A blog by Barry Edelson

No Bailout, Please —
We're Americans

Corporation: n. An ingenious device for obtaining individual profit without individual responsibility.

— Ambrose Bierce

News flash: the presidential candidates are shocked — shocked — to discover that there is greed on Wall Street. Imagine, some people working in finance are actually in it for the money! Since both of the would-be Presidents of the United States only found this out last week, they have presumably not had time to consider the possibility that greed is also at work when the markets are not approaching meltdown. Apparently, both of them were too busy in the 1980s to have seen Michael Douglas as Gordon Gecko declaring that "greed is good". Barack Obama was too preoccupied with being a community organizer in those days, and it would be some years before he would experience the joys of shaking down rich people for campaign contributions. John McCain was decades ahead of his young rival, having spent much of the 1980s cozying up to the likes of Charles Keating, thereby contributing to the last major financial crisis that the taxpayers were called upon to resolve. McCain is right in this respect at least when he claims to have more experience than Obama.

Denouncing greed as the root of the current credit crisis is like denouncing the sun as the root cause of hurricanes. It's true, in a way, but not exactly a nuanced explanation of the climate. Those who don't want to acknowledge that their own actions are part of the problem (for example, McCain's long record as a proponent of deregulation) naturally mock Obama for insisting that we need to understand how we arrived at this juncture if we are to fix the problem properly and prevent it from happening again. The Democratic candidate is not exactly long on details or proposals, but at least he isn't pretending that the past never happened.

I, for one, will try to resist the temptation to pronounce upon the causes of the immediate difficulties and will offer no sage words about the proposed solutions. Like legions of others who do not labor in the financial markets, and whose understanding of their machinations is merely that of a well-informed lay person, I am too inclined to shout jeremiads about the evils of capitalism and the excesses of its practitioners. As I am not running for elective office, this is too easy a target to merit serious discussion. Moreover, I admit my share of the responsibility for the wasteful, self-indulgent ways to which virtually all contemporary Americans are addicted. Without some consideration of the broader social forces that led us into this predicament, and without acknowledging that we are several generations removed from the mythological, heroic America routinely summoned up by politicians, there is little chance of truly understanding what has happened, let alone changing the rules of the game sufficiently to create a better society.

Your Mortgage, and Other Illusions

The scenario is as common as the dirt in the backyard: You apply for a mortgage from a bank, or some other bank-like "lending institution," which determines, correctly or not, that you are credit-worthy. They issue you the loan and you move into your new house in fulfillment of your little slice of the American dream. Unless you fail to make your monthly payments, over the next several decades you and the bank will hardly know the other one exists.

Now, unless you were either born yesterday or haven't read a newspaper since 1928, you know that the money you are paying monthly to the bank, just like the money people put into their savings accounts, isn't piled up as cash inside a vault somewhere. The bank takes that money (i.e., the profit on your mortgage) and invests it elsewhere, primarily by lending it in the form of mortgages to other home buyers or as loans to businesses, or whatever. That thousands of Washington Mutual's depositors were apparently unaware that their deposits were insured by the Federal government (or were unconvinced that this insurance was real) and thereby virtually guaranteed the bank's collapse last week, is not exactly a ringing endorsement of the American educational system. Even simple people ought to be able to comprehend simple financial transactions like loans, bank deposits and FDIC insurance.

On the other hand, it was not at all apparent even to those who read the newspapers regularly that banks have been taking the money they already lent to you and turning it into ridiculously complex financial products that they were selling to someone else. We've been hearing so much lately about these "mortage-backed securities" that we have lost sight of how bizarre the practice is at its core. Think about it for a moment: the bank sold the equity they hold in your house — IN YOUR HOUSE — to someone you never heard of and never asked for a loan from. Worse, they were permitted to do this without your knowledge, let alone your permission. If you, on the other hand, wanted to change any of the terms of your mortgage after the fact (e.g., by simply adding a co-signer to your loan), you would have to jump through legal hoops for weeks and fill out enough forms to choke the paper shredders at Lehman Brothers. And, in the end, you would probably not be allowed to do it anyway.

We now know, of course, that "mistakes were made" in the process of warping the straight-forward transaction of issuing mortgages. Presumably, great chunks of money were also made in the process. All kinds of loans have been repackaged as securities and injected into the world financial markets, making immeaurable fortunes for the middle-men and women who brokered the deals while spreading the risks of lending to you among investors, large and small, the world over. The bewildering securitization of modern life makes me think of the proliferation of lottery games available for sale at every corner store. There is no end to the ingenuity man will employ to separate fools from their money, and mortgage holders from their obligations.

The same question may be asked about the securities markets that is often asked about gambling: it may not be illegal, but isn't it nonetheless immoral? There are innumerable examples of this phenomenon, as Wall Street has concocted ever-more ways of making life interesting for its denizens. Consider short-selling, the practice of betting that a stock will fall, and "winning" the stock at a lower price if it actually happens. Didn't Pete Rose get banned for life from baseball for doing essentially the same thing? Some will no doubt argue that there are considerable differences, but on a moral plane, they are exactly the same thing: betting on failure, the very act of which makes failure all the more likely. Not surprisingly, one of the emergency actions taken by the Treasury Department last week was to ban short-selling of financial stocks. Hmm. If this is a healthy and positive practice, as its defenders habitually claim on the various stock market talk shows, then why could it not be employed as a bulwark against the collapse of financial firms, rather than condemned, albeit temporarily, as a threat to their very survival?

