Monthly Archives: January 2016

Ludwig von Mises: Economic Calculation in the Socialist Commonwealth

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Despite its track record of failure, oppression and misery, socialism has enjoyed a seemingly endless parade of apologists and defenders.  As improbable as it seems, the argument for state socialism was hotly debated in the 20th century. This inexplicable allure is surpassed only by the seemingly deathless appeal it holds to this day.  While there are many academics who are eager to put a new coat of paint on socialism’s rotten edifice, it seems that too few pay attention to the individuals who challenged socialism and were proven correct. This is likely due to the fact that this is exactly what academic elites and apparatchiks want. Regardless, everyone should read what is widely regarded as the definitive demolition of the argument for the socialist state, Ludwig Von Mises’ 1920 essay, Economic Calculation in the Socialist Commonwealth. It is important not only because it identified the failures of the socialist state with devastating accuracy, but because it is a purely economic critique of socialist economics.

Mises’ argument is built on three central theses:

  1.  A socialist state with a monopoly on production goods is effectively destroying the natural market price system and rendering rational economic calculation impossible
  2. A socialist state which prioritizes labor based valuations on consumer and production goods is ignoring individual subjective preferences
  3. The socialist state destroys personal responsibility and initiative by removing the incentive to economize

Mises draws an important distinction around production goods and consumer goods at the outset.  He observes that consumer goods, the final result of production which a consumer can use to fulfill a desired end, are valued in monetary terms.  Consumers can subsequently engage in trade using monetary exchanges amongst themselves in order to fulfill their subjective preferences.  The entrepreneur, on the other hand, is not afforded the same opportunity.  In order to prioritize production goods and engage in the act of economizing, the entrepreneur needs to perform economic calculation through a free floating price system which emerges through exchange in a system of private property.  Because the socialist state monopolizes production goods and dispenses them through an arbitrary and bureaucratic allocation process that’s devoid of rational pricing, the entrepreneur is hamstrung. An efficient division of labor cannot even take place.  No single human mind or collection of human minds can replace the social nature of the price system in a competitive free market.

Because Marxism, the philosophical font of virtually all socialist economics, posits that an exploitative relationship exists between the entrepreneur and the laborer, socialists attribute an inherently predatory quality to exchange relations in the production process. The entrepreneur is somehow extorting and expropriating from each laborer and depriving him of the surplus value that results in the final exchange of consumer goods. Socialists have wrongly assigned virtue to the state monopoly on production goods, and subsequently, end up destroying the uniquely human capacity for rational calculation. Once socialists have gained control of the apparatus of the State, there is no underlying set of principles by which the socialist state can proceed that is even remotely comparable to the price system of the free market.

When Marxism solemnly forbids its adherents to concern themselves with economic problems beyond the expropriation of the expropriators, it adopts no new principle, since the Utopians throughout their descriptions have also neglected all economic considerations, and concentrated attention solely upon painting lurid pictures of existing conditions and glowing pictures of that golden age which is the natural consequence of the New Dispensation.

Marxism also posits a juvenile theory of alienation inherent in capitalism, but attribute the malady to the wrong source. Socialists bemoan the allegedly dehumanizing qualities of free market exchange while conveniently ignoring the fact that state intervention exists everywhere. Modern neoclassical macroeconomics reinforce and perpetuate an unchallenged activist role for the state in economic affairs as well as the reduction of economic life to increasingly abstract mathematical models.  As Dr. Joseph Salerno astutely argues in the essay’s postscript, it is exactly the reverse.

Abolish all, or even one, of these institutions and human society disintegrates amid a congeries of isolated household economies and predatory tribes. But not only does abolition of private ownership of the means of production by a world embracing socialist state render human social existence impossible: Mises’s analysis also implies that socialism destroys the praxeological significance of time and nullifies humanity’s uniquely teleological contribution to the universe.

Dr. Salerno goes further to argue that despite Mises argument against full scale state socialism, the argument retains its relevance to contemporary state interventions in healthcare and energy production.  Whether they be tax breaks, subsidies or loan guarantees, the myriad interventions and subventions in the managed market economy create numerous distortions. Perverse production incentives, misallocation of resources, and institutionalized mediocrity are but a few of the deformations which result from keeping entrepreneurs insulated from the forces of supply and demand.

