On the way into the office this morning, I was reading two different things. These two quotes seemed to pull at me:
a. “But my wise old aunt Selma, now 91, often reminds me that the sins of omission are greater than the sins of commission, and that the greatest evils in the world, like mass poverty, are more the result of inaction than that of direct brutality.” -David Bornstein, So You Want to Change the World
b. “French President Nicolas Sarkozy said Thursday world came within “a whisker of catastrophe” during the recent financial crisis and that those responsible for the crisis must be identified and held accountable.” -Express, 9/25/08, by The Washington Post
Certainly there is plenty of blame to go around. But identifying the “culprits” (or their whiskers) is not quite so easy. Who is responsible for the crisis due to their actions? Due to their inactions?
The culprits?
1. What about homeowners who got mortgages that they could not afford? Are they completely innocent? Perhaps many were tricked or did not understand variable rates. But if we are assigning blame, we should be willing to perceive shades of gray.
I will note that assigning blame is sort of like bringing donuts to the office — if you bring them, you better bring enough for everybody. So while we are blaming, we might as well not discriminate against the “less noticeable.”
2. Moving “up the chain” so to speak, we next arrive at the lenders. Financial institutions that offer loans without the proper diligence put their firms at risk. This is true. So do we blame the institutions themselves? Perhaps we should also blame the people who work there?
3. The individuals that work at these institutions are supposedly intelligent and properly incentivized, right? If so, on the whole, they would not promote their individual short-term gains over the institutions.
4. But what if the organization has the wrong incentive structure in place? Perhaps the organization “had it coming” to them. Call it karma or call it statistics. But management has to realize the impact of its choices.
5. Let’s move “across the food chain” now. Since these financial institutions are highly connected in the financial markets, they put other institutions at risk as well. In economic terms, this might be considered an “externality”, a cost that one “organization” can impose on another. The problem with externalities is that the organization affected was not responsible. A typical example is air pollution. If Mexico pollutes and the wind blows it into Texas, Texas is harmed but Mexico is not. Is the creator of the externality to blame? Yes, in some sense.
6. But in another sense, the recipient of the externality sometimes can pursue strategies to minimize the effect. Doing so is part of the cost of doing business. Let’s think about this in a bilateral transaction sense — a connected institution can reduce its potential for damage by being skeptical — asking tough questions about institutions that it depends on, hedging its bets, and having alternative plans ready.
7. If the ecosystem as a whole is built on strong bilateral understandings, conventional thinking would say that the ecosystem should not be damaged by the loss of a few “bad apples.”
8. This raises another question — maybe we are too quick to assign blame to individual firms! Perhaps the whole financial ecosystem wasn’t as strong as we gave it credit for. Perhaps we are merely scapegoating when we complain about Bear Stearns, Lehman Brothers, or AIG. Chaos theory probably could offer scenarios in which such an ecosystem, even if strong at the bilateral level, could still have failure modes.
9. What about regulators? Don’t they have a responsibility to oversee the financial markets? Don’t they have the intelligence and foresight, and thus, the responsibility to act?
Conclusion
In practice, the person that throws the second punch is most likely to get caught and blamed. But what about the first punch? What if it wasn’t a punch, but a stinging insult? What about all the actions that led up to the conflict? Assigning blame to the most visible offense is overly simplistic.
Let’s use our brains instead of just finding scapegoats. Let us understand the nature of the problem across the whole system — and then correct the problem using as-specific-as-possible, targeted interventions.
7 Comments
I am writing because yesterday I received a forwarded eMail containing an attached titled “SHOTINTHEFANNIEMAE.” (I only just received it, and in PowerPoint format, whereas it seems you received it last October, and in PDF.) In doing some diligence on the author of the attachment – something that, as it turns out, we both chose to do – I ended up at your blog (http://djwonk.com/blog/) and read two of your posts: “On the Perils of Email Forwarding” (16th October 2008) and “Who Threw the Second Punch?” (26th September 2008). I have linked these since they have a common central subject – the financial crisis in the US – and so the following comments combine my reflections on these two posts. However, the majority of my response below is directed toward the latter post, since this one theoretically contains more substance and less thinly-veiled petty criticism.
