In Money We Trust

When something goes terribly wrong the only smart thing to do is find out what happened and prevent the event from reoccurring. It is completely illogical and extremely dangerous to declare that nobody should try to find out the cause of disasters. It's like watching New Orleans drown but refusing to find out why the city flooded. A sane, honest person would want to know what happened so the city doesn't flood again. She would determine the cause of the flood, determine what needed to be repaired and how, and investigate how to prevent the event from happening again. But if you're Megan McArdle you would encourage people to move back into the old neighborhood and do nothing else, because finding out the reason is too hard, the flood couldn't have been prevented anyway, and nobody is responsible because everyone is responsible.

McArdle clings to an incredibly weak argument to make her point.

[F]inancial meltdowns don't offer villains, for the simple reason that no one person or even one group is powerful enough to take down a whole system.

There were many reasons and no villains, and the bad practices that led to financial disaster were okay because everyone was doing it and everyone thought it would work.

[Matt Taibi] complains about CDO's on the grounds that Goldman hid the atrocious risks inside a fancy dan derivative package that no one could understand. But in fact, everyone was aware that CDO's were repackaging crap mortgages--that was the point. The idea was pure portfolio theory, broadly agreed upon by everyone involved. Everyone knew a lot of the mortgages might go bad, either by defaulting or prepaying. (This is a risk for bankers, who don't like the idea that if interest rates drop, their 7% mortgage might suddenly turn into a pile of non-interest-bearing cash which can only be invested at 5%.) But if you pool the risk, only some of the bonds will go bad, while others pay off. The result is a less risky, less volatile investment than any individual junk mortgage bond. And it would have worked, too, if it hadn't been for those crazy kids a collapse in the housing market of a scale not seen since the Great Depression.

Taibbi anticipated strawman arguments like McArdle's before she made them.

I’ve been shocked by how many grown adult people seem to have swallowed this argument, that the argument against Goldman’s behavior during the bubbles of recent decades is invalid because “everyone was doing it” — and other banks, like for instance Morgan Stanley, were “just as bad” as Goldman was.

Two things about that. One, it isn’t true, not really. By any reasonable measure Goldman is and has been the baddest guy on the block for a long time. When it comes to government influence, no other Wall Street company even comes close. And while maybe one might have made an argument that other players were more damaging to society before the crisis of last year, there’s simply no question now, after the bailouts and especially after the AIG fiasco, that Goldman now reigns supreme in the area of insider advantage. To pick any other bank to tell the story of the rapidly growing influence of Wall Street on politics and the blurring of public and private roles would be a glaring journalistic oversight, and surely even Goldman’s biggest supporters would admit this.

Two, even if it is true that “everyone else was doing it”: so what? Who cares? To me this response is highly telling. We published a piece accusing Goldman Sachs of systematically ripping off pensioners and other retail investors by sticking them with rafts of toxic mortgages it knew were losers, of looting taxpayer reserves to cover its bad bets made with AIG, of manipulating gas prices to massive detrimental effect, of helping to explode an internet bubble that caused over $5 trillion in wealth to disappear, and numerous other crimes — and the response isn’t “You’re wrong,” or “We didn’t do that shit, not us,” but “Well, Morgan did the same stuff,” and “Why aren’t you writing about Morgan?”

Why didn’t we write about Morgan? Because we didn’t. Because it’s your turn, you assholes.

Barry Ritholz read McArdle's claim that no one/everyone was to blame with disbelief.

I don’t really get Megan McArdle when she makes a statement such as the one above. It was in an article critiquing Matt Taibbi and defending Goldman Sachs.

Um, Megan, I am going to have to beg to differ with you. There were many, many identifiable villains who through their own action and inaction, helped create the crisis. There were people who remained slavishly devoted to an outmoded and disproven ideology, which led them to decisions that were indefendable. Some people engaged in utter recklessness when it came to risk management, or such gross irresponsibility that they are not merely morally culpable, but legally also. Then there are those regulators who gave the corporate interests they supervised pretty much everything they asked for. And of course, the people simply trying to grab a free lunch contributed mightily to the collapse.

I have 322 well researched pages that shows as much.