Mises predicted the failure of socialism with devastating accuracy years before the collapse of the Soviet Union. While China’s version of market socialism is undoubtedly an improvement over Mao’s regime, their economic and monetary policies have lead to massive instability and mismanagement of resources which lend further credence to Mises core argument.

Almost a full century has passed since the initial publication of this essay.  Despite socialism’s continued failures here and abroad, the champions of socialism continue to flog the rhetoric of a discredited ideology while remaining seemingly oblivious to the intellectual and moral void at the core of their pursuit.  The leading lights of socialist thought have not offered any meaningful rebuttal to this problem since perhaps Oskar Lange, but as Mises already correctly argued, mathematical models cannot replicate human action.

Socialism offers nothing but a license for the unlimited expansion of state power packaged as a litany of grievances dressed up in a pretense of intellectual profundity and moral rectitude.  The promise of “equality” is never achieved, but socialists peddle these pathetic fantasies with the same chicanery and mendacity as a televangelist. Mises offered a theoretical framework and a set of economic principles that were grounded in sound scientific reasoning and a respect for individual liberty.  His arguments deserve a proper reckoning.

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Niccolò Machiavelli: The Prince

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Poor Niccolò Machiavelli. 

He’s living in exile and writes The Prince in order to get back in the good graces of the Medici family, and despite his other more extensive works of political philosophy, earns an indelible reputation as the author of the blueprint for political dictatorship.  There is, of course, some truth to this claim, but anyone who views him or this work exclusively in this light just isn’t giving the man enough credit. 

Machiavelli has performed a tremendous service to humanity by writing this book. Not because it’s advice that should be followed. The genius of The Prince is that it is an unvarnished examination of the true nature of political power.  The Prince is an unflinching exploration of power stripped of contemporary political doublespeak, wonky policy talking points, feelgood platitudes, postmodern obscurantism, or academic jargon.  It reveals the mind of brute, naked power spelled out in clear, lucid English that anyone can grasp.  Some of his observations are incisive insights about human nature and group mentalities.  Anyone who wants to understand the mind and motivations of any politician should absolutely read this book. 

Anyone who thinks that a 16th century Italian Renaissance political discourse holds no relevance in 21st century liberal democracy is sorely mistaken. Machiavelli was affirming the power of the 16th century city state, but his thought formed the bedrock of modern republican democracy and has lost none of its importance. If modern politicians and apparatchiks spoke with as much clarity as Mr. Machiavelli, people might regard politicians and political power with the suspicion and contempt they deserve. Machiavelli’s book may have gained infamy by having Stalin, Mussolini and Gotti as fans, but let’s not forget that even the American founding fathers drew inspiration from “Old Nick.”  There’s no doubt in my mind that this is Frank Underwood’s favorite book.

Machiavelli is credited as the founder of modern political science, and there is a cold, calculated logic to this discourse. The most shocking aspect of The Prince is the casual manner Machiavelli accords political leaders a moral exemption from the rules they impose on their population. For the politician, there is no line of moral transgression that cannot be crossed. It is simply a matter of understanding the forces that might conspire to undermine his rule and take the steps necessary to preserve power.

The Prince is part history lesson and part instruction manual. Machiavelli is an astute scholar of history and the The Prince is filled with references to events and the actions of heads of state. He identifies both the successes and failures of these statesmen and pinpoints exactly which behaviors and decisions contributed to the outcomes. 

Let’s take a look at Mr. Machiavelli’s observations and advice. 

Everyone sees what you appear to be, few experience what you actually are.

Is there any category of person for whom the delta between public perception and reality is the greatest than the politician?  Is there any category of person who is able to exempt him or herself from moral judgment more skillfully than the modern day Democrat? 

And here comes in the question whether it is better to be loved rather than feared, or feared rather than loved. It might perhaps be answered that we should wish to be both; but since love and fear can hardly exist together, if we must choose between them, it is far safer to be feared than loved.

I’m hard pressed to think of a quote which summarizes American foreign policy or the police state as effectively as this one. 

