Okay guys, one more thing, this summer when you’re being inundated with all this American bicentennial Fourth Of July brouhaha, don’t forget what you’re celebrating, and that’s the fact that a bunch of slave-owning, aristocratic, white males didn’t want to pay their taxes.
Sound familiar? It’s a line from Dazed n’ Confused, delivered by “Ms. Stroud,” the bleeding heart liberal history teacher. A bit of silly dialogue capturing some of the naive philosophizing in fashion at the time.
It’s a joke, of course, mocking the idealism for idealism’s sake that had materialized in the post-Sixties hangover. But as I watched the movie the other night (it’s on an HBO rerun loop this month) it struck me… Ms. Stroud sounds like a lot of stuff we’re hearing today. The populists, the protectionists, the redistributionists… A fair number of people are offering the same criticisms of this country made in the seventies.
Look at any magazine, paper or news channel and you’ll see a piece on why or how excessive risk created this endless economic crisis, and why we may want to move back to the temperate habits and goals of the “company man.” How we might be returning to the safety and comfort of traditional, long term employment (for those who can find it), and putting aside the entrepreneurial mindset of the last two decades. Resigning ourselves to a future of lowered expectations and greater structure. Giving the government more control, and giving up our love affair with risk. And that somehow all of this would be a good thing.
A highly impressionable swath of the public, and the media that serves them the red meat populism they want, seem to be reaching a consensus our society was far too enamored with the concept of risk. That we’d be better served to work steadily, loyally at a job “producing something” than attempting to front load ourselves an early retirement using leverage, or striking out in entrepreneurial ventures. There’s merit to some of the argument, but it misses an essential point: That risk – sensible risk – bears none of the fault for our current financial mess. It’s maligned for no good reason, confused with the actual causes. And this is a ominous myth, a lethal misapprehension, because right now, sitting in the shithole we’ve dug for ourselves, Risk is Our Only Path Back.
As with any large event, a million smaller, finite causes led to the initial disaster. They can broadly be boiled down to three simple categories, each of which might sound and look like “risk,” but in reality is something entirely distinguishable.
On the corporate side there was opportunism, exploitation and fraud. Opportunism in that the people who were involved in creating and selling mortgage-backed securities, and the people who brokered mortgages to home buyers, both worked under “heads I win, tails you lose” bargains. Bargains so one-sided only a fool wouldn’t have abused them. Knowing their business was ultimately doomed, they sucked all the profit they could out of the bubble before it burst, ballooning it even higher in the process. Neither had any real skin in the game. Both knew they’d be laid off or see drastic decreases in income post-implosion, and that if they didn’t push the market even further, someone else would. They did what any rational opportunist would – bankrolled as much as they could and waited for the walls to come down.
This led to the exploitations and frauds. Salesmen at the banks pimped securities they knew were garbage to all sorts of investors, while brokers funneled liar’s loans to any buyer with a heartbeat. Even the smaller local and regional banks got in on the deal, writing mortgages for migrant workers and recidivist deadbeats, taking fees and flipping the toilet paper to the larger securitizing banks. Everybody was incentivized by short term income structures, and nobody faced any responsibility. Everything was done under the corporate umbrella, every actor one of thousands. If countless other brokers were writing garbage notes all over the country, and every transaction was plausibly honest on its face, what chance was there any individual malfeasant would ever face charges? ”I was just following orders…”
On the consumer side there was profligacy, envy and stupidity. Profligacy and envy in that people bought homes they couldn’t afford, and sucked cash out of them via home equity lines to buy overpriced shit Madison Avenue trained these “marks” to think they needed, or deserved. Stupidity in that they actually believed the housing market was immune to gravity. They needed only recall the wreckage of friends’ and family members’ finances when the Nasdaq cratered in 2000 to grasp where the market would inevitably go. They needed only consider the raft of articles on the business pages of every newspaper warning years in advance that housing was a time bomb. They needed only apply common sense where status obsession and the fleeting respite from reality that comes with buying shit ruled their brains.
They considered nothing. They bought the dealers’ rosy narrative… “You can’t lose.” Suckers at the table.
And spend like suckers they did. Bought the $699,000.00 home with 2% down and a family income of $70,000.00. Whacked the HELOC to make the house look like the ones they saw on Home and Garden TV, picked up a Range Rover Sport and took the family to Disney World. Their wealth was fantasy, of course, and in the end, as always, the foolish brought down the foolish. Thousands of the most extended “homeowners” defaulted, and that started the chain reaction collapse that cost many of their brethren jobs. Left to consider their mistakes, some have manned up and moved on. But a lot of them haven’t. They blame the bank. They blame the broker and the “Wall Street fat cats.” And in a few limited cases, some have a point. But they’re also refusing to admit what anyone who’s been there understands – that it takes two defective minds to have a fraud. One poisoned with a criminal bent; the other a common idiot. (If a 99 IQ’d mortgage broker could hustle you, you should have known enough about your limitations to realize you didn’t belong at the closing table in the first place.)
Separate from those interlocking causes, but possibly the fattest roots of the debacle, were hubris and “Institutional Autism.” Hubris coming from academic absurdists who believed they could make the business of insuring bad loans profitable with mathematical models. Sounds silly in hindsight – that fluctuations in something as clearly irrational as our housing market could be predicted and countered by a computer program. But at that point, in an impenetrable cocoon of arrogance and delusion, it was entirely rational. Why check the street? Why actually go out and see what was happening in the mortgage brokering business when you have mathematical formulas?
