Brooklyn/NYT Outrage/Madoff is Melmotte

Two articles in the New York Times express immense outrage today (“The Reckoning: On Wall Street, Bonuses, Not Profits, Were Real” and Paul Krugman’s “The Madoff Economy”). On some level, I can relate. I am also, in many ways, outraged. I worked in finance, but I wasn’t particularly aware of the extent of the MBS, CDO, etc. web of toxic assets/pseudo-insurance (although I was aware that the markets were death-defyingly levered). And I certainly had no idea something like the Bernie Madoff Ponzi scheme was even possible in even the lax regulatory environment of the past several years.

So yes, I am outraged, even as someone who worked in finance, by the scope of the mess. But I am also outraged by the press’s complacency during the boom. Why did the Tom Wolfes and Michael Lewises of this world write such fluffy little stories over the last several years about people in Greenwich who owned big yachts (publishing them in places like Portfolio, feeling dapper and clever and holier-than-thou) instead of actually writing good investigative journalism (digging deep into the numbers, asking themselves how all of this could possibly be the product of anything other than a bubble)? Wasn’t so much financial reporting over the past six years really just lifestyle journalism in disguise?

I was certainly wondering how all of this could be the product of anything other than a bubble—it completely blew my mind to work in finance in Midtown Manhattan from 2002-2008—but at least where I was working (which traded mainly quantitatively; in equities and fixed income, big traditionally liquid markets), it made some modicum of sense. I could see the money trail from point A to point B, I understood how the accounting worked, the auditing, how the trades were approved, how they happened. I had experience with high-stakes poker, and saw how quantitative finance resembled, in many respects, a very large poker game, which is something I could get my head around (whether or not one believes it is moral per se). My overwhelming impression of the very senior people where I worked was that they played by the rules (such as the rules may have been). Plus (and perhaps I sell myself short—to use to a financial metaphor) I do not fancy myself much of a financial expert and figured someone with more bona-fides—someone working at the New York Times, say, or the SEC, someone like Paul Krugman—would have noticed that the whole thing was a scam if that’s what it actually was.

So: where was the Seymour Hersh of finance when we needed him? I know finance people are secretive, but they aren’t any more secretive than people in the government. The two shows that This American Life has produced on the bubble (“The Giant Pool of Money” and “Another Frightening Show About the Economy”) are better than anything I ever read while the bubble was developing. Why did it take the bubble bursting for journalists to produce shows like these? And how can it be that Alex Blumberg, who I’ve met, and who seems like a really nice earnest guy, but who is in no way some big scary finance guy, can produce two hours of programming on the economy—and in the This American Life format, which isn’t particularly geared toward financial reporting—that are so much better than pretty much anything I read in the press or heard on the radio during the last six years?

Paul Krugman: where was your outrage at the height of the boom?

New York Times: where was your outrage at the height of the boom?

Even though I feel ambivalent about having worked in the financial industry (the word “ambivalent” isn’t as fun for people to think about and hear as the word “outrage”), I refuse to blame all of this only on Big Rich Mean Finance Men (“You know him, reader,—hypocrite,—my twin!”). I insist on blaming it in part on the SEC, in another part on the Bush Administration's crappy policies, in another part on the Clinton Administration’s economic policies, in another part on the ability of even reasonable people to live in denial, in another part on everyday greed, in another part on everyday ignorance, in another part on bad timing, in another part on the extreme functional specialization in our economy, in another part on the invention of Excel, in another part on the stone cold undeniable fact that history repeats itself, in another part on the decline of American literacy (for if more people read, more people would have read The Way We Live Now, Galbraith, and The Madness of Crowds), in another part on the fact human ingenuity is bigger than anything functionally human, in another part on people’s fear in this country (that they won’t have health insurance, that social security is going to disappear, that no one will take care of you if you are old and infirm)—it’s not just greed, it’s also fear, let us remember, and in another big part on crappy financial journalism.

I think looking for someone to blame—blaming, say, Big Rich Mean Finance Men at Merrill Lynch—for this will only serve to make us forget the lesson of this horrifically systemic (the scale is truly beyond human) bubble that much more quickly. Blaming only Big Rich Mean Finance Men is a form of scapegoating. And scapegoating is all about loading up a goat and sending that goat out into the desert to die; by sending the goat out into the desert to die, the people of the town are able to just forget all about the trauma, and if the people of our town forget, we’ll just be in another bubble in ten or twenty years.

Paul Krugman will be outraged again. The New York Times will be outraged again.

Paul Krugman today writes (reasonably enough—but only after a lot of scapegoating outrage):

“Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that ‘the financial system as a whole has become more resilient’—thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.”

John Kenneth Galbraith wrote, back in the 20th century:

“Nothing so gives the illusion of intelligence as personal association with large sums of money.”

“As to new financial instruments, however, experience establishes a firm rule, and on few economic matters is understanding more important and frequently, indeed, more slight. The rule is that financial operations do not lend themselves to innovation... All financial innovation involves, in one way or another, the creation of debt secured in greater or lesser adequacy by real assets.”

“Financial genius is before the fall.”

“The only function of economic forecasting is to make astrology look respectable.”

“The process by which banks create money is so simple that the mind is repelled.”

“It is, alas, an illusion. The mergers, acquisitions, takeovers, leveraged buy- outs, their presumed contribution to economic success and market values, and the burden of debt that they incur are the current form of that illusion. They will one day—again, no one can say when—be so recognized. A fall in earnings will render the debt burden insupportable. A minor literature will marvel at the earlier retreat from reality.”

“In any great organization it is far, far safer to be wrong with the
majority than to be right alone.”

Paul Krugman: you have read Galbraith—why are you just now becoming outraged? You are a very brilliant and very important economics professor—could you not have bent Alan Greenspan’s ear? Sent him a copy of Galbraith?

New York Times: could you not have gotten Alan Greenspan’s ear? Asked Alan Greenspan to read J. K. Galbraith?

Do none of you know Andrea Mitchell? Were journalists afraid to question Alan Greenspan because he was married to Andrea Mitchell? This sounds petty of me to ask, but I just don't understand where all the quality journalism went to while the boom was at its zenith. Journalists aren't particularly paid off to look the other way—not like people in finance or government can be—so where was the story when it could have amounted to more than mere outrage?