The vulgar crowd always is taken by appearances, and the world consists chiefly of the vulgar.

This quote applies just as much to physical appearance as it does the appearance of virtue. 

…the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.

I believe that Machiavelli made an incisive observation here. It’s been my experience that when arguing against government monopolies such as public education or infrastructure, the default rebuttal is that you oppose the underlying goal of education or transportation in general or you favor chaos and disorder or both. There is a strong tendency to assume that the status quo must not be disrupted and even entertaining the idea that free individuals could conceive something greater is regarded as naïve or reckless.

But when you disarm them, you at once offend them by showing that you distrust them, either for cowardice or for want of loyalty, and either of these opinions breeds hatred against you.

Machiavelli saw the importance and pitfalls of gun control long ago.  An effective state can’t afford to have subjects who will mount armed opposition nor can it afford to rankle those who assert gun ownership rights.  So instead you play a long game of propaganda, activist social science, and exploitation of public tragedy with good old fashioned manipulation of public sentiment. 

A prince must not have any other object nor any other thought… but war, its institutions, and its discipline; because that is the only art befitting one who commands.

At last, we arrive.  This is what the state does best. This is its true nature and purpose. It doesn’t even need to be bombs dropped or boots on the ground. It can be wars on drugs, poverty, science, or women.  The net result is perhaps worse. Not only do people actually die, but civic virtue, civility and reason die as well.

The Prince is a remarkable work.  Its simplicity and bluntness are qualities that are all too rare today.  Nowadays, citizens and politicians revel in layers upon layers of abstraction and rhetoric in order to rationalize state violence. And even when politicians are explicit about the usage of force, the other side is convinced that their preferred application of state force is better than the opposing side. 

The Prince is remarkable because it exposes the moral cancer that is eating humanity alive known as the State.  Is there any institution which sets individuals against each other quite like the State? How else does one explain the instant revulsion that political discourse breeds in certain individuals other than such discussions unmask a hidden brutality that lies at the core of political power? Machiavelli observed that the soldiers’ appetite for “avarice and cruelty” is sated through the military spirit of the prince. He was correct, but he didn’t extend the logic far enough.  It applies to the general citizenry as well.

Frédéric Bastiat: The Law

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I graduated from public high school and obtained a bachelor’s degree from a music school with some basic liberal arts requirements, and up until recently, I was never introduced to Frédéric Bastiat’s work. I’m disappointed by this fact, but after reading it, not surprised. 

Frédéric Bastiat’s masterpiece, The Law, should be read by everyone who values the freedom of the individual or a free society.  For those unfamiliar with Mr. Bastiat, he was a French businessman, political philosopher, and statesman and could be described as the Ron Paul of 19th century France. This book was published before he died and many justifiably regard it as his definitive masterpiece of political thought. The Law was intended as a response to the ascendant socialist policies and politicians. 

The Law is the megaton warhead of truth bombs. There isn’t so much as a wasted word. Every sentence bursts off the page and cuts through the fog of sophists, academics, socialists and would-be intellectuals with the precision of a Hanzo sword. 

The Law is a powerful argument that exemplifies the tradition of European classical liberal thought from which the American founding fathers drew inspiration and shaped the principles on which the modern libertarian movement is based. 

Bastiat argues that there is a supreme, natural law to which all written law must be subordinate, and that this ur-law has been perverted to serve its opposite purpose: legalized plunder. The right to “individuality, liberty and property” is the proper conception of the law and that the very existence of the state is merely the collective assignment of self-defense to a public institution.  Bastiat argues that as long as the state circumscribes itself to this function, individuals will not assign undue allegiance to the state nor petition for its expansion. It’s a compelling argument, but since socialism was ascendant when it was written, Bastiat attends to the logical consequences of empowering the state to engage in legalized plunder, the defining feature of socialist politics, in the remainder of the text. 

This book is one hundred sixty-six years old, and yet, everything in it would easily be shouted down as heretical and retrograde today by apologists for the state.  The truth of what he’s arguing cannot be denied. 