Many of the same politicians who have built entire careers railing against the interference of government in private business also regularly declare their fealty to "Judeo-Christian" principles and claim that their governing philosophies are direct reflections of their religious beliefs. The answer to the question, "What would Jesus do?", can surely never be, "Package these mortgages and sell them to China." And yet, I have not heard a single politician propose, as part of the staggeringly expensive bailout being hammered out in the halls of Congress even as I write these words, to outlaw the practice of selling your mortgage without your consent, or short-selling stocks, or any of the many other commonplace but questionable actions of traders that have put our entire financial system at risk. It cannot be argued that, because risk is at the heart of entrepreneurial capitalism, any risk is proper or worth taking. That is tantamount to saying that an immoral act is forgivable as long as the potential benefits are substantial enough to satisfy the majority.

Mythology and Politics

One of the essential problems of our financial system, in good times and in lean, is the same one that continually afflicts our political system: our mythological view of what kind of nation we are and what kind of people we think we have descended from. The Abe Lincoln prototype of the simple, thrifty, sensible, courageous self-made and self-educated man of the prairie was always an exaggerated fiction concocted for political consumption. Nonetheless, while our forebears were never as saintly as we would like them to be, our view of public and private finance, which has changed drastically since depression of the 1930s, would be utterly unrecognizable to the generation of the founding fathers. The Gilded Age of the late 19th century was no doubt viewed with horror by Americans whose Calvinistic leanings would have disdained the conspicuous accumulation and demonstration of wealth and worldly influence.

Yet somehow in the post-Civil War era, from this supposedly conservative and devotedly Christian body politic, the idea emerged that it was right and proper for men to acquire vast sums of wealth and to use that wealth to wield economic and political power, regardless of the consequences for anyone or anything. Moreover, it became normal to expect that most ordinary people would aspire to become rich, rather than, say, save their souls.

Since the first successful progressive movement a century ago, when Teddy Roosevelt stood up against the robber barons of his day, we have been engaged in a continuous struggle to mitigate the more heinous effects of market capitalism and to prevent succeeding generations of wealth-seekers from thoroughly exploiting their fellow citizens and despoiling the planet in the process. The recent invention of ever-more complex and risky financial instruments, the employment of ever-more people in an industry whose main product is its own enrichment, and the periodic fettering and un-fettering of the markets in keeping with passing political fashion, are merely continuations of this long and inexorable tug-of-war.

You Can't Get There from Here

It requires no great skills of observation to recognize that any economic system, like every other form of social organization devised by homo sapiens, will always benefit some at the expense of others. It is also self-evident that the larger the institutions upon which we rely for our prosperity and security, the deeper the craters they form when they fall from their mighty foundations and threaten to crush us all under their stony weight.

Arguing points of morality about a system that is by its very nature amoral, and, moreover, to do so in the midst of a grave crisis, would seem to be an exercise of surpassing futility. However, there is no argument more central to the issue at hand. It has long been the case that our society habitually celebrates the accomplishments of many individuals, in many different walks of public life, whose atrocious behavior should make a Sunday preacher foam at the mouth and fall over backwards. Free-market advocates typically defend even the most egregious corporate excesses with full confidence that most Americans do not condemn rich people but, on the contrary, aspire to be like them. Even when 80 percent of the people tell pollsters that they are against the bailout plan proffered by the administration, they are condescendingly dismissed as being too ignorant to understand the immensity of the problem. But this near unanimity actually reveals a consensus of decency and common sense among "regular" people that eludes our so-called representatives in government. The vast majority of Americans want the rules to be fair and to be enforced, and for those who break them to be punished. Even to many who do recognize the severity of the crisis, the bailout plans smells too much like an amnesty for corporate criminals not to offend the core values that Americans of all stripes apparently share. For politicians who never miss an opportunity to reduce the most ethically troublesome matters into rigid categories of right (us) vs. wrong (them), but who suddenly insist that citizens need to understand the complexity of the current problem, the chickens have come home to roost.

Who would have guessed that the president who has governed further from the right than any president in modern times would propose a socialist solution to the financial crisis that even Franklin Roosevelt would have probably thought too audacious to consider? And who would guessed that the most reactionary members of the House of Representatives, whose party has sunk to previously unknown depths of unpopularity, would most closely represent the skepticism of the vast majority of Americans, including many far to the left of them? The Congressional bailout debate has had the unintended consequence of exposing the political fault lines of left vs. right, Christian vs. secular, urban elite vs. small town folk, as the sham we should have always known them to be. This explains why neither of the two presidential candidates, each of whom could have honestly claimed to represent a different approach to governance at earlier points of their careers, have had nothing constructive to add to the discussion. Hostage to their partisan backers, as all major-party candidates ultimately become, they were unable to free themselves from the rhetorical chains that bind them and give voice to anything resembling an original opinion.

What one would not give to hear William F. Buckley and John Kenneth Galbraith discussing this predicament for 30 minutes. What would the laissez-faire conservative say about a gargantuan government bailout of irresponsible lenders? What would the liberal scourge of capitalist excess have to say about the underlying morality of a society that risks what paltry savings it has on high-stakes financial gambles? The answers would no doubt surprise us. But one thing we can be sure of: these two old friends who didn't agree on much would not have indulged for a moment in the obfuscations and simplifications that pass for political dialogue in contemporary America.

October 1, 2008

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