GM, bankruptcy, the self-referential problem, the Red Wings, and brains vs. brawn

General Motors has declared bankruptcy. I'm not going to link to any of the zillion of articles on it, because it's too depressing to have to read about it yet again.

Except for Dan Neil's article. He has a great take on it, recounting GM's glorious couple of decades, the '50's and 60's. He has an intriguing idea as to what was the turning point for GM:

I have my own theory. In 1999-2000, GM had a golden opportunity to right its ship by backing Democratic presidential candidate Al Gore. This might seem counter-intuitive. . .

Yes and no. It is counterintuitive in the immediate sense, because Al Gore wasn't really a Detroit kind of guy. He is quite the egghead, very cerebral and sensitive. The quintessential liberal intellectual type. But he was in favor of universal healthcare, which, as Neil points out, could have saved GM a bundle.

I think Neil is capturing something here, although he doesn't quite put his finger on it.

Something else happened in Detroit over the weekend, much more trivial, but a reason for celebration: the Detroit Red Wings won the first game of the Stanley Cup playoffs. Neil's colleague on the sports pages, Helene Elliott, put it this way:

the Red Wings on Saturday withstood the young Pittsburgh Penguins' energetic middle period by using their brains as much as their brawn.

Brains vs. brawn. The classic human dilemma. Whether to conquer with brute force or win through better planning and strategy. Hands vs. head. Football players vs. computer geeks. White collar vs. blue collar.

Pickup truck vs. sedan. Gas-guzzling but macho vs. small but efficient.

The Big Three have spent the last few years making oodles of money off of pickup trucks and big cars. I think the reason for this may be found in the ranks of their employees. GM, Ford and Chrysler have something like a million retirees. They have several hundred thousand current employees. Their dealers and parts suppliers employ another several hundred thousand. Throw in their retirees, and you easily have at least another million. Most of those employees and retirees have families, spouses, wives, kids, parents, brothers, sisters, etc.

Almost all of those people get a discount when they buy a new American car.

Then there are people who have other reasons to buy American cars, like politicians. If you are an elected official in Michigan, and you want to keep your job, you drive an American car.

I'm guesstimating here, but let's say that there are somewhere between 6 and 7 million people in this country with a direct economic interest in buying an American car. At least two million employees and retirees of the Big Three, their dealers and suppliers. Each of those has an average of two family members who buy a car. That's another four million, for six million. Then another million miscellaneous. 6 to 7 million. Most of them with some kind of discount. Let's say each one buys a new car every three years (Big Three executives used to be famous for getting a new car every year). That's two million cars a year going to this customer base. Until recently, cars were sellling at an annual rate of about 16 million a year in the US. If the Big Three were selling half of that, they were selling 8 million cars a year. 2 million of those would be a quarter. So a quarter of the Big Three's cars were being sold to people with a direct economic interest in buying American cars. People, in other words, who were already sold on them, and needed very little convincing.

Talk about insular. Most of those cars were being sold to blue collar workers, or retired blue collar workers. In other words, old white guys with little education beyond high school. How many black lesbians with advanced degrees do you think there are among the Big Three retirees? Not a whole lot.

Sound familiar? Big Three employees, retirees, and, effectively, customers, were and are the same constituency as the Republican party. It is no coincidence that the GOP and the Big Three are collapsing at the same time. It is, on the other hand, intensely ironic that Obama is the instrument of destruction of the one, and yet the savior of the other. Irony is 9/10th of the law.

Brawn vs. brains. The GOP and the Big Three represent brawn. Muscles. It is also no coincidence that Dick Cheney has emerged as the face of the Republican party these days, after being so invisible during the Bush administration. It is also no accident that Bush, his father, and Cheney were all in the oil business. They represent the "brute force" school of capitalism (although maybe "school" in the wrong word). Men (and it's almost always men) make money by the application of brute force - drilling for oil, mining, making steel, or, as (I think) Alfred Sloan put it, "bending metal and thereby adding value to it."

It is no coincidence that Cheney is the most forceful advocate of torture, the ultimate application of brute force to try to get something done, and that he is spending so much time attacking Obama. Obama represents brains. Obama represents the triumph of the intellectual, the egghead, the geek. But at this moment in history, he also represents a repudiation of the "brute force school," essentially because he has already begun to expose the flaws of that approach to life.

GM has failed in part because its employees believed their own hype, that there was something special about American cars. There are special American cars, sure - the Corvette, the Mustang, the Jeep. Those are arguably the three most iconic American cars ever - each has been made for decades. And each is a very macho car.

My family history is deeply intertwined with that of Detroit and the automotive industry. One of my great-grandfathers was the construction foreman on Henry Ford's mansion. My paternal grandfather started out life as a coal miner, moved up to the assembly line at Ford, went to trade school at Ford, and became an engineer. He only finished eighth grade, but all four of his kids went to college, and three of them have Master's degrees. I was going to be the first one in the family to earn a Ph.d.

My grandfather worked hard on the assembly line. But he also worked hard to make sure that that was exactly the kind of job that I would never have to have. I disagreed with my grandfather on just about every topic in politics, but I am forever grateful to him.

The old white guys whose world is disappearing are scared and angry because they don't understand this new world, and they don't feel like they have a place in it. What many of them don't appreciate, and what the rest of us should be grateful for, is their role in creating it.

Brains has triumphed over brawn because that is what brawn has been working towards. Not just in America, but all over the world, and not just in the last few years, but forever.

