Rigged to Win

Since Christmas, I’ve been working my way slowly through George Packer’s masterpiece The Unwinding, which chronicles the slow decay of American society and politics over the past generation in poignant prose that follows the struggles and triumphs of a handful of more-or-less-ordinary citizens, using them to illuminate the story of a nation.  It climaxes with the events following the 2008 financial crisis, which revealed how thoroughly corporate money and power had taken the American political process captive.  This passage was particularly eye-opening:

“The previous October, in the last month of the [Obama] campaign, Connaughton had picked up signs from [Delaware senator] Kaufman that the Obama team wanted to bring Robert Rubin on as Treasury secretary.  ‘Don’t you realize that half the country wants to hang Bob Rubin?’ Connaughton asked when Kaufman expressed enthusiasm at the prospect.  Kaufman would later say, ‘It was like a car had broken down and we needed a mechanic.’  Obama, inexperienced in government and a novice in finance, seemed to believe that Rubin and his followers were the only competent repairmen available.

No more proof was needed that the establishment . . . would emerge from the disaster in fine shape.  The establishment could fail and fail and still survive, even thrive.  It was rigged to win, like a casino, and once you were on the inside, you had to do something dramatic to lose your standing. . . . Rubin was no longer viable for Treasury, but his people were practically the only candidates under consideration by Obama, who, after all, had fought his way into the establishment from farther back than any of them.  Michael Froman, Rubin’s chief of staff under Clinton, later a managing director at Citigroup, introduced Rubin to Obama, and he continued working at the bank while serving on Obama’s transition as personnel director, then collected a $2.25 million bonus before joining the administration.  Jacob Lew, another Citigroup executive, became deputy secretary of state with a $900,000 bonus in his pocket.  Mark Patterson, a Goldman Sachs lobbyist, was hired as chief of staff at Treasury despite the lobbying ban.  Timothy Geithner, a Rubin protégé and the architect of the bailouts, was appointed Treasury secretary and survived the revelation that he had flagrantly underpaid taxes to the agency he was going to lead.  Larry Summers, whose meaty fingerprints were all over the pro-bank policies of the late nineties, and who earned millions in speaking fees from various future bailout recipients, became the leading economic adviser at the Obama White House.  Even Rahm Emanuel, Obama’s chief of staff, a career public servant, had made a cool $16.5 million at a Chicago investment bank in the thirty months he spent between government jobs.  All at the top of their field, all brilliant and educated to within an inch of their lives, all Democrats, all implicated in an epic failure—now hired to sort out the ruins.  How could they not see things the way of the bankers with whom they’d studied and worked and ate and drunk and gotten rich?  Social promotion and conflict of interest were built into the soul of the meritocracy.  The Blob was unkillable.”

The Truth about Property Rights

The bestselling (and remarkably, self-taught; he’s a neurosurgeon by profession) investing theorist, William J. Bernstein, recently wrote a book entitled The Birth of Plenty: How the Prosperity of the Modern World was Created.  A common enough theme to write on these days, and at first glance, probably much the same fare as Niall Ferguson’s Civilization: The West and the Rest (which I haven’t read yet) and Rodney Stark’s The Victory of Reason (which I’m sorry to say I have).  And from the book’s description, it would appear to be another paean to the glories of Enlightenment capitalism, arguing that four factors have led to modern prosperity:

  • Property rights, which drive creativity
  • Scientific rationalism, which permits the freedom to innovate without fear of retribution;
  • Capital markets, which provide funding for people to pursue their visions;
  • Transportation/communication, which allows for the effective transfer of ideas and products.

In an intriguing little interview at AdvisorOne, however, Bernstein displays a rare perceptiveness about what these frequently-lauded “property rights” really are, and how they must be maintained:

When people read Birth of Plenty, they assume I’m a libertarian, because of the book’s emphasis on property rights.  But at the end of the day, “property rights” is nothing more and nothing less than the respect that folks with less than you do have for your property, and if there’s too much spread between the rich and poor, that erodes that respect and property rights enforcement costs skyrocket. 