Working hand in hand with that was Institutional Autism, a cancer afflicting corporations far beyond Wall Street. The larger an organization is, the more hierarchical it is, the more its managers live in a virtual reality divorced from the actual one outside its doors. The CEO speaks only to certain executives who get their information from upper middle managers who cobble that together from politically sanitized reports they get from underlings. The data gets massaged by every hand in the grapevine to suit his purposes, and by the time it reaches the top, it’s diluted and convoluted enough that somebody at the top of a leviathan like Lehman thinks, “Fuck! We’re missing a golden opportunity! We ought to go deeper into this mortgage backed stuff.” Few in a position of power to make the important decisions ever get the pulse of what’s really taking place in the industry in which they’re investing. Couple that with the false comfort of a risk manager claiming the models have everything under control and you wind up with a clueless organization. At least among the managers whose decisions matter.
How could so many brilliant people make so many bad decisions? The question’s asked again and again, and it’s the wrong one. The real questions are, How could so many brilliant people’s bullshit detectors fail them? Why didn’t top brass at the banks send undercover agents into the field, like Bill Gross did, to examine the mortgage markets up close and get the hell away from those investments? Why, when they get to the corner office, do so many of these masters of the universe become robots, only able to deal with input served to them on a platter by subordinates? Might the real concern with allowing companies to become too big too fail not be that they might implode, imperiling the economy, but that their implosion is all but inevitable, a mere matter of time? That when anything reaches a certain size, through inertia, impossibility of management, and internal sabotage by self-interested employees, it necessarily regresses to imbecility?*
These are the causes of our current financial problems, and none of them – not opportunism, exploitation, fraud, profligacy, envy, hubris or “Institutional Autism” – have to do with risk. If anything, they’re anathema to the concept, futile attempts to create impossible “sure things.”
Risk is, simply, making a well thought out gamble on something with the intention that it will return a profit. And stepping away from the usual goal of money, how you define “profit” can be any number of things. Satisfaction with your work, making a difference, whatever it is, risk is taking a chance on losing something you have to gain something better. It’s not a device to be shunned or discouraged. If a pack of greedy landowners didn’t embrace risk two centuries ago, we wouldn’t have the extended holiday we do this weekend. Risks sits at the base of everything good and correct in the American character, a bedrock of individual dignity – the right to strike out on your own and succeed. Or fail.
To personalize it a bit, risk is the guy who sent me an email noting that, due in small part to something I wrote, he left a lucrative cubicle farm job to pursue a career in medicine because, though it was a costly gamble, he always wanted to be a doctor. Risk is the guys who told me they quit their comfortable corporate positions to open a start-up brokering concert and sporting events tickets online, and how it’s scary not having regular checks and living hand to mouth, but if given the option, they’d do it all over again. Risk is the person who started the media platform on which this piece was originally posted – someone who chucked a career at one of the better law firms in the country to write a book. Which has since sold God only knows how many copies.
Not everyone will succeed, and not everyone can take risks, and they should only be taken when they make sense. But win or lose, they answer an important question for everyone who’s made the effort: What if? That can drive some people mad, gnaw at them day and night. It’ll make a person cynical and half-assed in his approach to the thing he’s toiling at in place of the work he wants to be doing.** And generally, whatever the outcome, a well taken risk benefits us all. For every one that’s attempted, vendors and suppliers get paid, and somebody learns something about running a business. For the one of ten that succeeds meteorically, a whole industry attached to the endeavor’s production, marketing, accounting, etc… is created.
Now, at this moment, if instead of embracing it, half of us vilify risk, and run to the comforts of collectivism, populism and protectionism… If we try to recreate a safer time when “company men” had guaranteed long term jobs and benefits, or a brave new world where Uncle Sam acts as “Handicapper General” – we’ll have snuffed the only hope we have to climb out of this mess.
As lunatic as it sounds, we need to create a new, stabilized bubble to float us out of this economic quicksand, and we can only do that with some radical new technologies, inventions or markets that cause a massive inflow of investment. That only happens with innovation, and we can’t innovate or invent anything substantial enough for the task if we employ draconian regulatory structures discouraging entrepreneurs, and yoke enormous redistributive spending initiatives on the backs of the investor classes.
So when you’re watching the fireworks this weekend and the talk turns to where the country’s going, as it easily tends to these days, and a “Ms. Stroud” starts talking about how capitalism and “risk” culture brought us down, cut her off. Tell her yes, we are celebrating a bunch of aristocratic males who didn’t want to pay their taxes. And there’s absolutely nothing wrong, and everything right, with doing exactly that. Because without that gambler’s ethos – the guy who gets up every day and says, “I’m going to get more out of my life” – none of what we have here would have ever existed. And remind her that no, “risk” didn’t cause this crisis. But its absence – our stifling of it, or hesitance to embrace it as a crucial economic driver – will play a huge part in things getting a whole lot worse.
* See: Congress.^
** Which explains why half this country “phones in” its work and the quality of a lot of what we do, from production to service, veers from “mediocre” and “commoditized” to “defective” and “incompetent.”^