Tuesday, August 23, 2011

Griftopia by Matt Taibbi

I like nonfiction books too!  But before I say anything about this one let me tell a story.  My wife works in the academic field and so I’ve gotten to proofread dozens of grant applications over the past ten years or so.  A lot of them are detailed and some take months of more or less constant work on the part of multiple people.  This is for several reasons; they want to make sure their money isn’t going to be spent on liquor and corn nuts, they want to know that the applicants are literate and have a reasonable plan, there’s typical bureaucratic inertia, but mostly it’s because there’s a significant amount of money at stake and the foundations and agencies feel the need to justify what they do with it.  So imagine my surprise in 2008 when Hank Paulson demanded that Congress give him $700 billion by the end of the week and gave them basically a three page memo.  I was thinking of this a couple of weeks ago while my wife was working nights trying to put together a grant proposal asking for $15,000 to help some poor children get developmental screenings.  If she’d just ask for a couple thousand times as much there’d be less hassle, apparently.

Enter Matt Taibbi, gonzo economic writer.  He’s pissed off about this double standard and ready to shine some light into the dark corners of finance.  Taibbi pulls no punches and doesn’t avoid low blows.  In a chapter entitled “The Biggest Asshole in the Universe”, Taibbi goes after Alan Greenspan, calling him among other things a “gnomish bug-eyed party crasher”, a “gerbilish mirror-gazer” who rose to the top by “unscrupulousness and political spinelessness” – all by the second page.  Normally I’d say that this isn’t playing fair, but 1) Taibbi throws in impressive amounts of documentation amidst the invective, 2) all these people are more than capable of taking care of themselves, and 3) I’m pretty sure that most of them would do worse if it would make them a buck.

That said, sometimes this book does suffer a little bit from the incessant name-calling, and it is not necessarily that cohesive.  One of the last chapters is a reworking of a previous article that Taibbi had written for Rolling Stone in which he compared investment bankers to vampire squids (if anything this analogy is unfair to members of V. infernalis, which as far as I know keep to themselves and are only a threat if you happen to be a small crustacean.)  Each of the chapters tends to focus on one particular aspect of the current bubble economics that we currently find ourselves faced with without much overarching narrative besides the concept that the house always wins.

One of the best sourced and well written chapters is the examination of the mortgage bubble.  At this point I don’t think there are too many people left who argue that the insane heights of the housing market were based on anything more than wishful thinking and/or outright fraud.  I remember having a discussion in late 2005 with a friend of mine who was living in California and who stated that the whole thing was bound to collapse.  After looking into it, I was in complete agreement.  The idea that no one knew about this at the time is silly, because even during the height of the housing craze you could find articles questioning how people were qualifying for these loans.  And no one at any level seriously believed that people were ever going to pay back these option adjustable rate mortgages for eight or ten times their yearly salaries.  Rather, they believed that the individuals would just roll over into another loan or sell to a bigger sucker.  Not too long ago I read No One Would Listen by Harry Markopolos, which is a story about Bernard Madoff and how no one caught him.  A common theme in all these scandals is that various smart people claim afterwards that they had no idea.  This is a lie.  Instead, everyone knew that there was some sort of fraud going on but figured that they would be able to pass risk along to someone else before they were left holding the hot potato.  Imagine their surprise when the fraud turned out to target them, too!  There was so much grift up and down the whole chain that the real scandal, to my mind, is how the big players are demanding that they get paid back full price.  If they knew what they were doing then they were participating in a fraudulent scheme and don’t deserve it, and if they didn’t know what they were doing then they shouldn’t have been entrusted with that much money in the first place and shouldn’t complain that they get punished a bit.  There were a lot of entities trying to engage in rent seeking who had no particular expectation that they'd have to make good on their theoretical promises, too.  If that came as a shock (and it appears to have) then they shouldn't object to losing their shirts as well.

One quibble that I do have boils down to what is called within social sciences the functionalism vs. intentionalism debate.  In short, when examining a human event with a bad outcome, the question arises whether the event was caused simply by events or whether people purposely pursued the bad outcome.  In most cases it appears that elements of both are responsible.  Taibbi seems to lean pretty heavily towards the intentionalism hypothesis in describing events though; for instance, he claims that Greenspan deliberately encouraged homeowners to take out adjustable rate mortgages and then raised interest rates with the intent of enriching mortgage-holding banks.  Maybe that was deliberate, but I’d be pretty surprised if that was the only reason that he took that particular action.  I felt the same way about the commodities chapter; I’m sure that there was more than a little speculating going on, but at the same time the world is starting to run into some actual supply problems with grain and oil.  For that matter many of the excesses are explainable by the simple fixation on the next quarter’s earnings above all else without bringing deliberate intent into it.  It appears that most of these folks really believe that they’ll come up with something to patch up the balance sheet the next quarter if they can only get through this one. 

I also feel that the chapter on the health care reform debate and eventual legislation didn't actually acknowledge some of the things that the insurers actually did give up, such as their ability to deny claims based on pre-existing conditions and to cap maximum lifetime payouts on policies.  Maybe this doesn’t outweigh some of the bad aspects of the bill – it’s debatable – but it’s not accurate to say that the insurers got absolutely everything they wanted out of the process.

But this is a polemic, not a textbook, so it’s okay to get outraged here and then find nuance somewhere else.  I think that Taibbi’s underlying point is more or less unquestionable regardless of the details, and that is that the major players on Wall Street have managed to get themselves into a position where they take all the profits from risky behavior and never have to eat the losses.  He’s also pretty convincing in his analysis of government power – that the government that most people experience on a day-to-day basis is actually fairly overbearing and oppressive, but that this reverses for large corporations and big banks.  In one of the chapters he deals with local governments trying to raise short-term revenue by leasing out their infrastructure, which is marginally fair for the people involved who almost always end up having to pay more to use it.  He also examines a housing project that basically exists to create red tape and enrich lawyers and local interests; and he is, given his politics, surprisingly sympathetic to the ordinary Tea Party types who want to get the government out of their business.  He argues that the government actually is in their business and their only mistake is assuming that it's actually as invasive for big corporations and businesses, when in fact those entities get to write their own rules.

Anyway, it’s a quick read and gets the blood up.  I always question why I bother having any investment accounts at all after reading something like this and don’t simply invest in canned goods, bullets and Krugerrands.  It’s probably like the old joke about the man complaining to his friend about the crooked Faro gambling game being run in their city, but later being discovered by the same friend playing in it.  “Gus,” says the second man, “I thought you said this game was rigged.”  “Sure it is,” replies the first, “but it’s the only game in town.”

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