Bastiat righteously eviscerates the sheer elitism and contempt socialists have towards humanity by attempting to link moral choices and civic virtue to lawful coercive force. By supplanting the free choices of individuals with the forcible imposition of the will of the legislator and the bureaucrat, the socialist systematizes sociopathy, avarice and obedience.  All of the dysfunction Bastiat described in 1850 applies to the sad state of current affairs.

All of his observations of socialists are devastatingly accurate.  Socialists do not care for facts or reason and let neither get in the way of the forcible implementation of their agenda.  Socialists view humanity as empty vessels that need their divine guidance and their pretensions intellectual superiority. 

In the latter half of the book, Bastiat takes direct aim at the would-be ministrations of the philosophers, politicians and didacts of the day.  From Robespierre to Rousseau, Bastiat takes apart these insufferable authoritarians and their detestable designs on managing human affairs down to the last detail.  As a result of the perversion of the law to which this book is devoted, America and the West have colonized academia and created vast cottage industries dedicated to the various sects of state worship and their doctrines of obedience. The will to dominate others has polluted the minds and perverted the ambitions of people since the time of Plato, and Bastiat’s rebuke remains sadly relevant. Bastiat says it best:

If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of a finer clay than the rest of mankind?

Bastiat identifies the proper application of law as defensive force.  Every individual has an inviolable right to defend life and property. This is the sole function of the state confined to its proper role. In America presently, the respect for this basic, natural right is consistently undermined by the deranged and manipulative bleating of politicians, activists, and media alike in their ceaseless quest to consolidate power.  For some, mere ownership of firearms makes your motives suspect and armed protest will get you branded a terrorist by the bloodthirsty mob. 

One of the most provocative arguments is Bastiat’s skepticism towards universal suffrage.  Nowadays, all you hear from academic, media, identity politics and feminist circles is a relentless drumbeat of scorn and reproach heaped on the “white male capitalist patriarchy” and a seemingly ceaseless campaign to browbeat men everywhere into a posture of penitence for daring to exclude anyone from the ballot box despite having no role in crafting the founding documents.  It’s very easy and tempting to view Bastiat’s argument as the retrograde view of a man who wants everyone else to be subordinate, but this reasoning emerged from a philosophical conviction that political power was not meant to be coveted or actively pursued in service of anything beyond preservation of liberty in the first place. He contends that if the law were confined to its proper function, everyone’s interest would be the same. Films like Selma and Suffragette seem explicitly calculated to inculcate feelings of guilt and shame in men (white men specifically) for committing the unspeakable crime of disenfranchising women and minorities from voting. It’s more than a little ironic that feminists don’t want male politicians making decisions by legislative fiat over their reproductive choices, but are simultaneously completely content to advocate for expropriating resources for material benefits and special legal privileges by the same method.

Speaking of Suffragette, it’s also ironic that movie with such a pro-suffrage message seems to have borrowed from Mr. Bastiat. Bastiat wrote, “The safest way to make laws respected is to make them respectable”.  In the film, Violet Miller says, “You want me to respect the law? Then make the law respectable”.  Where was Inigo Montoya when we needed him?

Despite the attainment of universal suffrage, this achievement is apparently no longer sufficient either.  Between open appeals from our enlightened progressive overlords for mandatory voting and completely sincere appeals for children voting, the appetite for government sponsored avarice and unchallenged fealty to the state knows no boundaries.

Another important point Bastiat makes is that one cannot formulate political theory without first developing a rational, scientific theory of economics. Modern economic thought takes government intervention as a given. Bastiat died before the Marginal Revolution, but it’s apparent that his conception of economics assigned greater importance to human action and seemed closer to the theoretical framework of praxeology that was eventually articulated by Mises.  

As compelling as the idea of a limited state is, it seems fairly apparent that this idea has proven itself a failure. The law has been perverted to serve its opposite purpose, and many now take it as a given that the law must serve socialist agendas. Generally speaking, arguments to the contrary are immediately regarded with scorn, ridicule and censure. After years of inflammatory anti-capitalist rhetoric from the political, academic and media complex, we are living in a time when a self-identifying socialist is running for president. Imagine Mr. Bastiat’s disappointment in the current state of affairs were he alive to bear witness.