History always marches on, but sometimes it tramples. Conservatives celebrate capitalism because it holds people accountable. But they don't like the process of being held accountable any more than the rest of us.

Voting in California today

There are elections today in California. Some of them are the regular assortment of scattered special elections, runoffs, etc. Those are all location-specific; no statewide offices are at stake. There are several propositions, however, 1A through 1F. They are mostly dealing with the budget - that would be the dysfunctional California state budget that is a huge mess in many ways.

I am a hardcore political junkie, but I have been trying to avoid this one. The cause is not hard to figure out; California law requires a two-thirds majority to pass the budget. Republicans, who are in the minority and probably will be for the foreseeable future, dig in their heels and resist any kind of compromise on cutting spending and/or raising taxes. It doesn't help that our governor is a Republican; there is very little love lost between him and the Republicans in the legislature. Most of them consider him a RINO (Republican In Name Only).

We have a massive budget deficit that I have been trying hard not to think about. Most of the propositions are band-aids over this mess. I voted for most of them, because we have to fund certain things. But I really didn't want to.

Democrats and Republicans are basically playing chicken. Neither wants to blink first. Democrats don't want to cut spending, and Republicans don't want to raise taxes. Republicans think they can win this because they hate government already, so they figure if the state goes off a cliff, they will be proved right.

I, of course, think Republicans are being stupid. A large majority of Californians are Democrats; this sure ain't gonna make them feel better about the Republican party. Republicans probably think that they're well-positioned to hold onto the governor's office in 2010, because they have a couple of very rich candidates running. But Arnold is only there because of a quirk of history. He won election because Gray Davis was one of the least charismatic politicians in California. Then Arnold won reelection because his next competitor - I don't even remember the guy's name - was even worse. Arnold is not just the most famous Republican governor in the country, he is one of the most famous Republican governors in the history of the country. If these initiatives fail, which it looks like they will, he will look even more like a failure than he already does, and he ain't doing well. This will be yet another black mark on the Republican party.

I think the Republican Party has miscalculated what will happen if too many things really do get cut. I think a lot of anger is going to boil over, and it is going to be directed at them.

Polls close in less than 10 minutes. Turnout is expected to be extremely low. We live in interesting times. I think I'm going to be checking out Calitics.com a little more often for the next few months.

A unique solution to the housing problem

We have had more than our fair share of problems because of the housing bubble out here in southern California, particularly in the farther reaches of the Inland Empire, where houses sprouted like weeds, with little rhyme or reason. Or, more importantly, economic rationale. Now one bank that repo'd some houses has a unique solution: it's tearing them down. It makes more financial sense for them to destroy them than to try and finish them and then sell them. There's almost no salvage value; a granite countertop went for $40, some scrap lumber was traded for a six-pack of Corona. 30, 40, 50 years from now, this will live on as a symbol of a world gone mad.

Defending rich bankers

I can't believe I'm writing this post, but I have to defend investment bankers. Matt Yglesias wrote a rather unnuanced post (quoted at TPM) about the people who got us into this financial mess with this line:

I was saying that whatever one thought should be done with large financial institutions as a policy matter, surely we could agree that the executives at these institutions are primarily bad people.

He immediately equivocates - a little - by noting that others did not agree with him. So he explains why he thinks these people are bad:

They’re multi-millionaires who want to earn millions more. It’s possible, of course, that Vikram Pandit really does find being a bank executive to be intrinsically interesting. But a good person, who’s primary passion was the life of a bank executive, would be donating the bulk of his massive compensation package to charity. But that’s not what Pandit’s doing. Rather he, like virtually all executives at major firms, is living a life that’s primarily oriented around an ethic of greed.

I must protest. One of my great pet peeves is intellectually sloppy social criticism, particularly from liberals, and this is a prime example. Dear God what an awful generalization. He's dismissing hundreds of thousands of people with a single judgment. And an extraordinarily simplistic one, at that. Yglesias is a good writer, but his ability to turn a phrase fails to mask a seriously underdeveloped argument:

it’s a sign, I think, of a kind of sickness running through American society that we’ve lost the willingness to just say clearly that ceteris paribus greedy behavior is not virtuous behavior. In the spirit of decency, of course, we recognize that none of us are without sin. It would be crazy to try to condemn everyone who’s ever done anything greedy to the gallows. But the fact still remains that greedy behavior is not admirable behavior and that, as Krugman says, it’s very unlikely that the “best” young people were going into finance. And to say that they’re not necessarily good people need not entail that they’re criminals. Simply the fact that the best people are people who aren’t primarily driven by greed. (emphasis in original)

I agree that a shift in our culture's attitude away from worshipping the markets would be a most welcome and healthy change. But let's throw out a couple of counterexamples: Bill Gates and Warren Buffett. Both of them are wealthy beyond belief. Each of them could have stopped accumulating money decades ago and still been billionaires. Both of them have made the decision, as Yglesias thinks they should, to give away the bulk of their fortunes. Gates has dedicated his life to it, and is putting his prodigious talents into his foundation, rather than Microsoft. Before each of them made the decision to give away their money, they could have easily been characterized as insanely greedy for hoarding tens of billions of dollars. But now that they are giving it away, they are models of good citizenry. What has changed? Nothing except time.