Goldman Sachs was but one of the 5 biggest investment banks that requested from the SEC, and received, an exemption from the net cap rules. This allowed their leverage to balloon from 12-to-1 to as much as 40-to-1.

As a nation, we need to stop pretending this is “too complicated” and start holding the responsible parties accountable . . .

That is the last thing McArdle wants to do. She claims to not understand his point.

Ritholtz is not, in many of these cases, describing villainy. He is describing "being wrong", which is not a crime, thank God. Villainy involves people who know, or should have known, that what they were doing was likely to lead to the awful results.

I mean, you can quibble and say "You should have known[...]", and indeed you should have, but if, for whatever reason, your senses deluded you, you're not a villain. No, even if you were thinking about the presentation you had due at work--or how angry you were at your husband for having a fling with his secreatary--rather than concentrating on your driving.

When something is common enough, I think it definitionally isn't villanous. It may be a practice that should be fixed--we should all be more careful when starting our cars, I'm sure. But most of us have, at some point in our lives, accidentally stepped on the gas instead of the brake. And in the overwhelming majority of cases, this is not a huge problem, or even a problem at all--we run into the curbstone, or roar out of the driveway a little too fast. We don't punish people merely because, through a fluke of circumstance, the one time THEY did it happened to be fatal. Or at least, we shouldn't.

Remember that McArdle is habitually wrong. She was wrong on Bush (twice), wrong on Iraq, wrong on almost every aspect leading up to the financial crises, wrong on the bank bailout, and wrong on health care innovation. She can't even understand an article on securitization. She's even wrong on cooking. The last thing she can afford is for people who are wrong to be held accountable for their actions. She'd be managing a Payless shoe store in Trenton if that were the case.

But why is she so very wrong so very often? Because she doesn't think for herself. She depends on consensus to give her her opinions, just like she depends on other blogs to tell her what to write about or what to think. Like all authoritarian followers she's afraid to think for herself and goes along with what she's told or what her peers think. Authoritarian followers were not permitted to form their own opinions; they were forced to agree with the opinions of their authority, so they are unaccustomed to examining an argument and coming to a conclusion. That conclusion might contradict what they are told and authoritarians can't let that happen, throwing everything they think they know into question and forcing them into the terrifying position of having to think for themselves for maybe the first time. The fact that she is being paid to not think is just gravy.

For some reason know only to McArdle and her god, she has chosen the financial industry as her authority. They are the parent who cannot fail her and must be supported at all costs, no matter how abusive they are. The people of Wall Street and DC who nearly created a Great Depression Part 2 (and who still might) must be absolved of all blame, or else the entire imaginary world in McArdle's head will be threatened.

There are two basic narratives of what happened. The first is that bankers had bad incentives: they took massive risks because the profits were so good in the up years that it was worth the risk of the bad, or because they could pass the risks onto some other sucker, or they thought Uncle Sugar would bail them out. The other narrative is that bankers had bad information: they didn't understand the risks they were taking.

I've always preferred narrative B, because Narrative A doesn't make much sense. The CEOs of big banks lost vast sums of money, and their jobs, most of their social status, and so forth. They held onto the worst tranches of their securities, which implies they didn't know how badly they were going to blow up. Etc.

I find it vastly more plausible, if not so comforting, to believe that systems can occasionally produce bad results even if the incentives basically point in the right direction. The FICO score revolution was valuable, but we took it too far. The money sloshing around US markets disguised the problems, because people who got into trouble tapped their home equity, or in a pinch, sold the house at a tidy profit. Everyone from borrowers to regulators was getting the same bad signal, that their behavior was much less risky than it actually was.

That doesn't mean that nothing can be done. Maybe we decide we want a less complex financial system. But it won't be because there's some villain manipulating everything into ruin; rather, we may decide that there are certain kinds of risks we can trust ourselves to handle.

I'm not sure that this would work, and I'm skeptical that it's a good idea. But the more time we waste trying to figure out who did us wrong, the less quickly we will arrive at an actual solution.

Not everyone has McArdle's neurotic need to support the banks.

A failure to prosecute the "villains" responsible for the financial crisis that brought the United States to its knees will leave the country without the moral compass needed to avert future crises, a Wall Street luminary said.