I find your arguments deceptively attractive and simplistic, appearing and positioned as both thorough (both “up” and “across the food chain”) and all-encompassing.
But, unfortunately, if I were to use your logic – which ends in the call to “…use our brains instead of just finding scapegoats,” there would have been no Nuremberg trials and there would have been no Enron trials. Or do you consider the guilty in the Nuremberg trials “real culprits” while the guilty in the Enron trials were not? Or do you consider that these are not comparable, because the guilty in Nuremberg cost people their actual lives, while the guilty in the Enron trials cost people “only” their family’s financial livelihoods? Of course, this medium does not readily support point-counterpoint discussion in real time, so I may never know. But, given the gravity of these situations, and the harm done to millions of human beings in each case, I’m not sure on which planet such advice would have been welcome, but I’m fairly sure it would not be this one.
Sometimes, the root of the problem needs to be examined to see how to avoid repeating the problem. Of course, that examination is best conducted by impartial (to the extent possible), rational (if such persons can be found in the heat or aftermath of such issues), experts. But, that examination needs to be conducted nevertheless.
Yes, one can find “shades of gray” in making an analysis of the events leading up to the financial crisis in the US that now affects national events and individual lives as far away as Central Asia, where I am currently writing this comment. And yes, there were many minor players in this drama as it unfolded: every person who borrowed 100% or more of the value of anything – and every person who lent the borrower those funds – is, in my mind, such a minor player. But, just as there are many soldiers in a war, there are only a few political leaders who call for that war and only a handful of generals who lead that war. These are the main culprits. Calling for us all to examine our individual and collective navels to consider the level of our personal “shades of gray” is missing the point.
The point is that many of these main culprits are being allowed to escape because they have succeeded in supporting the “winners.” In my perhaps not entirely elite mind, the “winners” can be defined as those politicians whose political careers have been advanced for promoting exactly those culprits who caused such calamity, partly by the support that those main culprits afforded those politicians. (I am leaving aside, for another day, a more cogent commentary on why Fannie Mae or Freddie Mac would spend any funds – which actually are taxpayer dollars – on any contributions to any political candidate. That is a mystery far beyond me.)
I feel that this point is also the one made in that forwarded eMail titled “SHOTINTHEFANNIEMAE.” However, instead of addressing the content, your approach – if I understood your comments correctly – was to:
a) ridicule the type case of the title;
b) generally abuse the author – someone who, you infer, has written a politicized piece for uneducated people – for not providing his correct title and not posting the piece on some permanent web site – showing that he is clearly not “serious;” and
c) specifically abuse the author by stating that you “…didn’t expect the author of a presentation about Fannie Mae to be at the English Department.”
As I said in my opening comments, I ended up on your web page in search of the author of this piece. And, I have found several statements in the work that could be strengthened or re-stated. I have saved a version of the PowerPoint and re-stated those items for review by Associate Professor Jantz, to whom I will send the edited PowerPoint for his review.
But, before moving on, may I ask why anyone should take you seriously? After all, by your own admission in the “About” tab of your web site, you state that, “I am a software developer and (by interest, not yet by profession) policy wonk.” I would guess (although I will not demean you personally by making a poll on the following subject on an open web site) that a majority of respondents to such a poll might not consider the job of “software developer” to be the best basis for formulating educated opinion on public policy.
Mr James, I have lived and/or worked in over 60 countries during the almost 30 years of my adult life spent in international business. Many of those countries did not and still do not have the simple but powerfully supporting societal force called “rule of law.” Persons with much greater knowledge and experience than I have tried to define “rule of law” simply: you may see some of these results by entering “define:rule of law” in a Google search. My favorite (no doubt showing my lack of class) is probably the one on Wiktionary: “The doctrine that no individual is above the law and that everyone must answer to it.”
For rule of law to work, there has to be some notion that the law, perhaps only eventually but without doubt certainly, will come calling on the door of the culprit – the criminal. The law will then cause said criminal to face the consequences of the actions s/he has taken as determined by the evidence of those actions presented at an open trial. Otherwise, why not rape and pillage during wartime? When my side wins, it will prove I was right! Why not drive my company to greater heights doing the wrong things? Everybody else is doing it, so I’m clearly not wrong! Why not steal taxpayer dollars to promote politicians who agree with me? When they become President or get re-elected, they’ll keep me in my job!