What if Bill Gates had stopped accumulating money when he was worth $100 million? Would we think better of him? If he had not made his fortune, he would not have it to give away. If he hadn't made it, that money would be in the hands of others, who presumably would not have had the same incentive to give it away. If one person has $30 billion, he can easily give away $29 billion and still have lots left over. He could give away $29.5 billion and still have lots left over. But if 3,000 people each have an average of $10 million, they will not be giving away $29 billion of that. So, in a perverse way, it's actually better for Bill Gates to make tons of money and give it away. Not that I want to use this argument to justify the extreme accumulation of wealth; there are a fair number of people who don't give away their money and waste it on expensive wines and fast cars.

What I object to here is the ridiculously broad generalization that "greedy behavior is not admirable behavior." Well, yeah, but that's not exactly an original insight. I believe that was outlined in the Ten Commandments. Every society struggles with finding the balance between meeting the needs of the society and allowing individuals to maximize their own self-interest. And every society is in constant danger of losing that balance. And every society occasionally does lose that balance, and either individual initiative is suppressed, or greed is unleashed. We are currently going through a period of reevaluation of that balance, because we lost it. Agreed.

But we are not going to redress this imbalance with these kind of pronouncements that an entire class of employees is "bad." There are dramatic policy changes that we have to debate and enact. I am a big fan of raising top income tax rates and the capital gains tax.

I am also a big fan of changing our culture away from excess greed. I am a big fan of bringing some good old humiliation down on the heads of people who went too crazy on Wall Street. Some of that is going to come in the form of people wielding bludgeons, financial, legal, moral, political, and cultural.

But the best moral arguments require a degree of distinction and discipline largely missing from this post. Yglesias' last line is particularly unhelpful:

the best people are people who aren’t primarily driven by greed.

I worked for an investment bank in New York, Babcock & Brown. This isn't a great time for B&B; its stock was listed in Australia, and has entered "voluntary administration," i.e. bankruptcy. It was hit hard by 9/11 (airlines were big customers). It was very much an investment bank that made money by moving around pieces of paper. I have no idea how much good it did for society by doing so. I do know that they found investment banking intellectually stimulating.

But working for B&B was one of the best experiences of my life. I liked just about everybody there, and they were basically good people. They treated me, a secretary, very well. I would have walked across hot coals for my boss, Joni, who was one of the best managers that I have ever worked for. One of the other best managers I have ever worked for was her boss, Jim. I think I learned more about management there than I would have if I had gone to Harvard Business School. It was, in some respects, a better experience for me than earning my degree in philosophy at the very progressive college I went to, Swarthmore.

So I find the argument that the "best" people do not work in finance particularly unhelpful. Are there "better" people than investment bankers? If our criteria is service to others, then, yes, I would put priests, nuns, and missionary doctors on a higher plane than investment bankers. But we need bankers, and we need good people in finance. And priests, nuns, and missionary doctors need financial professionals (full disclosure: my father is a stockbroker, and some of his clients are missionary doctors). Are there bad people in finance? Obviously. But they are not all bad, and to describe them that way is intellectually and morally sloppy.

I don't like intellectually sloppy social criticism for the same reason that I don't like intellectually sloppy investment banking. Bad ideas can infect dialogue and influence behavior, and whether they are bad ideas on a progressive blog, or bad ideas on a Citibank spreadsheet, they are still bad ideas. Bad investment banking decisions are made by people who let an unhealthy emotion, greed, influence their analysis. Bad political decisions are made by people who let an unhealthy emotion, anger, influence their analysis.

Greed and anger have some things in common; they can both be very effective in the short-term, but highly destructive in the long term. Most importantly, they can both be addictive. Venting righteous indignation can provide an adrenaline rush, just like making millions of dollars can provide an adrenaline rush. This is what Yglesias is doing, and where the danger lies in his argument. He's giving himself permission to pass judgment, with very little nuance or distinction, on hundreds of thousands, if not millions, of people. I don't think he has the right to make that judgment. I know I certainly don't have that right. But he has an incentive to make an intellectually sloppy argument, because by doing so he gives himself permission to vent some righteous anger, and thereby make himself feel good. Focus, Matt, focus. Keep your eyes on the long-term. I think it's perfectly fine to criticize investment bankers as greedy. They are greedy. But no person can be reduced to a single adjective. Calling them bad people, as a class, crosses the line. At least for me. And it crosses the line for both moral and intellectual reasons.

I also dislike sloppy blanket judgments like this because I think they are politically unwise. If your political opponents can take apart your arguments, you lose credibility. This is why I don't like Michael Moore, the documentary filmmaker. I don't think he has much credibility because he is so intellectually sloppy.

There's one detail about investment banking that Yglesias completely fails to mention: most people leave it fairly quickly. I knew several people who worked for JPMorgan or McKinsey or some other high-pressure professional services corporation for a year or two or three right out of college, made a chunk of money, and then went off to do what they really wanted to do with their lives. If you're 23, you can work 80-hour weeks, and someone is willing to pay you enough for you to pay off your student loans really fast, why not? You may be able to do the world a lot more good than if you went straight from college to teaching underprivileged children, but found yourself broke at 35, whereupon you have to take a job that pays you a lot of money. There are many people who work for investment banks, and they do so for a very wide variety of reasons. If your parents are poor immigrants, and you want to be able to provide for them when they are elderly, you have strong incentive to make lots of money quickly. If one or both of your parents are gone, you may need to provide yourself with a safety net. This is a problem with Yglesias' blanket judgment; he's making judgments where none may be justified. Which is ultimately self-emasculating. If you pass judgment on someone who clearly does not deserve it, you may very well end up embarrassed, which is the antithesis of empowering.

