Dear colleagues,
Since the coming of the Global Financial Crisis in 2007, I've tried to make some sense of what's been happening. Mass media reports don't help a lot. What to make of financial derivatives, securitisation, collateralised debt obligations and credit default swaps, not to mention toxic waste? And what was happening with all these things that caused such a massive problem?
Finally I've come across an author who explains matters in an understandable way, and is highly entertaining besides. Matt Taibbi is a contributing editor for the magazine Rolling Stone, not what you might think of as a prime source of financial analysis. Taibbi's vivid prose is worth reading on its own, and furthermore his message is powerful and not what you might expect.
Taibbi's book is titled Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America (New York: Spiegel & Grau, 2010). It treats events up to the middle of 2010, based in part on Rolling Stone stories.
"Griftopia" is Taibbi's coinage for a utopia for grift. Grift is another word for graft, which means swindles, corruption and political dishonesty. Taibbi argues that the US financial system has been surreptitiously deregulated through inside influence from powerful bankers who then manipulate markets to suck vast quantities of cash from the rest of the country. When the company-created bubbles burst, the government obligingly bails out the crooks.
"The new America ... is fast becoming a vast ghetto in which all of us, conservatives and progressives, are being bled dry by a relatively tiny oligarchy of extremely clever financial criminals and their castrato henchmen in government, whose main job is to be good actors on TV and put on a good show." (p. 33)
In Taibbi's picture, much of the US operates on a grift mentality. People with no assets and little income accepted massive house loans, expecting to sell after prices rose or to skip town if not. Agents tricked genuine house buyers into taking inappropriate loans by telling lies about their terms. Mortgage brokers fudged figures about the quality of loans. Investment companies put loans into bundles, gave AAA ratings to far too many of the bundles, and used shady methods to reclassify lower-grade bundles into AAA. Rating agencies allowed this to happen. Investment banks made billions of dollars from selling bundles of loans to pension funds and insurance companies. When the bubble burst, the banks were rescued through billions of dollars of government bailout money.
Taibbi despairs of both the right and left responses to the high-level rip-off. He is contemptuous of the right-wing populists who blame poor people, especially blacks, for the economic collapse. "A loose definition of the Tea Party might be fifteen million pissed-off white people sent chasing after Mexicans on Medicaid by the small handful of banks and investment companies who advertise on Fox and CNBC." (p. 17) For Taibbi, the radical right has totally missed the main game.
Taibbi pins the blame on elite bankers and their political allies in both political parties, including Bush and Obama. Taibbi has a special hatred for Alan Greenspan, former head of the Federal Reserve. He traces Greenspan's personal trajectory from libertarian supporter of Ayn Rand to government insider. "Greenspan pompously preached ruthless free-market orthodoxy every chance he got while simultaneously using all the powers of the state to protect his wealthy patrons from those same market forces. A perfectly two-faced man, serving a perfectly two-faced state." (pp. 36-37) The title of the chapter about Greenspan is "The biggest asshole in the universe".
As well as explaining the mortgage game - the centrepiece of the financial crisis - Taibbi also addresses the commodities bubble of mid-2008, when the prices of food and oil rose dramatically despite no glitch in supply. The reason? Banks quietly snuck through changes in regulations that had stabilised commodity markets since the 1930s, allowing investors to manipulate the market and extract vast quantities of money from ordinary citizens, many of whom ended up without jobs or homes.
Here is Taibbi's summary of the oil bubble of 2008: "The big investment banks convince the ordinary investor that oil prices are going up because of 'fundamentals', then they get all that money coming in, at which point their predictions about prices going up actually come true. Then they ride in with their own bets and make a fortune, front-running the massive flows of capital pouring into the market. Meanwhile, we all end up paying $4.50 a gallon for gas, just so these assholes can make a few bucks trading on what amounts to inside information." (p. 154)
Taibbi also addresses sovereign wealth funds being used to buy up bits of the US, for example a 75-year lease on Chicago's parking meters was sold just to balance a budgetary shortfall.
Another eye-opener is Taibbi's treatment of Obama's health insurance bill, which he says is a trillion-dollar giveaway to companies in return for an expectation of campaign donations for a couple of elections, with little prospect of actually improving anyone's health.
"The epic struggle to pass health care reform was at once a shameless betrayal of the public trust of historic proportions and proof that a nation that perceives itself as being divided into red and blue should start paying attention to a third color that rules the day in Washington - a sort of puke-colored politics that puts together deals like this one and succeeds largely through its mastery of the capital city's bureaucracy." (p. 177)
Taibbi saves his strongest vitriol for the investment bank Goldman Sachs: "The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled-dry American empire, reads like a Who's Who of Goldman Sachs graduates." (p. 209).
Taibbi thinks electoral politics are not up to the job of addressing the problems, because neither side addresses the big-time grifters. However, Taibbi is weak on solutions. Still, it is worth understanding the problems better. If Taibbi is right, there will be more financial bubbles before things improve.
Brian
6 January 2011
I thank Trent Brown and Sharon Callaghan for helpful comments on drafts.