This little statement neatly encapsulates the two points about property rights that I’ve tried to hammer home on this blog before: (1) property rights are rooted in social convention—they exist because society believes they ought to exist, and determines to protect them by custom, and law; (2) property rights exist for the purpose of common welfare, not for their own sake or the sake of individuals only.  Put these two together, and you find that, if property ceases to serve the social good, it ceases to command the respect of society; morality and custom therefore no longer suffice to protect it, since it no longer serves its moral and customary purpose, and the only thing left to protect it is the brute force of legal enforcement.  And it becomes a vicious cycle—as laws and security guards proliferate, people come to think of coercion as the only safeguard of property, so that as long as you can get around the letter of the law, or the enforcement reach of the law, you’re welcome to as much as you can get ahold of.  

Bernstein understands, in other words, what the Torah understood—that redistribution of property is not the abolition of property rights, but the surest means to protect them, and along with them, social welfare and stability generally.  Bernstein goes on, deploring the effects of skyrocketing inequality:

There is no question that economic inequality is killing us; we have the highest rates of obesity, homicide, violent crime, and incarceration in the developed world, things that all covary strongly with inequality.

If there’s one myth that’s more corrosive than any, it’s the notion of “job-killing taxes.”  By that logic, Somalia should be the world’s richest nation, and Sweden and Switzerland the poorest; Massachusetts ought to be our poorest state, and Mississippi the richest.

It’s a brutal fact that in highly productive societies, a lot of income needs to be redistributed. The objective evidence on the subject suggests that marginal tax rates have to be very high — in the range of 70%-80% — before the income effect becomes overwhelmed by the incentive effect; I find it hard to believe that Bill Gates, Larry Page, or Mark Zuckerberg are going to work any less hard if their income tax rate jumps to 45%. 

He also adds some sage words of advice that run very much against the grain of our society’s conventional financial wisdom, and against the self-interest of the investment advising industry.

I’ll forego the 50-cent words and simply say that wealth is not a dollar amount, but rather a ratio measured in years: in other words, how many years’ living expenses you’ve saved.  The person with a million dollars who needs to spend only $50,000 annually is twice as rich as the person who needs $100,000.

If you think that your happiness is tied up in the things you own, then you are both sadly misinformed about human neuropsychology and doomed to be unhappy. Bottom line: keep your expenses down, save like hell, don’t stop until you’re pushing up the daisies, and look for “utility” in the things that really matter: connections with other people, competence in a vocation or avocation, and most importantly, acquiring autonomy over your time and effort, i.e., becoming your own boss.

If you can’t reach those three goals by the time you’re in late middle age, you’re toast.

Needless to say, I’ll certainly be buying the book.

Down with Democracy?

The past 36 hours have witnessed a maelstrom of geopolitical and financial chaos to rival the most tumultuous days of September and October 2008.  The unlikely culprit?  Democracy.  The original article, for that matter–Greek democracy, for that matter.

For much of the past couple years, and increasingly in the last three months, world financial markets have been held hostage by the debt problems of a small Meditteranean nation that accounts of 0.5% of the world’s GDP.  Whenever prospects for Greece looked better, stocks soared, bonds fell, the euro rose and the dollar fell, economists cheerily prognosticated on the likelihood of buoyant global growth over the coming months and years.  Whenever prospects for Greece looked worse, stocks plunged, bonds soared, the euro fell and the dollar rose, economists filled the airwaves with somber assessments of economic health and prophecies of impeding doom.  After the most most harrowing and pessimistic period yet, markets suddenly gained new faith in Europe at the beginning of October, and began a heady and exhilarating climb to new heights of optimism, capped off by an exultant surge last week as European leaders overcame their differences to agree on a dramatic and it seemed decisive solution to the Greek problem.  

But what goes up must come down, and Greek Prime Minister George Papandreou’s announcement Monday night of a referendum pullled the rug out from under the market about as decisively as a terrorist attack on Wall Street could’ve done.  From Tokyo to New York, stock markets plunged, erasing their recent gains.  Bank stocks took what Obama would call a “shellacking.”  US Treasury bonds rallied so fast that experienced traders were left dizzy and disoriented.  World leaders and economists erupted in furor–how dare he?  How dare he call a referendum?  Papandreou himself was suddenly sitting in the hotseat, facing a no-confidence vote and the defection of key party members, his government at risk of collapse.