There are great policy debates ahead of us. Liberals have a great deal going for us at the moment. Some great leaders, many smart people, momentum, many opportunities to prove ourselves and our ideas. This is a time of crisis, and, as Rahm says, "never waste a good crisis." Resolving these crises will require exceptional intellectual discipline. There are many, many ideas out there about what went wrong and how it can be fixed. We have to careful as we evaluate policy options. We can't overreact. We absolutely must be prepared to admit that we are wrong, because we will be. To be so prepared, we must remember that we are human, and that we are fallible. And we must remember that the same is true of the people with whom we disagree. Investment bankers are human beings, and we must understand them, and treat them, as such. They are not inherently "bad."

The crisis and law firms

The NY Times has an article about how the economic crisis is affecting law firms. As someone employed in a law firm, I have a professional interest in this. The Times points out that

The silver lining, if there is one, is that the legal world may be inspired to draw blueprints for the 21st century.

That would be a good idea. I think some of the downsizing that we have seen is going to be permanent. There simply will not be as many deals in investment banking going forward, which means less need for lawyers. I'm also in favor of reining in excessive lawyer salaries, although I don't think my own salary is excessive (I'm not a lawyer).

The Times article also points out that the crisis may force a change in law schools. Again, a welcome possibility. Law schools, like, I suspect, many professional grad schools, enjoyed some benefits from the recent economic boom times. They could charge higher tuitions, and ask for more money from alumni. All without having to rethink their fundamental value proposition.

But do students really need to stay in law school for three years? I didn't go to law school, but why should they? Isn't that just tradition? Would it be possible to start studying for a law degree as an undergrad, and continue studies in law school with just a year or two of study? Why not? My grandfather was a successful lawyer, but he didn't even have a bachelor's degree. He was working as a clerk at an insurance company after graduating from high school, when someone suggested he go to law school (this would have been the 1920's or thereabouts). He said "What's that?" because he had never heard of law school. But he found out what law school was, went to one, became a lawyer, and sent all three of his daughters to college.

Law schools haven't had much incentive to try to provide better value for their students because they haven't had to. They could charge insane tuition because students were willing to take on massive amounts of debt, knowing that they would be making good money as soon as they graduate. If your starting salary is $150,000, you don't mind debt of $80,000. But that also means that you aren't going to be taking a job that only pays $50K. Like, say, as a government prosecutor.

I suspect the layoffs we are seeing are going to result in an imbalance of supply and demand. There are a lot of laid-off lawyers out there, and a lot of them are very good. If I were one of those, I would band together with some other lawyers recently laid off, and undercut the prices charged by the higher-end firms. That would be a great silver lining for this crisis.

This would be another great time not to panic

I've been thinking about that Rudyard Kipling poem, "If," particularly this line:

"If you can keep your head when all about you
Are losing theirs and blaming it on you;"

What a time to apply an overused line. This is about the clearest example of that idea at work that I have ever seen. Everywhere I look I see and hear panic, frustration, confusion, anger. I also see hope and some optimism. But lots of angst.

Except, of course, in Barack Obama. Or in Michelle Obama. Malia and Sasha are probably reasonably calm, too, but that's to be expected from kids who have incredibly cool parents.

In the WaPo opinion section, slings and arrows are coming from the left and right. William Greider, national correspondent for The Nation, and Baby Boomer liberal relic, is worried about something called the "corporate state," which sounds ominous, and would probably have me trembling in fear if I couldn't dismiss it as a meaningless cliche reminiscient of the worthless blather I read when I was studying the Frankfurt School. What the hell is a "corporate state?" A government controlled by corporations? The relations between government and corporations in this society is incredibly complex and constantly changing. Using the phrase "corporate state" dismisses that complexity as unworthy of discussion, and replaces it with a trivial demogogic appellation. Here's a great example of Greider's stale tactics:

The president is now trapped between these two realms -- the governing elites who decide things and the people who are governed. Which side is he on? If he does not choose wisely, the anger could devour his presidency.

Or it might not. The anger at AIG and their close friends on Wall Street might stay directed at corporate idiots and criminals. Maybe, just maybe, the President of the United States, an incredibly gifted progressive leader, might be able to focus that anger and achieve some kind of real reform. He might decide that he is on the side of the people who elected him. Which would mean that the anger would not devour his presidency.

From the right, Kathleen Parker, one of the nicer conservatives in the punditocracy, writes a pieces titled "The Foundering Father," and spouts just as much random nonsense as Greider, this time accusing Obama of not being in charge. She quotes his response to the AIG mess, "The buck stops with me," and then dismisses it as a cliche. That's an interesting rhetorical device: provide evidence that your political opponent is doing exactly what he should be doing, and then use an almost-clever line to diminish the significance of his achievement.

I think Obama is still doing a fantastic job. I also think a little perspective is in order. I'm going to repeat the oft-repeated line that Obama has been in office just a few weeks, but I am going to add a caveat.

Obama inherited a number of problems. He is tackling many of them. He has started cleaning up some spectacular messes. He and his staff have made some mistakes cleaning them up. But that is to be expected, and Obama warned repeatedly that mistakes would be made.

Obama's big problem right now is not a lack of focus, it's not the random mistakes, it's not the criticism from the right or left. Obama's problem is that he has spent a fair amount of political capital, he's attempting the impossible on several fronts, and, as of right now, Sunday morning, March 22, 2009, he has almost nothing to show for it. But that's just a function of time.