Your world, Mr James, mitigates against rule of law because you prefer to see big picture answers to the problem. It’s not the fault of those corporate executives – they were just trying to grow their businesses. It’s not the fault of the leaders at Fannie Mae and Freddie Mac – they were just trying to get people homes. If America would just provide everyone with homes and jobs and health insurance, these people wouldn’t be doing these bad things. So – how did you put it?
“Let’s use our brains instead of just finding scapegoats. Let us understand the nature of the problem across the whole system — and then correct the problem using as-specific-as-possible, targeted interventions.”
Yes – I agree. Let’s do that. But, as far as I can tell, nowhere in any of your posts – which, I may note, you state as being for “educated people – i.e. people reading this blog” – have you displayed the education or the courage to suggest anything specific. It would have been welcome, indeed, for you to have led the charge in the “using-the-brain” thing by suggesting those “as-specific-as-possible, targeted interventions.”
So, taking a dose of my own medicine, as it were, here are six specific, targeted interventions that I would suggest:
1. Every person who borrowed 100% or more of the value of his/her home or other underlying asset and has defaulted on payments both loses the home/asset and is black-listed as unable to borrow for seven years. Sorry – borrowing money is not one of the inalienable rights of being an American citizen or permanent resident. (In Dubai, among many other countries, defaulting on personal loans of all kinds – including credit cards – earns the debtor a free ride to prison.) This would help eliminate at least some of those pesky “shades of grey” that you mentioned.
2. Those lost assets should be sold at market value – presumably to buyers with good credit and/or with the wherewithal to make such purchases – and that money should be sent to the US Treasury. Note that I am very clearly stating that the banks that lent the money should NOT be refunded any proceeds from such sales. There is no reason why lenders that make poor lending choices in the hopes of greater profits should be able to get that money back. It’s all about risky investments turning sour – and the lenders taking the loss accordingly. More on this later…
3. Every bank officer who signed off on a loan for 100% or more of the value of any asset loses his/her banking license for one year. There go quite a few more of those pesky “shades of gray.” You may feel that this does not address the problem. I feel that this very precisely “prunes the problem” (or at least part of it). Not everyone who borrows is smart enough to know what s/he is doing – but the “educated” bank officers who were extending these amounts of credit to such individuals knew full well what they were doing. A driver who gets behind the wheel drunk loses his/her license for a year (which, of course, is not enough). What’s the difference? I want to get the unscrupulous bank officers out of the banks so that the ethical ones will get the promotions and instigate the correct approach to lending.
4. Every person at every company that has been bailed out by the US Government since March 2008 – that would include the Bear Stearns hastily-arranged “marriage” to JP Morgan Chase (“Marry in haste, repent in leisure…”) who received more than USD 150,000 in 2007 total compensation (meaning, of course, including bonuses, stock options, etc), and anyone who received any performance-oriented bonuses, stock options, etc, would have to take out a loan before the end of this year equal to 50% of his or her 2007 total compensation and hand that money to the US Treasury. And, so lucky! Instead of losing their homes (like the greedy borrowers) or their jobs (like the greedy bank officers), these people just have to pay back what they “earned” – and only what they “earned” for one year! – and at such low interest rates!
5. The above would not apply to a special class of persons: the top management of those failed and bailed out firms. Instead, every person at those companies who received more than USD 10 million in 2007 total compensation (again, including bonuses, stock options, etc), anyone who received any performance-oriented bonuses, stock options, etc, would have to take out a loan before the end of this year equal to 100% of their 2007 total compensation and hand that money to the US Treasury. So lucky, too! They get to help so many people by just paying back what they “earned” – and also only what they “earned” for one year! – and also at such low interest rates!
6. Every politician who received money from every company that has been bailed out by the US Government would have to repay every dollar of such contributions to the US Treasury before the end of this year. I will make no further comment about these people, although I feel that Dante should create a special ring in Hell reserved for them.
You may feel that this is somehow not helping to “…understand the nature of the problem across the whole system…” I disagree. It would send a very clear message across the whole system: you are responsible for your actions. This means that – no matter how big your bank is, or your insurance company is, or your car company is – you are not above the law. If you want to remain in this society, then be responsible to it for your actions. If you want to “financially rape and pillage” the other members of your society, then you are going down.