After years of seemingly endless crisis management carried out by a mysterious top tier of financial and political elites behind closed doors at dramatically-titled “emergency summits,” the idea that a key decision should be made by “the people” seemed ludicrous and downright quaint.  In view of the recent wave of “Occupy” protests, a popular outcry against the mismanagement of the economic crisis by the elites, it was an irony worthy of Greek drama that the next global crisis threatened to come from giving power back to the people.  After all, despite Papandreou’s stalwart confidence that a referendum on the new rescue plan would at last establish a political mandate for the difficult reforms needed, many quite reasonably feared that the Greek people, incensed by recent austerity measures, would stubbornly reject the rescue plan, pulling the plug on the euro and defaulting on their debts as the lights of Europe went out one by one.  Indeed, it is perhaps a tribute to the courage of Greek politicians that in a world increasingly ruled by plebiscite, they have until now been willing to resolutely govern, making painful decisions for the long-term good in the teeth of popular outrage.  This courage is the more impressive when viewed alongside the mass abdication of America’s political “leaders,” who, confronted by similar budget woes, have refused to lead, choosing rather to be led nowhere by the fickle will of popular opinion.

However, whether one thinks that the referendum represents a noble re-empowerment of the long-disenfranchised masses, or a cowardly and reckless abdication in the midst of crisis, the reaction it has evoked reveals that, for all our rhapsodic paeans to “democracy,” we in the West are not really ready for it.  Sure, democracy is fine for things we no longer really care about–things like gay marriage and the like.  By all means, let’s decide those by mass referenda.  But when it comes to the things that really matter, the gears that turn the wheels of the world–when it comes to money, in short–we know that “the people” can’t really be trusted, and that expert leadership needs to take charge of the situation.  Democracy may be a great ideal, a fine motivation for bombing a few oil-rich Middle Eastern countries, but it’s much too risky to actually practice.

Documentary Roundup #1: Inside Job

In the last few weeks, my wife and I have gone on something of a documentary binge.  While there are of course wonderful documentaries about all sorts of things, the ones that I really get into are usually the hard-hitting exposes of political or economic deception that is being perpetrated upon us (e.g., Food Inc., perhaps my all-time favorite documentary).  All four of the documentaries that we watched recently (Inside Job, The High Cost of Low Price, Super Size Me, and The War You Don’t See) fit that description, so in the next three posts I will be accordingly evaluating them on three different criteria.  First, message: what is the point they are trying to put across?  How are they trying to change the world for the better?  Is it an important, morally pressing, and coherent message?  Second, content/compellingness of argument: how well do they succeed in accomplishing their agenda?  Is their argument clear, do they bring relevant and compelling information to the table?  Is their evidence strong enough, and their answers to objections forceful enough, to persuade a skeptic?  Third, cinematography: is it a well-made film, enjoyable to watch?  Under this heading fall all the film rudiments–good script and organization, arresting visuals, good sound quality.

For good measure, I’ll also throw in a docu-drama that we watched in the last few weeks, that is of historical, not political or economic interest–KJB: The Book that Changed the World.

Inside Job (2010) 

 Directed by Charles Ferguson 

Message: 5/5
Content/Compellingness of Argument: 4.5/5
Cinematography: 5/5

This movie didn’t win an Oscar for nothing.  Powerful and urgent message, engrossing narrative, visually beautiful, and some truly delightful moments of interviewees writhing under the camera.  Inside Job investigates the anatomy of the 2008 financial crisis, and comes away with a damning conclusion: the major financial actors involved rigged the system so that they would make money hand over fist, come what may.  The major government actors involved aided and abetted their fraud because they were largely themselves financial industry insiders, and/or were driven by blind faith in a deregulatory ideology.  Worst of all, despite all of the public outrage after the financial crisis, almost nothing has changed.  The same financial entities dominate Wall Street, only now more monopolistic than ever, and those who made millions (or hundreds of millions) at others’ expense in the lead-up to the crisis still by and large retain their immense fortunes.  The so-called “financial reform” bill ended up changing next to nothing, and all of the new appointments in the Obama administration are every bit as much the corrupt industry insiders that dominated the previous two administrations.  As my dad put it, “the most left-wing candidate that could possibly get elected in the US today ran on an explicitly anti-Wall-Street platform, and still nothing changed.  Now that’s scary.”  