The analogy that I would like to propose is this: imagine a married couple, who have just gotten married. They've just bought a house together. They moved to a new state so that one of them could get a better job, and the other one is unemployed. The honeymoon was a couple of months ago. They're moving in together, merging households, changing addresses, adjusting to lots of new realities. They have a big fight. About something each thinks is important, but really isn't. In the middle of the fight, neither wants to compromise, each may be wondering, "why did I marry this person?" Things look ugly.

But then one of them agrees with something the other one said, and apologizes, and then the other apologizes for something else, and they start to mellow. They get over it. They go out to dinner and a movie. Etc., etc.

That's where our political situation is right now. We're in the middle of the fight. We've got lots of boxes to unpack, and the TV isn't set up, so we can't watch movies, there are plumbing problems we didn't know about, the neighbors aren't as friendly as we had hoped, we miss our old friends, haven't seen family in a while, etc. We know this marriage and this move and the new job were worth it, but we don't see a payoff yet.

We are spending trillions of dollars on things that we don't understand. Will we be able to solve the credit crunch, the recession, etc.? Eventually. Are we doing this the right way? I have no idea. We've pumped $170 billion into AIG, and there are no visible signs that we have gotten anything in return. All those "shovel-ready" programs funded by the stimulus package? Has anyone seen a bridge repaired, a pothole filled? Probably not. Are we going to be wasting billions? Yes. If 1% of the stimulus package vaporizes into thin air, that's about $8 billion down the drain. And that would be a best-case scenario.

But at some point, the fight is over. The boxes are unpacked, the cable TV is working, the new dishwasher is installed. At some point the potholes will start to be filled, the bridges repaired. Troops will start coming home. We'll be making nice with the Iranians and the Syrians and the Cubans. There won't be as many people arrested for using medical marijuana in California and other states that allow it.

And I will be thankful that Barack and Michelle (and Malia and Sasha) and all the people who work for them chose this time as a great time not to panic.

Those AIG bonuses

So AIG paid some bonuses while they were taking billions of dollars in government money to avoid bankruptcy. Wow.

Like about a gazillion other people, I am pissed off about this, but not too pissed off; in the grand scheme of things, this doesn't surprise me that much or bother me much more. $165 million is not that much money compared to what we're spending to keep AIG afloat, and I think I am just not that surprised any more at the sheer stupidity and greed of people on Wall Street. I'm saving my anger.

What I am surprised at is the stupidity of whoever wrote these contracts. I can understand incentives in a contract: make X amount of money, and we will pay you Y bonus. I have no problem with that. But apparently these people wrote contracts that promised payment of bonuses even when they clearly DID NOT make X amount of money. They must have written contracts that did not take into account the fundamental ability of the company to actually pay the money promised by the contract.

AIG does not have $165 million to kick around. We have lent them tens of billions of dollars. They will make the argument that if they don't pay people, they'll leave. Fine. Let them leave. Then hire someone else and give them incentives to clean up the mess. Right now there are lots of unemployed investment bankers out there. I have no problem incentivizing people to clean up a mess. I have real problems with paying people for failure.

One ancillary question running through this debate has been: can we get the money back? How about taxing the bastards? Megan McArdle asked Laurence Tribe about the technicalities involved in that. I don't think it would be a good idea to target these people particularly. I think Obama is going to wait until the argument swings to whether or not we should raise the capital gains tax, or the top tax rate on the wealthy. He's going to have a fair amount of ammunition. The Republicans argue that the private sector is a better steward of money than the government. Right now, that is just laughable.

Cramer v. Stewar: this is what accountability looks like

So Jon Stewart brought Jim Cramer onto his show for the Smackdown Of The Year. Kudos to Cramer for having the guts to go on the show, when he knew that it was not going to a fun, lighthearted interview. I don't really have a strong opinion on Jim Cramer. He seems like a decent guy, but I'm not a fan of the premise of his show, acting crazy about investing. Investing is driven by two emotions: greed and fear. Either can be productive; either can be counterproductive. Successful investors are those who manage to soberly rational about how and why they invest. Emotions cannot be eliminated from investment decisions. But they can be modulated, and they should be understood. Yelling and screaming is not, to my mind, conducive to careful analysis.

This is not to say that Cramer is not a smart guy; he is. He knows his stuff. It's impossible to judge how he has affected markets or individuals specifically.

But Stewart makes a great point: whose side is a network like CNBC on? Are they on the side of the players gaming the system and making millions by being wildly irresponsible, or are they on the side of the masses watching their shows? Cramer is honest enough to admit that he was close enough to some of these people that his familiarity with them may have compromised his judgment. Yeah, just a little, maybe.

One of the great virtues of capitalism is that it occasionally does hold people accountable for their mistakes. This is one of those moments. Jon Stewart represents Jim Cramer's customers, holding him accountable in a very public way. And Cramer knows that he has no choice but to face the music if he is to have any credibility. Small comfort as the markets melt down, but better than nothing.

One thing that Jon Stewart does not point out is that there is always a conundrum in financial reporting: if you are smart enough to understand the financial world well enough to be able to critique it, you probably aren't going to be working for an organization that is truly critical of these financial institutions. This is why I don't read financial analysis in newspapers and magazines like The Nation and Mother Jones. It's why I do read financial analysis in newspapers and magazines like Forbes and The New York Times. It's one reason I have a subscription to The Financial Times. This does not necessarily apply in areas like human rights and civil rights; there are great lawyers working for Amnesty International and the ACLU.