Or, you may more likely think all the above is too harsh. I say that because of your statement that, “Assigning blame to the most visible offense is overly simplistic.” So, I suggest you read an NPR commentary by Russell Roberts dated 25th March 2008 and titled “Does Bear Stearns Bailout Set a Bad Precedent?” (http://www.npr.org/templates/story/story.php?storyId=89064840) Given today’s benefit of hindsight, his sternly-worded warnings now sound both eerie and prescient. If I may paraphrase his thesis: Loss is not a bad thing in the profit-and-loss calculus. But, replace the counterbalance of loss with government bailouts for whatever good intentions you can “sell” to the public and you start paving the road to the hell of the current financial disaster.
In my opinion, the societal equivalent to Mr Roberts’ profit-and-loss calculus is rule of law. Replace the punishment due the unscrupulous, predatory, and unremorsefully greedy with big thinking about the weakness of “the whole financial ecosystem” and you have criminals on the loose. If, as I assume, we both don’t want child molesters in our neighborhood streets, then we should also not want unscrupulous bankers and unethical corporations in our city centers. The difference seems to me that you think they should be treated differently. For me, a crime against society is neither white collar nor blue collar – it’s a crime against us all and it should be punished.
You note that I do not suggest jail time anywhere – but I do suggest that the money that the unscrupulous and unethical have gathered be returned to the US Treasury. This money should be used to retire the bad debts of legitimately indebted persons and organizations. So that we are clear, I do not include in the “legitimately indebted” any banks, any insurance companies, any car companies, or Fannie Mae or Freddie Mac. I do include in the “legitimately indebted” most of the small-to-medium sized enterprises that, by supplying many of the above depended on them for their own livelihood and have been harmed by the bad management at those organizations.
You also do not seem anywhere in any post to take into consideration that, while most Americans are scrupulous, hard working, and careful with their money, we are being saddled with debt that we cannot pay back and that is threatening our financial retirement security – if this hasn’t been eliminated altogether. I wonder, Mr James, if as a child you were ever taught the fable of the industrious squirrels and the lazy squirrels. It’s a well known tale: basically, the industrious squirrels worked hard all summer while the lazy squirrels enjoyed the season. Then, when winter came, the lazy squirrels wanted to “borrow” the results of the work of the industrious squirrels. Those replied that they had worked hard all summer and now planned to enjoy the fruits of their labors – and, besides, there was only enough stored up for them and their families for that winter.
Bearing this little fable in mind, could you please tell me exactly why we “industrious squirrels” should pay much higher tax rates on our current salaries that we have earned after two or three decades of hard work, why we should risk our social security allocation that we have set aside with our hard work, or why we should agree to overextend the full faith and credit of the Government of the United States of America – all because the “other squirrels” chose to waste their time and money enjoying the season now past? What part of the burden of this financial crisis on us tens of millions of thrifty, hard-working American people is fair?
Of course, you cannot answer. One of the downsides of conducting a “debate” via a posting mechanism such as this is the unsatisfactory lack of timely riposte. Perhaps we will meet again via this or another medium. But for now, as far as I’m concerned, it’s not the fault of the forest for not providing enough trees, and it’s not the fault of the weather for not providing enough rain for those trees – it’s the fault of the squirrels who have no nuts. And, as far as I’m concerned, there is no legal, ethical, or moral reason why they should get mine.
@Jeffrey: You wrote: “if I were to use your logic – which ends in the call to “…use our brains instead of just finding scapegoats,” there would have been no Nuremberg trials”. I hope that your argument is more than an appeal to emotion (i.e. the horror of Nazi war crimes) in an attempt to discredit my argument. I would be interested in hearing the support for your argument. Perhaps you could explain why or how using our brains instead of finding scapegoats is a bad way to serve justice?
@Jeffrey: Thanks for taking the time to write down your thoughts.
However, I get the sense that you are getting yourself worked up unnecessarily.
For example, you wrote: “Or do you consider that these are not comparable, because the guilty in Nuremberg cost people their actual lives, while the guilty in the Enron trials cost people “only” their family’s financial livelihoods?”. I hope you are not trying to put words in my mouth here.