The best part of the film is how Ferguson manages to elicit some remarkably defensive or idiotic reactions from some of the people he is interviewing, putting them in the hotseat and mercifully pressing his advantage to expose their duplicity.  Frederic Mishkin and Glenn Hubbard (professor and dean of Columbia Business School, respectively), may not ever be able to show their faces in public again.  For Ferguson draws attention to the corruption that has infested the discipline of economics itself, in which supposedly objective economics professors are paid staggering sums (which they are not required to disclose) by the entities that they are supposed to be writing reports on (e.g., Mishkin being paid over $120,000 by Iceland to write a report on the financial stability of Iceland).  

Two objections might be made, which explain the 4.5 stars on Content/Compellingness of Argument.  In order not to waste too much time on the actual unfolding of and resolution of the crisis in late 2008 and early 2009, so that he can focus on the more insidious lead-up and aftermath, Ferguson tends to rather dramatically oversimplify what went wrong and, more importantly, what went wrong with the immediate political responses, like TARP.  This oversimplification may well leave an escape route for those who refuse to accept the basic contention of the film and blame the crisis, say, on too much government intervention.

The second concerns the crucifying of Mishkin, Hubbard, et. al., and is so well-summarized on this law blog (well worth reading) that I will simply quote the objection from there: 

Ferguson, however, essentially leaves it at that: Summers, Hubbard, and others have made millions by being shills for Wall Street, which must explain why they did it. That is simply wrong. I cannot imagine that either of those men wrote what they wrote to become rich, or that they continued to write such things after having been seduced by the riches of Wall Street. They are true believers whose arguments are congenial to Wall Street. Becoming rich was incidental to their career paths. They sought career success in top-flight economics departments, and the rest fell into place.

The better question, therefore, is how it has come to pass that the economics profession is dominated by men (and it is still very much a boys’ club) who believe such nonsense. Some of these guys still think that there was no bubble — that the financial crisis was actually a rational, equilibrium response to economic fundamentals. And even those who will not say anything quite that crazy publicly are still unfazed by the manifest failures of their ideology.”

This last remark points to the most troubling thing that the movie reveals–the impenitence of all those complicit in this crisis.  It would be hard to imagine a bigger wake-up call than the financial crisis of 2008–a more serious meltdown is scarcely imaginable (it’s worth remembering that the fact that impacts were not considerably more severe was due only to massive and repeated emergency action).  If there was anything that could convince bankers, politicians, economists that something was wrong with their paradigm and their actions, it would be the 2008 crisis, right?  Yet hardly any seem to have learned their lesson.  Few if any of the major bankers have admitted any wrongdoing, nor have Hank Paulson, Ben Bernanke, or any of the other Wall Street stooges in Washington admitted that they completely screwed up.  Most economists continue to preach the same orthodoxy.  

And, worst of all, the American people have quickly forgotten their grudge, and moved on to new scapegoats…it took little less than a year for Republicans to make Obamacare, rather than Goldman Sachs, Public Enemy No. 1.


So, go see this movie.  And then go do something about this appalling situation, if it’s not too late.

The Grass is Always Greener

It’s very easy for Christians today, appalled at the rampant economic injustice and violence that is being perpetrated, and appalled above all at the indifference of most Christians to it, to get themselves worked up into a rage of righteous indignation.  How could we get into such a mess?  How could Christians let such horrible things happen?  There must be some profound heresy at work here, or some deep structural sin; it’s all the fault of capitalist ideology, perhaps.  I speak, of course, of myself as much as of anyone.  And of course, I don’t want to retract one word of it–we are surrounded by appalling injustice, appalling injustice that Christians should be addressing rather than abetting, and it is important that we analyze the underlying causes, historical and ideological, and repent of them.  Nevertheless, it is helpful to keep a bit of historical perspective, perspective that might lead us to give up in despair because we are such a wicked people, but which may have the more salutary effect of helping us see hope and even progress amidst our current wickedness. 

Some of our current problems have been recurrent features of every age, and so there is no need for apocalyptic gloom at the singular depravity of our age; rather, a call to ordinary (though still radical) repentance, sanctification, and waiting upon the Lord.  Some of our past injustices, including some very profound ones indeed, we have since overcome, so much so that it now seems self-evident to us that they are unacceptable, just as self-evident as it seemed to our ancestors that they were perfectly acceptable.  This spiritual progress can give us great encouragement when faced by our current besetting sins, because we can recognize that they are not insurmountable–Christ is sanctifying history, and will sanctify it.