Another part of the problem is the audience. If someone had written a great, penetrating piece in The Nation several years ago criticizing collateralized debt obligations, no one would have been surprised that The Nation was criticizing capitalism. And no one would have been surprised that readers of The Nation were receptive to an argument that was critical of capitalism. On the other hand, if Jim Cramer had been critical of collateralized debt obligations, he would have had more credibility, but it's not clear that it would have made much of a difference. As someone once said, it is difficult to convince someone of something, if their paycheck depends on them believing the opposite. As long as everyone was making money, the most damning questions didn't get asked, answered, or even acknowledged. Except by short sellers.

As for this particular interview. There has been a great deal of discussion of this segment; it made the front page of the FT today. There were some interesting comments about it on Megan McArdle's blog.

Cramer himself dismissed Jon Stewart as just a comedian in the days before he went on the show. That misses the point of comedy like Stewart's entirely. Sure, there are large swaths of comedy that are low-rent, bordering on the imbecilic. But someone like Jon Stewart has to think about the issues he is discussing to be able to make jokes about them. His articulation of the issues in this interview is superb. Comedy at its best offers instant insight.

So this is what accountability looks like. Enjoy. I am posting all three segments of the unedited interview.

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Unedited Interview Pt. 1

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

Part II:

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Unedited Interview Pt. 2

Daily Show Full Episodes
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Jim Cramer

Part III:

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Jim Cramer Unedited Interview Pt. 3

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

A very British take on the crisis

I am poaching more from Andrew Sullivan today. This is apparently a British comedy show that I have never heard of, with a very funny take on the crisis:

A solution for those absurd banker bonuses

Paul Krugman is pissed about the bankers who have lost hundreds of billions of dollars, and have yet paid themselves large bonuses. Maureen Dowd is also pissed. She wants disgorgement - she wants to get the money back. Of course, many, many, many people are pissed. I would say the "pissed off" group includes pretty much every American who does not live in Greenwich, Connecticut or various neighborhoods in Manhattan.

I would like the money back as well, but I don't want it back by demanding back their bonuses. I'm going to take the logic that justifies these bonuses just a bit further.

There are a couple of justifications for paying people in the financial industries lots of money. First, there's the idea that they earned it. If I negotiate a deal worth $100 million, and I negotiate a 1% fee, that means that I get $1 million. And I get it because I negotiated it, and all parties agreed to it. I am selling my services for what they are worth. That's the free market at work. I have no problem with that. I've benefited indirectly from that system; I used to work at an investment bank as a secretary, and I got good bonuses because the people that I worked for negotiated good fees for our company.

The second justification for paying large bonuses is that if you don't pay your best people well, they will leave and go elsewhere. There are a couple of problems with this argument at this point in time. First, where are they going to go? Pretty much all banks are in the same boat. Second, if your bank just lost tens of billions of dollars, then the people who work for your bank are not very good at their jobs. Seriously, would you want "Lehman Bros. mortgage bond trader" on your resume right now?

But let's take this justification at face value. The idea is that people who provide essential services should be compensated well for providing those services. Lawyers who negotiate extremely complex contracts should get paid more than ambulance chasers. Investment bankers who negotiate multibillion dollar LBOs should be paid more than people who arrange standard mortgages. As I wrote above, that's the free market at work.

But let's think about this a little differently. Right now these banks and other companies are in dire straits. The federal government is providing an essential service by bailing them out. Some people think we should be demanding partial or total ownership of these banks in exchange for our money. We're handing over large checks, we should get equity (this is Krugman's argument). But that way, some would argue, lies socialism, and banks should not be nationalized. I tend to agree. I'm not in favor of the government running my bank, even if it's in serious trouble.

When lawyers negotiate deals, they don't ask for equity in the deal, unless there are unusual circumstances; they get paid straight fees. Bankers might get equity, and venture capitalists by definition do get equity. So some equity in exchange for the taxpayer's money is a good idea, but it will not work for the whole deal.

So let's get back to this idea of high fees for essential services. The government is definitely providing an essential service to these bankers and insurance companies, and all their assorted associates. How can we charge them high fees for these essential services?

Simple. Raise their taxes. The Bush administration lowered taxes for the wealthy, arguing that would stimulate greater economic growth, because individuals are better stewards of their own money than the government. That argument is not working all that well right now.

I would love to see Republicans try to argue against raising taxes right now. I understand that raising taxes in a recession is supposed to be a recipe for disaster, so maybe we can wait six months or a year. But we are definitely providing essential services to rich people right now.

Rich people argue that they are wealthy because of their own initiative. This is true to an extent, but not the whole picture. They are capable of acting on their own initiative in ways that make them wealthy because they live in the United States of America. If they lived in Zimbabwe, no matter how resourceful and ambitious they are, they would not be wealthy (unless they were part of the corrupt ruling regime). The government is not only providing essential services right now by bailing out the financial system, it has been providing essential services for decades. Centuries, even. A reasonably effective, if often flawed, judicial system. An excellent, if often flawed, educational system. Roads, airports, etc.

One large problem with this bailout is that if the banks et al. lose huge amounts of money, even if they don't pay bonuses, they don't pay negative bonuses. Even if we get every dime of the bonuses back, all $18 billion, that's still a tiny fraction of the money required for the bailout. We can't make these bankers pay us directly for providing the essential service of bailing them out. And even if we could get money from them, it still wouldn't be enough.

One of the essential services that the government is providing is a form of insurance. The FDIC works because it is an insurance company, of sorts. Banks pay insurance premiums on their deposits; the FDIC uses that money from the premiums when it has to bail out of savings and loan or a bank. That's what the (former) $100,000 limit was for; deposits were insured to $100,000. Now it's $250,000.

