It is a distinct temptation to concentrate one’s attention, and therefore one’s censure, on the intrigues of Wall Street. And often mere intrigues are what they are. I am have been perusing a handful of books by business and finance journalists, which among other virtues provide the reader with some picture of the human personalities behind the boom and busts of high-finance engineering. For instance, there seems to have been a very clear personal rivalry, an archetypal clash of masculine ambition, concomitant with the rise of the mortgage-backed bond market. The very invention and early development of this new trade in debt securities confected out of hundreds of mortgages, tracked rather neatly for some years, starting in the early 1980s, with the competitive enmity between Laurence Fink and Lewis Ranieri, of First Boston and Salomon Brothers, respectively.
The portrait that emerges from stories like this is that ritual denunciations of “greed” can easily blind us to the deeper motivations of the men who built up the infrastructure of usurious finance. Simple avarice, the desire for material gain or possession, is only one aspect of the libido dominandi.
The acquisitive impulse in man strives for more than possession of wealth. It aims at prestige and honor and status; it desires luxury and decadence; it aims at that respect or fear from one’s rivals which gratifies the innately competitive man; it compasses, also, that pride of the underdog or outsider who conquers the establishment; it embraces indignation at slights or humiliation, and all the welter of grudges and jealousies and strife that follow its the train. Many passions and pressures are wrapped up in it. Men are creatures of complex motives.
Political economy is a subject that can easily take on the dusty aspect of the lifeless academic. The phrase has an aroma like a university library, and a texture like the dry pages of charts in the financial papers. But political economy remains ineradicably a human drama. It is only a dreary and paralyzing delusion to permit the fascination with numbers and equations to drive from view the human beings at back of it all.
Now (to shift my interpretative lens from political economy to political philosophy), when you consider that part of the very project of modern philosophy was to free the libido dominandi, the human acquisitive impulse, from the supposed mummery of the ancients, both Christian and Classical, you can see why in my judgment modern philosophy itself is implicated in the wreck that high finance has made of our political economy. To simplify an extraordinarily complicated story, the ancients, impressed by man’s capacity for folly and evil, dedicated a goodly portion of their efforts to fettering his mind with the accoutrements of discipline and self-denial and uprightness. Reason was the instrument of this discipline; and since the order of the commonwealth could not but reflect the order in the soul, reason in politics consisted to a large degree in the efforts to instill virtue, piety, civic-mindedness — none of which came readily to fallen men.
The modern revolt can thus be seen especially in the attempt to throw off all the accoutrements of ancient reason, especially to the extent that these were instantiated in institutions, and liberate the natural instinct toward possession, toward conquest, toward acquisition, that is in man. From this supposedly native instinct the moderns derived their social contract. Interest, not virtue, would form the ground of politics: man becomes a political creature in a solemn contract, operating in perpetuity, with the artifact known as the State as its guarantor.
The moderns generally parted ways from there. Hobbes said that men assented to the aboriginal social contract out of fear of violent death. Locke added that security of property was important too. Rousseau introduced to spirited streak of radicalism by suggesting that men were tricked into abandoning their aboriginal freedom, or merely robbed of it physically, by the first possessor or owner. From that provocation a thousand socialist schemes were hatched. Adam Smith softened the whole system with a profound subtlety by arguing for a pre-political sociality that could, under the right circumstances, compel sheer interest to the service of order and prosperity.
The question of where the American Framers stood in this great debate across the ages, between ancient and modern, is a truly fascinating one. Nor is the answer, on my reading, nearly so obvious as liberal historians have supposed. My own view is that the conventional narrative, which presents the Framers as basically Lockeans at heart, is mistaken. It overemphasizes the importance of the Declaration of Independence while neglecting the Preamble to the Constitution and above all The Federalist — both of which documents contain distinctly non-modern aspects. But whatever the Framers intended, in practice the acquisitive impulse in Americans has been strong indeed, and has been permitted a wide compass to operate, usually — but not always — within the bounds of law.
Indeed, historically, America has had political economy that included plenty of speculation and shenanigans and outright fraud — from Aaron Burr to the gold rushes, from the speculations surrounding the railroad industry to the speculations in real estate of our day, America has produced some brazen finance adventurers alright.
