to college. Since the Clinton era, deregulation has led to increasingly risky behaviors on the part of those to whom we all looked at as risk-averse stewards of our money. Investment banks, with their stocks and bonds and other arcane financial instruments used to be the place for those kinds of risky transactions. Oops.

What was AIG's role in all of this? Once the smarty-pants whiz kids convinced buyers of the worthiness of their product, they looked to hedge their bets. That's the "credit default swap" you heard about during the height of the melt-down. The firms selling the bundled loan instruments took out insurance to cover their losses. They bought that insurance from AIG. When the loans went south, the insured firms went to AIG and holy-run-on-the-bank-time-Batman but AIG didn't have the cash to pay off on their policies.

Since the health of the insured firms' balance sheets rested on being reimbursed by AIG for their losses, had AIG fallen those insured firms would have followed swiftly on its heels. That's the argument for "too big to fail".

These days, no one person (CEO, Compliance Officer) can understand all the products financial services firms offer -- that alone is enough reason to re-institute Glass-Steagall or something like it. Because risk averse people do not go into investment banking. There will always be those who need to push the envelope. When those pushers have access to the workings of the financial underpinnings of our nation, when there is no regulatory hammer waiting to fall (Clinton's beginnings followed by Bush's expansion of deregulation), when borrowers can be manipulated into thinking that there is such a thing as a free lunch (read house) then you have a recipe for disaster.
This post was sparked by watching an interview on CNBC - Warren Buffett was questioning Hank Paulson on the occasion of the publication of Paulson's new book on the crisis. That was the reason I was in B&N today - to buy the book. They had 10 copies initially. There were none in the store today. There are 8 people waiting for the 7 copies on order. Somehow, I think people are interested.


  1. Hey, thanks for the shoutout!

    On the talking points, I agree 100%...why is it that a cogent set of talking points isn't out there on these issues? Today I see that simple but wrong (in relation to the issues) has prevailed over what's true as the polls reflect a mistaken re-emergence of faith in conservative economic know, that policy that drove us into the tank in the first place. ARG!

    I've gone back and forth about Paulson's book -- do I want it, don't I, will it enlighten? Probably, and I'll probably buy it just as soon as I finish "The Wrecking Crew" and "Too Big to Fail".

    I'd also like to write a set of talking points about what we should, and shouldn't take seriously with regard to mainstream press reporting. (Hint: almost nothing should be assumed to be factually correct, and the more hysterical they are, the less likely it is that they're right.)

  2. You're welcome, Karoli! I love reading you and I'm happy to share the joy.

    Is there something in the air these days? I wrote about reporting and "the truth" on Feb 4th and expressed the same skepticism that you evince. Write the tp's.... I spread them .... I talk A LOT!!

    As to simple triumphing over truth, did you listen to Sarah Palin speaking to the Tea Party this week?????


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