@Jeffrey wrote “But, as far as I can tell, nowhere in any of your posts – which, I may note, you state as being for “educated people – i.e. people reading this blog” – have you displayed the education or the courage to suggest anything specific.
Jeffrey, I’m sorry that the tone you’ve taken seems to be bitter and angry. Worse, this appears to be an ad hominem attack (implying that I am not educated or courageous). I’m not sure that responding will be productive, but I will give it a try anyway.
I just added a note to my “On the Perils of Email Forwarding” entry. It says, “I did not mean to imply that readers of this blog are necessarily ‘educated’, not did I mean to imply that people who don’t read this blog are not.”
Let me give some context to the above blog posting. I wrote it because I felt that we (I mean American society) was scapegoating. We were looking for overly simplistic answers, in my opinion. My point was to raise some important questions, not to make specific policy recommendations.
Sometimes the most valuable course of action is to ask a simple question. For example, asking the question “Are we headed in the right direction?” is sometimes the most productive use of our time.
@Jeffrey wrote “Of course, you cannot answer. One of the downsides of conducting a “debate” via a posting mechanism such as this is the unsatisfactory lack of timely riposte.”
Actually I did answer, and I did so in under 24 hours. I hope you feel better now.
@Jeffery wrote “However, instead of addressing the content, your approach – if I understood your comments correctly – was to:
a) ridicule the type case of the title;
b) generally abuse the author – someone who, you infer, has written a politicized piece for uneducated people – for not providing his correct title and not posting the piece on some permanent web site – showing that he is clearly not “serious;” and
c) specifically abuse the author by stating that you “…didn’t expect the author of a presentation about Fannie Mae to be at the English Department.””
A. Yes, I ridiculed the type case of the title, but only because I am an equal-opportunity ridiculer. Indeed, I regularly ridicule emails that I receive if they are written in all caps.
B. I did not abuse the author. I did, however, criticize his choice of forwarding a PowerPoint presentation instead of making it available on the Web. That is exactly why I titled the post “On the Perils of Email Forwarding” instead of something like “An Analysis of the Fannie Mae Situation”.
C. I don’t understand how this qualifies as abuse or a personal attack. It merely was a statement of my expectations. In case there was any misunderstanding, I just added a clarification in my original posting that says “(A clarification in response to a comment: I have nothing against departments of English or people who work at them. I am only saying that, at the time, I did not expect an English professor to spend considerable time focusing on financial or governmental issues.)”
The point of my blog post was not to get into the details of the content. In case you are wondering, here are some reasons why I didn’t want to get into the details:
1. With no authoritative version of the document on the Web, I did not believe that it would be productive to take the time to criticize.
2. Personally, I did not find the document very compelling.
3. There are plenty of content already available online from reputable sources that do go into the details of the Fannie Mae situation from various perspectives.
Jeffery wrote: “But, before moving on, may I ask why anyone should take you seriously? After all, by your own admission in the “About” tab of your web site, you state that, “I am a software developer and (by interest, not yet by profession) policy wonk.” I would guess (although I will not demean you personally by making a poll on the following subject on an open web site) that a majority of respondents to such a poll might not consider the job of “software developer” to be the best basis for formulating educated opinion on public policy.
@Jeffrey: Thanks for not demeaning me personally with a poll. I appreciate that. Oh, is there any chance you were just using the Argumentum ad populum logical fallacy (aka the bandwagon fallacy)?
Are you saying that having software development skills precludes me from being able to formulate an informed perspective on public policy? That would be rather telling.
To your other point, you should take me seriously for the following reasons. First, I snagged the domain name “djwonk.com” which is a monumental achievement. Second, I take myself super seriously, so you should too. Third, the words “wonk” and “wonky” have massively positive connotations across the country and world. Fourth, you should take me seriously because I sometimes use self-deprecating humor.
Actually, for what it is worth, there are a few reasons you might take me seriously:
* I am naturally interested in issues pertaining to public policy
* I have studied public policy as part of my education
* I am willing to engage others in that discussion
* I am willing to debate arguments on their merits
Decide for yourself.
Post a Comment