I’ve had all this brought home to me in a bit of “light reading” I’ve been doing lately: The House of Rothschild, by Niall Ferguson–an exhaustive history of the family-run banking behemoth that dominated European finance–indeed, world finance–for nearly a century.  Ferguson is a maddeningly amoral historian, seeming to admire anyone who contributes to the cause of progress, and caring very little for the means by which they did it (see my review of his book Empire for more on this).  He clearly admires the Rothschilds a great deal, as financial geniuses, and is untroubled by the fact that most of their activities would’ve made Goldman Sachs look like Saint Francis.  Indeed, it is somewhat amusing–he at times goes to considerable lengths to exonerate them from various fictitious accusations against them that were popularized in their time, but in the course of doing so, manages to unearth a seedy underbelly of bribery, manipulation, and trickery that was simply the norm for their activities.  These folks thought nothing of bribing public officials to gain lucrative financial contracts, and then turning around and using their position of strength in the market to make huge additional under-the-table profits off the participating governments.  They thought nothing of using their inside political information to outmaneuver all their competitors and establish an unbeatable monopoly position, or of encouraging misinformation to create panics or buying frenzies in the market off of which they could profit.  War profiteering was their specialty, and they sometimes helped encourage the continuation of wars to ensure a continuation of profits.  In other words, all the charges that books like Confessions of an Economic Hit-Man or The Shock Doctrine level against modern multinationals, these guys were guilty of thrice over.  These guys were the quintessential disaster capitalists, economic hit men, Wall Street fat cats. 

Of course, I wouldn’t quite take this as a parable of “there’s nothing new under the sun” because the Rothschilds were, in many ways, a novelty, the first of these financial mighty men to walk the earth.  They were the originals of the decadent species that has now proliferated around the earth.  But, we can learn from them that things now are perhaps not quite so bad as they seem.  At worst, corruption now is comparable to the corruption that characterized European courts in the 19th century.  At best, we have actually improved a bit.  Like I said, these guys make Goldman Sachs look like Saint Francis, and although you can be sure that the seediest of Goldman’s dealings are buried deep beyond the reach of any Congressional Investigation, I think it would be fair that N.M. Rothschild and Sons would never be able to do now, with the laws and accountability structures we have now (deeply flawed as they are) what they could do then. 

There is a second lesson also from the story of the Rothschilds.  As I said above, there are two ways in which we may take encouragement from the past–there are injustices we see around us now that we can discern as age-old enemies, and there are injustices from the past that we have now overcome.  What I just mentioned was an example of the first, but I was struck by an example of the second when reading about the Rothschilds.  

It is, of course, silly to have to mention it, absurd that it should even have been striking to me; after all, it is cliched by now to say it: Christians were terrible to Jews.  But I don’t know how many of us really want to own up to the fact.  We’re so tired of liberals using the Holocaust as a weapon against Christianity that we barricade ourselves against the charges altogether, we sweep all that injustice under the rug.  The Holocaust, we say, was an aberration–it can’t be chalked up to the legacy of Christianity, but to a bunch of mad Darwinian Germans.  Very well, but the longer legacy remains.

The Rothschilds, unsurprisingly, were Jews, and grew up in the Frankfurt Jewish ghetto.  Ferguson’s point is not to dwell on this background, but bits of it couldn’t help emerging from the narrative, and it was shocking to confront the fact of just how discriminated against and repressed the Jews in 17th and 18th-century Germany were.  And of course, the reason Ferguson doesn’t dwell on it was because there was nothing unusual about the Frankfurt situation–this was simply how Jews had to live in most Christian countries–cramped into tiny houses, with their movements restricted, mocked by passersby, without citizenship rights.  And what’s striking about all this from my perspective is that this was not happening in modernity like the Holocaust–when we can chalk it all up to loss of faith, but in a deeply pious age in Lutheran Germany.  There were godly Christian ministers preaching faith and love from their pulpits, even while endorsing (or at the very least turning a blind eye to) the cruel repression of the Jews, and this went on for centuries.  

By comparison, the astonishing ability of modern Christians to blind themselves to the oppression they are supporting in the Third World no longer appears so astonishing.  After all, most of our victims are out of sight, out of mind, but the harsh treatment of the Jews was going on in every city in Christendom, right outside the churches.  So perhaps when we are tempted to extol the virtues of our medieval and Reformation past, and lament our modern apostasy, we should remember that there are a few moral advances to be thankful for the in the modern age.