America has also flourished, of course, because of the extraordinary enterprise of her people. The acquisitive passion need not always issue in rapine. On the contrary, it has been the peculiar greatness of America to demonstrate the magnificent power of the human mind, creative and ambitious, unleashed for its own private endeavors. I reckon it damn-near impossible for a patriotic American to read of, say, the audacity and industry of the early American shipping, which was so often hampered and harried by British monopolies backed by the might of the Royal Navy, and not feel a thrill of pride in his breast. Or consider the greatness of Hamilton’s vision of political economy, which while perhaps be less than satisfactory to today’s free traders, was utterly indispensible to the prosperity of the early Republic. Meanwhile, no traditionalist can possibly gainsay the credentials of John Randolph of Roanoke as a man of the Right, yet some of this great Senate orator’s most devastating polemics were delivered in the defense of free trade. Nor should we (me included) forget that much of modern finance innovation is not, in fact, usurious. Capital lent in the form of debt securities is a legitimate means of funding ventures. Enterprising men must have access to capital (let us also recall that often in America they have been born with none, and yet this proved no barrier to success and great wealth), and that capital is perforce a risked venture. Some speculation will always remain. That cannot be helped. Venture may be defined as this embrace of risk and defiance of convention, in the hope of eventual gain, and sometimes it goes very wrong.
But the American political economy, historically, was also such that the failure of the ventures could be endured and learned from, in the manner of experience being the teacher of man. The acquisitive impulse was free, but the consequences of its excesses be borne by those who lived by it. There would be no rescues. It is only fairly recently that, alongside the preaching of this dream of global capital integration, we have come to this pass where our speculations must be rescued by the state. The New Deal was the first great revolution along these lines, where the American social contract was refashioned to include a strong element of cushion for failure. Less fully understood, perhaps, is the role played by Globalization in extending and amplifying this revolution. This is where we Conservatives need to really work to revise our picture of the world and man’s place in it. The integration of global capital markets has not, as advertized, produced greater stability but rather greater fragility. A town on the edge of the Australian Outback can go bankrupt because of liquidations and margin calls on Wall Street. Icelandic banking woes can drive asset-management funds all over the world into technical default on derivatives contracts. The failure of capital-market integration (which is what Globalization really is) forced the hand of policymakers to effect a shocking series of interventions into the private economies of the world.
In the end political economy is still a thing of human drives, morals, tendencies, habits, superstitions, artifacts, and ingenuity. And as my old friend Chris Floyd puts it, Globalization is a disordered enterprise that amounts to “the delusion that human life can best be sustained at an inhuman scale.” It is high time we reckoned with this.
Comments (14)
Not even in a state of intoxication would I gainsay the credentials of Randolph. But I will note that he was defending the concrete material interests of his 'section', as was his obligation. I tend to the opinion that Hamilton is the wiser sage for national America, which makes our free-trade regime all the more melancholy.
The acquisitive impulse was free, but the consequences of its excesses be borne by those who lived by it. There would be no rescues.
Well, yes and no. The record of nineteenth-century speculative ventures and booms in failing, and spilling over to affect the fortunes and well-being of the unconnected is rather dismal, as witness the chain of depressions with which that century was laced. The record of minimally-regulated capitalism is isolating the effects of epic failure, prior to the birth of the regulatory state, the Fed, and the New Deal, was itself an epic failure. Capitalists, when they fail, ideally ought to suffer; it is not entirely clear that ordinary persons, knowing nothing of the machinations of the capitalists, nor of their great speculative ventures, should suffer with them, having participated, at most, it ignorance.
Posted by Maximos | December 9, 2009 5:42 PM
If we can't bring back the reality checks, we are doomed. If we keep treating bailouts as inevitable, unavoidable, and even morally required, we are doomed. There is no such thing as a free lunch, and if you keep making the government lie to people and tell them that there is, that they don't have to pay the consequences of their actions (because they've taken innocents hostage who will also suffer those consequences), we are doomed.
My every instinct says this. I have no expertise, but I know from experience on multiple sides--in individual lives, with children, in history, in society--that if you cut the connection between actions and consequences, you have chaos and disaster.
Posted by Lydia | December 9, 2009 9:03 PM
It's sort of a question of, how harsh will be reality when it hits? In my judgment, the more this process of capital integration and abstraction from the sources of real prosperity continues without check, the harsher it will be. The politics of repair -- our efforts will not admit of perfection but, rather, will ever consist in adjustment to circumstances, in compromise and correction, in melioration, in partial or temporary arrangements.
I say that one obvious way to gradually "bring back the reality checks," as you say, is to reel Capitalism in from the heightens of engineered abstraction and the magic of bigness, back down into the communities from whence it came.
Practical methods of doing this are a tricky matter indeed. I lean toward two decisive reforms in banking: (a) restore the quarantine between retail, depository banking and the securities trade; and (b) incentivize and coax the investment banks to return to private partnerships. It was a bad idea to let these gamblers have access to the massive capital of public shareholders. If they must gamble and speculate, let it be with their own capital.
Posted by Paul J Cella | December 9, 2009 9:45 PM
But if they always know they will be bailed out? I just don't see how anything can possibly work as long as bailouts in the long run are assumed. That may just be my ignorance. (Really.)
Posted by Lydia | December 9, 2009 10:22 PM
Paul,
I'm with you, buddy. Keep insurance out of banking and investing. Likewise keep the bankers out of insurance and investing. Then we need a different category for M & A business.
Statists use the selfishness of large corporations as excuses to grab more power from citizens. It's true that large corps. often use their power selfishly in ways that harm the economy. What do you think about using progressive taxation of existing corporations as a means of limiting their size while mandating that new corps. that reach a certain size must divest some of their holdings in order to reduce their size?
How about this strategy for eliminating the property tax? Replace it with general revenue and simultaneously gradually exclude groups like veterans and the elderly from having to pay property tax?
Posted by TomH | December 9, 2009 11:58 PM
Part of the problem might also be that very few people within a large corporation share in the responsibilities. If everyone within a company felt as if they had a real stake in the company (stock options do not count), it would be harder for one man's personality alone to decide the fate of the company. People who have a large stake in things tend to be more prudent and more conservative. Part of the problem is not the bigness, but how the power if concentrated.
There was also the fear of sin and damnation. These, too, have been removed by modern philosophy. It seems as if you are implying that one of the impulses of modern philosophy is to provide a reason for license.
The Chicken
Posted by The Masked Chicken | December 10, 2009 8:17 AM
Lydia -- keep in mind that deposit insurance dates from 1933. So that side of banking has long been under not just assumed but guaranteed bailout, at least for the depositor. The FDIC runs a pretty effective operation in general (though is it under strain now). What it is doing is bailing out the lender. Retail banks borrow from many small lenders (at a very small interest rate) and then use that capital to lend long at higher rates. The make their profit on the "spread" or difference between, say, the 2% they are paying to depositor and the 6% they received for mortgages and business loans.
Now there are ample reasonable arguments against deposit insurance. I'm sympathetic to some of them. But surely as practical matter of political fact, there is no sense is talking as if it were a plausible goal to remove deposit insurance from our scheme of political economy.
Restoring the separation between commercial and investment banking (which lasted until the mid-1990s after all), and returning investment banks to private partnership are in my view more achievable goals (well, the first one at least -- even the Governor of the Bank of England has endorsed something like it).
TomH -- I would say there will have to be some carrot as well as stick in whatever efforts are made to reduce corporate size, some sort of facility and guarantee analogous to all the tricks the Fed and FDIC employ to smooth the way for acquisitions of distressed banks.
As I said in the other thread, I am very very reluctant to support any policy that will hurt American business right now. I make an except for the banks, because the moral hazard of their sector is so extraordinary.
I have a principled opposition to property taxes. Tax income, cap gains, even consumption before you tax property. There is something positively feudal about it; as Maximos has said to me, only half-jokingly, can't we at least get some of the good things in feudalism along with the bad?
Posted by Paul J Cella | December 10, 2009 8:22 AM
Now there are ample reasonable arguments against deposit insurance.
Not to carp and cavil, but informational asymmetries pretty much eviscerate those arguments; the average depositor has neither the time nor the inclination to inquire into a bank's finances, nor even the capacity to understand them sufficiently, to make an informed decision. This is why the history of banking, pre-deposit insurance, was often one of panics, runs, and ruination. Funny how most of the ruination was visited upon the small depositor. Few bankers ever suffered, or suffer today, as a consequence of their failure.
Any increase in articulated complexity entails a corresponding increase in supervision, if the complexity is not to become cover for chicanery, looting, and so forth. In other words, if you want a complex, modern society, you must have complex, modern regulation.
Posted by Maximos | December 10, 2009 9:54 AM
Dozens of bankers lose their businesses almost every Friday afternoon. For some reason my own state of Georgia leads the country in FDIC liquidate-and-sell-assets operations. Now I don't own a business, but I would think that losing one amounts to suffering for most bankers.
One reasonable argument against deposit insurance is precisely the localist one: a man will be more inclined to bank with the neighbor or friend he trusts when there is no assurance from the government. Once put a federal agency on the hook for your deposits and "member FDIC" is all you need to know about a banker. He might as well live a thousand miles away for all you care.
I can think of other arguments too.
Posted by Paul J Cella | December 10, 2009 10:05 AM
Even over a century ago, when a larger percentage of banking was, of necessity, more localized, depositors still lost their money, despite the relationships of trust, & etc. No depositor can know as much about banking as the banker himself.
There is also the complicating factor of fractional-reserve banking: banks lend out 9 dollars for every 1 in deposits, and so forth. This is obviously a type of risk, for the depositor, against which it is reasonable to insure. Not only is the banker lending long, which might be risky, but he never has on hand any more than a small fraction of his obligations, which is inherently problematic when his long lending goes dodgy, and depositors get nervous.
Posted by Maximos | December 10, 2009 10:40 AM
If everyone within a company felt as if they had a real stake in the company (stock options do not count),
It is also possible that stock options and its cousin selling stock short should go by the wayside. Let the stock be owned by its owner, and if someone thinks the price will go up in the future, let him buy it now with actual real live money now so he owns it now, and if he thinks it will go down in the future let him sell off what he has today, (or if he has none) go buy elsewhere.
Or, looking at buying long, it seems to me basically flawed, and one of the symptoms of the prevalent greed lying around, that people only ask themselves (about buying stock) will I be able to sell it to some other sucker for more later and DON'T ask themselves instead will the addition of my capital to the company enable the company to actually create new wealth for the world, out of which I will take my fair share? In other words, their concept of "turning a profit" is almost wholly focused on the later probable selling price, instead of "turning a profit" by actually helping generate new wealth that didn't exist before.
I know that there are economic problems with this, but if my comment above holds any water, it would seem to suggest that choosing to sell stock after only a short time holding it (absent, let's say, a brand new basic corporate policy decision announced since buying the stock) is itself almost a sufficient proof for the investor's point of view to being overly bound up in greed and "let take some other sucker for all he's worth" kind of mentality.
Maximos, I agree with your point about fractional reserves. Can't an argument be made that the only "rationale" for the practice is to leverage a deposited dollar into a greater profit margin, a margin (I would tentatively submit, ready for correction from those who understand banking better than I) which by its very nature is in excess of a rational profit margin since it depends on a pretense of wealth rather than on real wealth?
Posted by Tony | December 11, 2009 10:26 AM
Paul,
If we have to pay an annual property tax, that is really a rent, so there is no actual ownership of real property. The state effectively owns all the real property. It's different than with personal property tax. The state won't come take your car if you fail to pay the PPT. They'll just fine you for using their roads, which upholds the law of contracts.
My strategy regarding property tax elimination was "defeat in detail".
Banks are in severe stress right now. Add stress and the rest of business will suffer even worse. There may come a time to regulate them tightly as regards capitalization, but not now. That doesn't mean that we shouldn't regulate the business that they can engage in, even now.
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