Pioneer hedge fund manager Michael Steinhardt is angry that the bailout of America is eroding the nation's capitalist ethos while those whose deeds crippled the U.S. economy suffer scant opprobrium, their names still untarnished.

"Something really went wrong here. We're about to enter a period where our budget deficit will dwarf anything we've seen before," Steinhardt told the Reuters Investment Outlook Summit in New York.

"What we really needed a long time ago was a recognition that there were villains apace. The evils of the financial system should have been recognized long before this," said Steinhardt, who no longer manages billions of dollars but whose counsel is sought on Wall Street and among select politicians.

Steinhardt, who is a bit of a villain himself, lists Alan Greenspan, Ben Bernanke, the American public, and many others. He has no problem naming names and calling for accountability.

"The question is, What's going to come of this, if there are going to be no villains?" he said.

"Is Hank Greenberg a villain?" Steinhardt said, referring to the former chief executive of insurer American International Group, recipient of a $152 billion federal bailout after it suffered massive losses mainly on complex securities tied to mortgages that had declined in value.

He rattled off other names: James "Jimmy" Cayne, former CEO and chairman of defunct investment bank Bear Stearns Cos, whose unsustainable leverage in two failed hedge funds sparked the crisis in summer 2007.

And Richard Fuld, ex CEO of failed investment bank Lehman Brothers Holdings Inc., whom Steinhardt said he saw last week in a restaurant "happy as a hero, blowing kisses."

Finally, he asked, referring to the senior counselor of Citigroup and a former Treasury secretary under Clinton. "Is Bob Rubin a villain? Still at Citibank? Is he a villain? You can't name a villain? Is this a villain-less debacle?"

Although a friend of Clinton, Steinhardt knocked Barack Obama's pick of ex-Clinton officials for key positions in his administration. The choices reveal a deep lack of substance on the president-elect's part, he said.

"We have a new president who I find to be an absolute tabula rasa in terms of his knowledge of anything," he said, referring to Obama as a blank slate.

"Pay attention to what Obama says and you will find he hardly ever says anything of consequence."

Steinhardt also railed against Congress, where the quality of intellect "is not exactly awing."

"It seems to me that the intellectual level that we are surrounded with both in government and in the industry is exceptionally low at the moment, it makes me angry."

Not everybody ignores reality, however, not even in The Atlantic.

Here's the synopsis: Financial innovation produced a vast network of complicated asset-backed securities traded among what insiders call "shadow banks," or unregulated banks. Shadow banks looking to park cash where it would hold value
and earn interest created a short-term securities market -- much like a checking
account. But unlike a regular FDIC-insured checking accounts, these deposits
would not be guaranteed by the government. So investors borrowing from this
shadow depository system had to put up collateral. And they chose ... their
asset backed securities.

Why is that dangerous? Because in the shadow banking industry, these deposits, backed by sub-prime mortgages instead of the FDIC, acted as money. Banks relied on it for transactions. "Subprime morgage debt had entered the money supply." But then the housing bubble burst. Depositors dumped their assets to raise cash and tried to withdraw their money,raiding the shadow depository market, and the money supply crashed.

McArdle is still claiming that financial innovations weren't a problem. She is wrong, as she is wrong about so many things. Here McArdle either deliberately out of dishonesty or accidently out of stupidity thinks she's found support for her claim that sliced and diced mortgage securities did not contribute to the economic crises. McArdle also wrote an irrelevent article claiming banker pay had nothing to do with the crises, claiming bankers' pay is so high because they must take so many risks with huge amounts of money. She does not mention how they ran to the government when their bets went bad, invalidating her theory.

McArdle has written so many tediouus words defending the indefensible. She has danced around pretending to be impartial, criticizing insane mouthpieces like Glenn Beck for balance while supporting the financial elite. It's just an insane waste of words, of time, of money. We are drowing and McArdle is shoving our heads under water, telling is that this is how it has to be, for our own good. And it works. Sensible people still find it nearly impossible to believe that our elite are perfectly willing to watch us suffer and slowly die, as long as they get rich in the process. The truth is too painful to accept, so they choose to believe the lies instead.