There is no official insurance fund for the bailout, besides the Troubled Asset Relief Program, but that is an ad hoc insurance program, developed on the fly. The insurance fund that the banks are relying on is the pool of money that is the United States government's ability to borrow money, which is, in turn, backed by the financial stability of the United States as a whole. So, in a sense, the taxes that we all pay are payments into this insurance fund that we call the United States government that is bailing out our financial system. This is, in a sense, another version of the "essential services" that we, as a country, are providing to bankrupt bankers. We are providing them with ad hoc, made-up-on-the-fly insurance coverage for their mistakes. The problem is that they haven't paid into the insurance fund as fully as they should have; that's why the federal government has a huge debt.

So, to make sure that the insurance fund that we call the US government is fully funded, we need to charge the people who rely on that insurance fund the proper premiums. Which, in this case, is called "raising taxes." I think we should start with the capital gains tax.

Depression or recession?

Are we in a depression, or in a recession? I'm starting to get depressed just thinking about it. Tyler Cowen lists eight reason why he thinks it's a depression. Megan McArdle, in whose blog I found the link to Cowen, adds that she thinks we might be in a depression because "we don't understand how to get in or out of it."

I'm not enough of an economist to make the judgment. This is certainly the worst recession I've ever lived through.

One thing that strikes me that is different about this is that we are seeing massive increases in efficiency and productivity because of the Internet, but we are not seeing increases in wealth because of those increases. It's ridiculously easy to find news, or music, or just about any kind of entertainment, but most of it is free, or pays its content creators differently than old media does. NYTimes.com is vastly more efficient at making the content of the NY Times available to a worldwide audience, but it's not making as much money for the NY Times as the paper edition.

That will eventually be corrected. At some point the business models will adjust. They are already starting to. But there remains a great deal of pain that we have to go through first. And there is almost nothing that the government can do about that.

There is nothing unusual, of course, about changes in technology precipitating changes in business models that lead to wrenching change in an economy. But it's happening very quickly, and across the world.

Again, I'm not an economist, so I don't know how to crunch the numbers for that. But it strikes as something unique about this economy

The crash of '73 - 1873

Nice article from the NY Times about the Panic of 1873. Some interesting parallels with what's happening today - absurdly high prices, too much debt, credit crunch, failing banks, direct government intervention.

Megan on the crisis

Megan McArdle, economics blogger at The Atlantic, has a good explanation for the financial crisis. It's not completely comprehensive, but it's a fairly thorough examination of the bad mental habits so many people developed. She's not a fan of either political party, so she calls both out for their failures. Her basic conclusion is that mass delusion reined.

Complexity theory and the financial crisis

The Washington Post has a very good Op-Ed piece about how complexity theory explains the financial crisis. Finally. I've been thinking about how complexity theory could help us all makes sense of this mess. This is a good first step.

They key takeaway is that companies evaluated risks sui generis, as individual phenomenon, without analyzing connections to the system as a whole as thoroughly as necessary. Given normal conditions, the computer models predict that financial instrument X has Y percentage of going wrong. However, if conditions change very dramatically, beyond the parameters of the model, the chance that something will do seriously wrong also change dramatically.

What's key to understand is that the introduction of these computer models were themselves a change in the conditions of the markets.

Bailout passes Senate

The bailout plan passed the Senate. Not much of a surprise, and mostly a good thing. There are $150 billion in new tax breaks. That sounds like a huge amount, but two are expected: extending tax breaks for renewable energy, and changing the alternative minimum tax. Both of those are longstanding issues that had to be resolved soon. I'm in favor of both of them. I'm not impressed that the costs aren't accounted for in this budget, but I'll take what I can get. Let's worry about balancing the budget with the next administration.

For now, get the thing passed.

Oops.

Time for a redo; the House did not pass the bailout.

I admit to some relief. Paul Krugman was in favor of it, but just barely (like pretty much everyone who was in favor of it, I think). He was tolerant of the policy, and recognized the politcal reality; this was the best the Democrats could do and expect any kind of Republican support at all.

Kos didn't like it, although he recognizes the need to do SOMETHING.

I'm torn between Krugman and Kos; I don't always agree with either, but I trust Krugman on economics, and I respect Kos on the politics.

All of that, of course, is irrelevant right now. The thing is dead. It won't come back up for at least a couple of days. I don't expect opinions to soften in the interim. The people back home are not going to discover a new love for Wall Street.

It's becoming clear that, for all his ability to manage the crisis day-to-day, Henry Paulson didn't play the politics of this well. That's not really his fault; he's not a politician. But his initial power grab didn't go over well, and springing the "$700 billion" figure out of the blue, immediately after the Merrill Lynch-Lehman-AIG few days of terror, didn't help. That's a huge chunk of change to start talking about all of a sudden.

I'm sure Paulson didn't calculate the politics of how the House and Senate would react; first, he didn't really have time, second, it's not his background. SOMEONE in the Bush White House should have realized that this was not going to play in Peoria. Of course, that would be assuming that someone in the White House would have a clue how this is going to play in Peoria. Which, obviously, no one, least of all Bush, does.

I've said it before, I'll say it again: George Bush's biggest problem isn't that he isn't very bright or isn't intellectually curious or even that he's a stubborn SOB. George W. Bush's problem - and now, our problem - is that he simply isn't a very good politician. He just doesn't know how to read other people very well, particularly when they potentially disagree with him. Which means that he does not anticipate problems like the House Republicans not going all with him. Which means that he has no idea how to GET them to go along with him. He just does not have the empathetic imagination: he cannot imagine another person's perspective very well.

Bill Clinton, of course, was an absolute genius at that. And I mean genius in the literal sense: he was not brilliant at it, he was a genius at it. He could imagine how all the other parties in a particular situation would react, not merely to a policy proposal, but to each other. Bush has no idea that that is even an important thing to try to do.

So now we're stuck with a broken deal and a financial system in crisis. We know what the minuses are: an incompetent, powerless president; a furious electorate; raging uncertainty in the financial markets; a fractured GOP, with open revolt among members.

Are there any pluses? The Democratic leadership seems to be united. Henry Paulson presumably now has a better sense of how to play the politics; he seems to learn fast. The rank and file Republicans in the House have now had their chance to make themselves heard; maybe that was enough for some of them.

Maybe Congress will come up with a better bill. It will come up with a different one, that's for sure. Maybe it will be dramatically different; maybe it will just be tweaked.

One variable I can't predict is how John Boehner and the rest of the House leadership will react. They may very well be furious at Bush for not playing this well; at the very least, they can't be happy with Bush. But if this goes down again, Wall Street is going to hold them accountable.

There's one wild variable: the VP debate is on Thursday. Ain't no way in hell this is going to be postponed. If Sarah Palin holds her own, maybe Republicans will be more confident of victory for McCain in November. But if, as seems more likely, she tanks, they may be ever-closer to panic mode. How that will play is anyone's guess.

Government seizes WaMu

The federal government has seized Washington Mutual. This is the largest bank failure in history.

I'm finding this out late at night, so my thots are brief. I don't bank there, so it doesn't affect me directly.

My first thot is that this makes the bailout picture more interesting, and hopefully brightens the picture a bit, because it takes a large degree of uncertainty out of it. JPMorgan Chase is taking over WaMu's retail operations, and writing down $31 billion in the process. That's a large chunk of change that the government won't have to worry about. So this is one example of the free market actually working. The strong and smart survivor, i.e. JPMorgan Chase, is taking over the weak failure. With the government's help.

It's not good news for WaMu, but it might be slightly good news for the rest of us.

Not suspending blogging

My friends and fellow Americans, and fellow citizens of the world: I want to assure all of you that I will not be suspending my blogging because of the current financial crisis. You may be certain that I will continue to provide deep insights and the occasional witty commentary for your edification and pleasure, despite the hole that Wall Street is in.

Never fear! Even if my presence is required in a distant city, I will keep up my obligations to you. To all of you. I will be in constant communication with our nation's leaders if they do, in fact, require my participation, which they might, because, you never know, there's always an odd chance that the perspective of an ordinary American might be the breakthrough needed to solve this crisis.

I will also keep all of my commitments to late night talk show hosts, even though I currently have no such commitments. If Jay Leno, or David Letterman, or Jon Stewart, or Stephen Colbert, or even Ellen DeGeneres calls, I'll be there for them. I won't bail on anyone like John McCain did on Letterman last night. No sirree! I would do everything in my power to show up for any of them. I would gladly accept free airfare for a trip to New York, regardless of how it might interfere with my life.

Thank you all for your patience and understanding during these, our trying times. I will continue to post updates throughout the crisis about my determination to keep blogging. Given that I occasionally post movie reviews on this site, I may also demonstrate my commitment to solving this crisis by seeing a movie and writing about it. It's the least I can do.

Should the debate this Friday be canceled?

No.

John McCain wants to cancel the debate this Friday so that he and Barack Obama can focus on the economic crisis. I don't think that's a good idea. I think it's a terrible idea. What Americans need now is the opportunity to hear what the candidates think about the issues. The rest of the people involved in solving this can work around the debates. A debate is one of the best possible ways for candidates to communicate with the American people, which is of paramount importance right now.

If the debates are canceled, McCain and Obama will end up talking to other people in Washington. That's not what we need right now. We need them talking to us.

Live-blogging the Senate hearing on the bailout

The NY Times is live-blogging the Senate hearing on the bailout. Thank God there is pushback from both Democrats and Republicans on the Bush Administration's need for speed.

– Senator Dodd, the Democratic chairman of the panel: “I understand speed is important. But I am far more interested in whether or not we get this right. There is no second act to this.”
– Senator Richard C. Shelby, Republican and ranking member of the panel: “Before I sign off on something of this magnitude, I want to make sure we’ve exhausted the alternatives”

What's interesting is the reaction of Republicans from largely rural states. Richard Shelby is from Alabama. I don't know this specifically, but my guess is that there isn't a lot of investment banking going on in Alabama.

What we are witnessing is a breakdown of the Reagan coalition. Reagan brought together religious and cultural conservatives, and Main Street and Wall Street business types. Those groups don't necessarily have much in common beyond an interest in lower taxes and the free markets; Wall Street and Main Street people might be socially liberal.

It is becoming clearer by the day that the fiscal interests of religious and cultural conservatives, particularly in the South, are diverging from the interests of Wall Street. Richard Shelby's constituents do not want to bail out the East Coast elitists on Wall Street. Chris Dodd has a fair number of investment bankers among his constituents, but he's also a Democrat, and there are a lot of people in Connecticut who ARE NOT rich investment bankers.

So if Richard Shelby wants to keep the non-investment bankers in his state voting Republican, he has to stoke the populist fires.

This is going to be interesting to watch. Republicans against corporate greed? Conservatives against the excesses of the markets created by too much deregulation? Hopefully this will be too much hypocrisy even for Republicans.