The difference between paying and forcing, blurred again

Matt Taibbi at TrueSlant posts a terrific article about the causes of the financial crisis. I like a lot of his points:

“For what we’ve learned in the last few years as one scandal after another spilled onto the front pages is that the bubble economies of the last two decades were not merely monstrous Ponzi schemes that destroyed trillions in wealth while making a small handful of people rich. They were also a profound expression of the fundamentally criminal nature of our political system, in which state power/largess and the private pursuit of (mostly short-term) profit were brilliantly fused in a kind of ongoing theft scheme that sought to instant-cannibalize all the wealth America had stored up during its postwar glory, in the process keeping politicians in office and bankers in beach homes while continually moving the increasingly inevitable disaster to the future.”

He nails it pretty well. In a word, the US financial system is a giant compulsory Ponzi scheme, with politicians and business executives at the top and the rest of us getting screwed. The blame for the crisis should be shared, he says, and letting either the Wall Streeters or the politicians off the hook is dogmatic. It’s similar to the Rand/Marx dichotomy that isn’t: “There is some small class of people who have great power and use it to steal from everyone else. Invariably, I belong to the second group.” It’s a teens-level redux of class warfare.

Taibbi suggests that both the politicians funneling dirty money to election funds, and the businesspeople providing that money by taking their points off toxic deals and buying vacation homes in the Caribbean, were both equally guilty:

“This GSE story is a big one, but if it gets used as a path back to a “The Market Reacted Rationally” version of history, we’re screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.”

I cannot quite buy this evil incarnate at the top of the mountain theory. Taibbi ignores the difference in projected power between two groups of people. Businesses can only balance the books in their favor, politicians can use force against any form of blowback. There is a qualititative difference there, and just following the money does not quite tell the story. For instance, I’ve pointed out before that bankers’ actions were perfectly rational if one considers the implicit guarantee from the Fed, Treasury, and Congress that they would not be allowed to fail – by forceful edict. There were two ways this trading could have played out when the system crashed. In the market version, conservative banks who had eschewed growth for the last decade would watch as the paper tigers of the BoA’s and Citigroups collapsed, and use their hard-won capital to purchase the remains at pennies on the dollar. This happened in a few cases, like Wells Fargo picking up Wachovia, but it was not to the extent that it should have been to break up the too-big-to-fails once and for all. In the corporatist version, the government would step in and save bad banks from their bad investments using money forcefully extracted from taxpayers. This happened and is still happening and will happen for the next 50 years.

Rationality does not just mean seeing bad investments for what they are and avoiding them. Taibbi ignores game theory. Rationality requires weighing the risks including the reactions of others. If there is a player in the game who can tilt the field in your favor unfairly, game theory suggests you court that player and play the tilted field. That is exactly what Wall Street did – rationally. The only short term gains here were election cycles.

No comments: