The Only Winning Move

This article is making the geek rounds. It’s the soul-bearing confessions of one of the people who wrote the software that made credit default swaps in mortgages so easy to produce, package and sell. As you’ve no doubt heard, credit default swaps have “Something” to do with the current financial unpleasantness.

I have three things to say about this article.

(1) As a piece of writing, it’s fascinating - in the sense that the mix of emotions on display from our humble author is complex and suitably postmodern. I say “suitably postmodern” because where on the one hand he seems to be unable to decide whether or not (and to what extent) to feel guilty about all of this, on the other hand there’s a dimension of feeling like he needs to put on a public display of feeling guilty not so much because he’s worried about his reputation (he didn’t have to write the article after all), but just because that’s what the genre demands of him. If you’re writing a confessional, there must be guilt. And if you’re writing a “good” confessional, there must be complexity associated with your guilt. And, well, by the end of this I really am convinced that the author contributed about 10% of the content and LITERATURE provided the rest.

(2) It points out for the first time - and I say “for the first time” because I personally am not aware of having seen it front and center in any analysis of the “crisis” before - that “technology” is as much “the culprit” here as any individual trader. The class of political commentators keeps discussing this issue entirely from the point of view of regulation, because when you have a hammer, everything looks like a nail. Sometimes, though, things aren’t politics. Sometimes, even politics isn’t politics. Lots of times, it’s technology instead. And it’s interesting to me - as someone who blogs about politics/economics but works in (some broad interpretation of) technology (I study Lingusitics and Programming and I raise Programming to SpecLinguistics for most tasks) - that someone else had to point out to me that the explosion in computing power, computer ubiquity, and the growth of the internet probably had more to do with the formation of the credit bubble than anything else. After all, these three things were all sine qua nons - not for credit default swaps per se, but certainly for the pervasiveness of them in the noughts.

(3) The most interesting line in the article is this one:

Once upon a time, this seemed like a very good idea, and it might well again, provided banks don’t resume writing mortgages to people who can’t afford them. Here’s one thing that’s definitely true: The software proved to be more sophisticated than the people who used it, and that has caused the whole world a lot of problems.

I think that line is the most intelligent piece of commentary on the mortgage “crisis” that I’ve read. Let me spell out the points I like:

1. Credit default swaps are not a bad thing - This idea has also been expressed by Russ Roberts recently on EconTalk. Don’t ask me which one - one in the last 20, I can’t remember which. Roberts’ point was that in theory these kinds of monetary innovations make the market more stable - by spreading risk around the globe and thus minimizing the risk to any one individual. The market becomes a more robust thing as risk becomes more manageable - which it does if people sell small pieces of it bundled with bigger pieces of “sure things.” Everyone’s bets are hedged, and this makes it (in theory) less likely that anyone will lose big at the poker table.
2. Funny mortgages ARE a bad thing - as NPR trips over its shoelaces on a daily basis trying to convince us all that more financial regulation would have prevented World Hunger, not to mention the recent stock market collapse, it forgets that Economics 101 could have prevented both of these things (really) much more efficiently if anyone had been paying attention. Economics 101 tells you that you can’t sell things to people who can’t pay you and expect to make a profit. That turned out to be true - and interestingly, no amount of government obfuscation attempts (through Fannie Mae and Freddy Mac and securities rating agencies) could hide this simple truth in the end. Another line from the piece: “But when 1,000 similar loans are combined, and the U.S. government, through Freddie Mac and Fannie Mae, absorbs the default risk, you now have a nifty little AAA-rated piece of paper paying one or two points above Treasury bills. And if the value of the loans is in excess of the limit set by the government agencies, your savvy friends on Wall Street can create a class of subordinated bonds that will absorb all the defaults in the deal. With friends like these …” Again - right on point. (A) most of these deals wouldn’t have been made without government backing (implied, granted) and (B) what strings the government tries to attach to its guarantee in the form of safety regulations to try to control people smarter than it are futile almost by definition. Better that the government not try to suspend economic reality AT ALL.
3. Software is a tool and is useful or not according to who’s using it - The trouble with putting a piece like this out on the internet is that someone in the Poppa Joe Obama Administration will eventually see a need to regulate financial software too. But software just is. It amasses data and crunches that data. If the seeds of the problem lie in the fact that the software greased the wheels, enabling a volume of CDS trades to take place that was out of proportion to the risks people were willing to assume, then the same information can be used to untangle the mess and to protect against it in the future. There is a fortune waiting to be made by someone who write software that accurately monitors just how risky your supposedly “safe” government-certified AAA “securities” really are - and does this by looking at the actual financial product and tracing its origins rather than lazily letting a government certification do the talking for it. “The software proved to be more sophisticated than the people who used it.” Right. And that’s because the people who used it used it to create the securities, but not to track them - a responsibility they pawned off on the rating agencies.

So this article (title “My Manhattan Project: How I helped build the bomb that blew up Wall Street.” on nymag.com) is recommended reading on so many levels. The important thing to get out of it, as always, is that these things are always more complicated than any politico doofus is capable of sorting out, much less really understanding and much, much less foreseeing and preventing. Sometimes, the world just changes, and the regulations they wrote before there was widespread software and the internet will find themselves outmatched. And the regulations they put in place to deal with this will be out of date and ineffective by definition, because the world will have moved on already.

Don Boudreaux calls this post “one of the most disingenuous that [he's] ever read.”

I wouldn’t go that far. It’s certainly mistaken, but I don’t think it’s disingenuous. By which I mean that I think the author really does believe that he’s advancing a fair argument against the case for free trade, it’s just that he’s mistaken about it’s being a fair argument.

The argument goes something like this: many of the politicians who are now bleating that protectionism will cause economic damage have themselves in the past been authors of protectionist measures - typically in the form of export subsidies, but also, on occasion, in the form of outright tariffs. Ergo, they can’t be as concerned about the economic damage of protectionism as they claim. Probably they are just using ideology as a weapon against political opponents rather than voicing real economic concerns.

And I think that much is completely uncontroversial. Yes, it’s a bit annoying that he doesn’t concede that the pro-tariff voices are guilty of the same form of hypocrisy - but at the same time I don’t think anyone should have to qualify their criticisms of politicians with “now I know both sides are hypocritical…” It should be a given of the discourse by now that Democrats and Republicans are pretty much equal opportuity liars when it comes to harvesting votes.

Where this article goes wrong is here:

We’d say there are some free-trade evangelists who do argue against this stuff — and company-by-company corporate welfare seems an especially dumb way to go about things — but the point is that the world isn’t falling apart because the US (or Japan) has an export subsidy. There are barriers to truly free trade everywhere you look and yet they don’t seem to be dangerously ravaging the global economy.

This, of course, is a straw man. No proponent of free trade seriously claims that the whole world economy will fall to pieces unless all trade barriers are removed immediately. It’s true that they have at times in the past made such dramatic claims when the bill in question was particularly draconian - but in virtually all of those cases they were also right.

In normal times the claim is more along the lines of “protectionism is a bad idea: it will slow the growth of prosperity, ultimately resulting in worse conditions than we would have had without it.” It’s a very measured, practical claim, much the kind of argument that one advances against any bill he has rational grounds to disagree with.

So yes, Jon Weisenthal’s argument here is a straw man. But I wonder whether Mr. Weisenthal himself knows that? In other words, I agree with Dr. Boudreaux that Weisenthal’s column is mistaken - I just don’t agree that there’s anything that singles this one out from all the other mistaken claims against Capitalism floating out there in the aether. There are so many other arguments from “serious” commentators against economic liberty that are easily this lame or worse floating about that I can’t get too worked up about Mr. Weisenthal.

The more interesting question is why this sort of thing is allowed to pass for serious discourse. Weisenthal’s column, after all, appears not on his personal blog but in a respect business web journal. I suspect it’s some combination of all of the following:

1. There aren’t enough censors - true proponents of free market ideology are a minority, so there aren’t enough Don Boudreauxs in the world to publicly counter the patently erroneous claims of all the Jon Weisenthals. To the public, this makes the Jon Weisenthal version look authoritative.
2. Free Market ideology complicates the debate - other people out there who know better are not motivated to correct the Jon Weisenthals of the world because they can do without the complication that free market ideology poses. Since neither Democrats nor Republicans have a consistent set of principles, it’s easier for them to just argue against each other than to argue against each other plus one more opponent who is consistent. Neither side will ever win convincingly under the current scheme - but at least they both get their moments in the sun. Allow a third, consistent, voice into the debate and you might actually lose someday.
3. Anti-market Bias is real - I’m still agnostic about Bryan Caplan’s anti-market bias - an idea treated with more intellectual rigor by Paul Rubin - but the thesis is this: people’s naive intuitions about economics evolved in tribal groupings and so are more concerned with distribution than incentives. This mindset is inappropriate for the modern world, where the (potential) supply of goods is practically unlimited, but it is hardwired biologically and so difficult to overcome. It is this biological template that largely accounts for the irrational opposition to any market-based solution. I am not entirely comfortable with this response partly because it raises the idea that the Libertarian cause may be futile and partly because it has the character of an ad hominem. I include it here because in my own experience it is the case that there is a hypocrisy double standard as regards free market ideology. No hypocrisy on the part of an individual Democrat or Republican is ever taken to be damning for the general cause, where even the slightest deviation from orthodoxy on the part of a Libertarian is taken (e.g. by Weisenthal) to be an argument that the princples themselves are futile. The disconnect is so pronounced that Caplan’s resort to a genetic explanation is plausible. I would prefer to avoid this explanation as much as possible - but if the facts bear it out, they bear it out.

Of the three I think most weight probably goes to reason number 2. Free Market Ideology is particularly bothersome for the powers that be at the moment because it’s just been vindicated by the present market collapse. Free market economists of every stripe have been warning for years that there was a financial bubble while more mainstream economists rolled their eyes. Now that the stock market has, in fact, collapsed, the status quo wants its bailout and can’t have these plans complicated by the inconvenient truth that the promise of a bailout is what caused the current mess (by allowing them to take risks they wouldn’t ordinarily have taken). For their part - the social democrats on the left are not eager to point out that it was not a market failure but a regulation failure that got us where we are for the obvious reason that they are trying to sell even more regulation. They are quite happy for the public to believe that it needs protection from the free market. Indeed, it’s the classic mafia scheme. You know “nice business you got here - be a shame if anything were to happen to it. Give me money and I’ll see to it it doesn’t happen.” A gaurantee they can meet since they’re the only real threat on the block.

In any case, I don’t think Weisenthal’s being disingenuous. I think he’s just parroting stuff he’s overheard and which no one has been too quick to correct him on. He’s a mediocrity, not a hypocrite, and this is annoying, not egregious. We have bigger fish to fry than Weisenthal.

Noah keeps sending me links to Glenn Greenwald articles that purport to show that Greenwald isn’t just some partisan hack - he has integrity. And this effort has succeeded: in each case, Greenwald takes a position on the new Administration that is appropriately critical of what he (rightly) sees as dangerous hypocrisy on national security policy. Greenwald is one of the few on the left who sees Obama’s “reversals” of Bush policies for what they are: meaningless window dressing meant to cover up what is fairly described as a wholesale adoption of the basic Bush approach to national security. So, kudos to Greenwald. Honestly.

That said, there are reasons to be disappointed in the second article notwithstanding. Is there anything wrong with the article itself? Certainly not. Greenwald says all the right things: Obama has tacked a bit back toward Constitutional protection from the Bush years, but not enough to call it meaningful. The most dangerous policies have been reaffirmed, and what’s worse, the press doesn’t seem to notice. But for some reason I can’t quite cheer this one as enthusiastically as I cheered the first one, and that’s because there are signs of Greenwald’s trademark Bush Derangement Syndrome creeping back in.

It’s not the sort of thing you can put your finger on, exactly, but go read the article and tell me if you don’t agree. There’s no crusher quote I can pull out to make it really obvious, but the general pattern is there: Greenwald seems sudeenly very concerned that someone will mistake him as having reversed course on Bush, and this “fear” is simply unfounded.

First, there’s the fact that if anyone is safe from the charge of liking the Bush Administration it’s Greenwald. If you author three bestsellers making the case that it was the worst post-war administration - at least in terms of constitutional issues - it’s fair to say that no freethinking person will mistake you for one of its apologists. So why do I nevertheless get the impression that Greenwald is just the slightest bit defensive about criticizing Obama?

Second and more importantly, while it’s true that a real civil libertarian will weigh his options and pick the lesser of two evils come election time, he should have no problem criticising whoever is in power at the moment for whatever civil liberties violations are at that person’s feet. I guess I think that if Greenwald were singleminded in his zeal to protect the Constitution from presidential abuse, he would simply inveigh against the violations du jour without too much care for any has-been Administration that is now out of power and can do no more harm - especially one as solidly discredited in the public eye as the Bush Administration.

But I guess the real point for me is that I don’t really get where Greenwald’s impression of the Bush Administration as staffed exclusively by blackhearts finds root. I’m not going to sit here and try to defend them, mind you. I disagree with the Bush Adminisration about a great many things, and all things considered it’s good that the nation has moved on. In fact, I think the Bush Administration is largely to blame for the frightening tack left the nation is currently taking. Somehow - and don’t ask me how - they managed to envigorate the left even as they adopted most of their principles. Steel tariffs, No Child Left Behind, prescription drug entitlements - it takes a lot of partisan reality distortion to see these policies as “small government initiatives.” Yet somehow that’s now what they are in the public’s mind, and the left wing in this country is no longer too very far to the right of Sweden’s as a result.

It can’t have been Bush’s intention that things end up this way, though, and to me that’s the point. If we’re where we are and it’s Bush’s fault, then it’s not because of some crafty masterplan that backfired. Rather, it’s just plain old-fashioned ineptitude. It’s not evil so much as happenstance. From where I sit, the Bush Administration just isn’t particularly special. If I had to sum it up in one word, it would be “mediocre,” really. Try as I might, I can’t see Cheney or Rumsfeld or even Ashcroft (really) as “sinister.” They were all just kind of there, and poorly managed, and they slogged through pretty much the way any Administration slogs through.

Ah but what of the civil liberties issues that Greenwald is so concerned about? Well yeah - they’re mediocre there too. I don’t think the Bush Administraton was part of any radical power grab. Quite the contrary - I think all of those policies are precisely the moves that Public Choice Theory would predict. That doesn’t justify them, mind you - but it does make it hard to find any of it all that shocking. What a lot of Bush Administration critics are quick to forget is the mood after 9/11. It was the first foreign attack on US soil since Pearl Harbor - and similarly shocking to the population. The Left wasted no time making it clear that it was all Bush’s fault for having ignored some critical intelligence reports. And the Right responded in the predictable way of trying to push the blame over to Clinton on exactly the same charge. The charge was no doubt correct in both cases - the reality being that politicians weigh risks to their reputations when making decisions. If an Al Qaeda attack were planned but unlikely, and if the public furthermore knew nothing about it, then a politician would have little to gain by spending political capital to prevent it. The facts on the ground are that most democracies prefer a pound of cure to an ounce of prevention. And so when George W. Bush found himself in the hotseat after 9/11, he did what any politician would do: made a great show of “acting resolutely to prevent future attacks.” This was because the Left had made it clear that the attacks were all his fault, and the Right, by trying to shift the blame to Clinton, unwittingly played into this by failing to dispute the idea that the Oval Office is where the buck stops on such matters. Bush’s political future now hung on whether there was another attack, and so he did what any rational actor does in response to such signals: he pulled out all the stops preventing the next one. Never mind that a lot of these measures were unnecessary, expensive and even illegal - a politician rationalizes in the same way as a trial lawyer. Just as a mediocre trial lawyer leaves it up to the prosecution to curb his own abuses in the defense of his client, a mediocre president leaves it up to Congress and the courts to keep his policies in line.

To my mind, all presidents in living memory save two have been “mediocre” by this definition - where “living memory” starts with Kennedy (i.e. when my parents’ generation started to become politically aware). Which is to say - they all sort of sloged through and did what Public Choice Theory would predict. The only two exceptions I can think of are the Johnson and Reagan Administrations, where Johnson was clearly evil and Reagan basically good. These are the only two who really had visions of where they wanted the country to go and acted on them. All the others? Meh. They just kind of got buffeted along by History. So it’s really hard for me to look at the Bush Administraton and see anything particularly sinister - and I think that’s why I can never really understand where Greenwald is coming from, even in those cases like now when I basically agree with him. There just isn’t anything special enough about the Bush Administration to warrant all this invective.

Should Greenwald criticize what he sees as constitutional abuses? Absolutely. Every citizen should. It’s up to all of us to draw lines around power and keep it contained. To the extent that Greenwald does just that, my hat’s off to him. But the Bush Administration has now faded into history, and there’s no reason to believe it’s going to stand out against the Clintons and Carters and Fords and Nixons that came before it in any way. They were all sort of disappointing, no friends to Liberty, ignorant of Economics, blah blah blah. Space normal speed, folks. If anything, I take it as a promising sign that when Al Qaeda fired the opening shots in a war on us in 2001, we didn’t respond by covertly nationalizing large parts of the economy and drafting every able-bodied man who couldn’t buy his way out of it the way we did in Vietnam. The country may not have learned all there is to learn about the need for calm reflection in these situations, but I think it has improved a lot since the 60s. Bush covered his ass to the extent Congress and public opinion allowed - and that’s really about all you can say about him.

If civil liberties is your axe to grind - and it is a noble choice - I think you have to start from the basic assumption that most Adminisrations will trample on them if not watched and held closely accountable, but also console yourself that it’s genuinely rare that a set of the truly sinister comes along. Obama and his henchmen probably aren’t particularly sinister either - but they’re the boyz in charge right now and so keeping them reigned in is the important thing. People on the left who are serious about doing that need to get over their Bush Derangment Syndrome sooner rather than later. The danger with Obama is greater, I think, precisely because he gets a free pass from so many BDS sufferers. Greenwald finds himself in a position to do some real good here. His anti-Bush bona fides give him real street cred with the kind of people who live for hating Bush - which is to say, exactly the kind of people who are signing all of Obama’s blank checks right now. The right will complain, of course, but will not be taken seriously given just how unpopular the outgoing Administration currently is. So it really is up to people like Greenwald - people who have built up political capital with the Daily Kos crowd - to at the very least play referee and tell the left wing wingnuts to shut up when the right’s criticisms are on point. I hope he will focus on this in future articles, and not give in so much to the temptation to relive his glory days. Hating Bush was fun and all, but other things are more important. Obama and his cronies are neither more nor less dangerous than Bush and his in and of themselves. But there are two (probably related) things that have me just a bit more worried than I was in the Bush years: Obama is more charismatic and convincing than Bush, and public opinion is generally less inclined to be critical of him - distracted as they are by how terrible Bush is supposed to have been. In other words, all the same base instincts that were there in every other Administration are here now too, and the walls around them are thinner. People like Greenwald, if they are serious about defending constitutional liberties, need to keep their eyes on the ball.