Despite the rhetoric of Constitutional conservatives and minarchists, they have no track record of success in scaling back the state.  During the Obama administration alone, the funding for the Department of Homeland Security dried up and the charter of the Ex-Im Bank was allowed to expire.  Both were revived and conservatives played a role in their restoration. And when conservative candidates for president openly champion minimum wage indexed to inflation, it’s fair to say that modern American conservatism has drifted far away from its original principles.

Forget the pretentious Marxists, socialists and the so-called anarcho-communists and their attempts to resuscitate dead ideas and pass them off as transgressive thought.  These people dominate academia and have plenty of sympathy in the media, political and intellectual classes and they continue to present themselves as beleaguered underdogs whose voices are being choked under the oppressive stranglehold of capitalism. What utter horseshit. 

Those who’ve borne the torch of liberty have always had to fight the socialists, centralizers, planners, and academic elitists who think they know what’s best for you. Sadly, the false promise of socialism retains its appeal in the 21st century. Fortunately, the message of The Law remains undimmed by the passage of time and more urgent than ever. 

The Big Short (2015)

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Despite its own blatant obsession with profits and artifice disguised as substance, Hollywood has been deeply unkind to Wall Street in its films. It’s unsurprising given the fact that liberals have colonized Hollywood and an overwhelming majority of films and television shows have varying quantities of leftist editorial.  You’d assume they’d be nicer given that plenty of Wall Street hedge fund money flows into Hollywood. Perhaps the tone of reproach and recrimination that forms the backdrop of The Big Short can be attributed to Wall Street’s increasing reticence to fund Hollywood ventures. Regardless, The Big Short is filled to the brim with contempt for banking and partisan agitprop.

I went into the cinematic adaptation of The Big Short expecting it to have the same editorial flaws as the book and these expectations were confirmed. Unfortunately, the film exceeds the dishonesty of the book and makes additional errors which alternate between rehashing thinly veiled leftist talking points and acts of blatant deception. And the book is plenty dishonest all by itself.

Why grouse about it?  Because the film, like the book, wants to have its cake and eat it too. It wants to be big Hollywood entertainment while simultaneously convincing you that it’s being honest with you and giving a definitive, fact-based account of the housing crisis. It’s a movie that wants you to believe that it is a Smart, Hollywood Movie made by Smart, Educated People Who Get It and it’s exposing that stuff you always assumed was a bunch of shit, but it’s really here to confirm your bias! See? The New York Times and the Wall Street Journal agree, too!

The film deploys a number of techniques to insinuate its truthfulness. Just like House of Cards, The Big Short makes generous usage of the dramatic aside. The actors deliver little monologues directly to the audience which refer to the actual historical events to let you know that you’re being admitted into a circle of confidence and being given the straight dope.

In the book, Michael Lewis offers little explanatory passages throughout the book to help the reader understand the actual instruments and transactions being discussed. In the film, they use celebrity cameos and snarky text blocks. They’re lifting the veil of secrecy and demystifying all that Wall Street technobabble! Margot Robbie explains CDO tranches while luxuriating in a bubble bath! Anthony Bourdain makes an analogy between CDO’s and fish stew made with aged ingredients!  Selena Gomez breaks down synthetic CDO’s while playing blackjack! How droll!

Bear in mind that the film isn’t without entertainment value. Director Adam McKay has a track record in comedy and he wisely sought to emphasize the book’s bleak humor. As a piece of entertainment, The Big Short is a Wall Street movie that at least has a little fun with an admittedly gloomy topic.  I just wish it was as substantive, informative and morally righteous as its cheerleaders claim. 

The film’s partisan bias surfaces right away.  In a voiceover delivered by Jared Vennett (Deutsche Bank trader Gregg Lippman IRL), Ryan Gosling takes us back to the heady days of Salomon Brothers in the late 70’s and early 80’s where the mortgage-backed security had its humble origins.  We’re introduced to Lewis Ranieri, the presumed father of the MBS as recounted by Michael Lewis in Liar’s Poker.  Before mortgage securitization, Vennett says, banking was a boring profession. It was inhabited by losers. It was devoid of this absurd speculation with Byzantine instruments and impenetrable jargon.  It was boring. You got that, proles? Banking used to be boring.  Let’s make banking boring again, Comrades!  If only there was a politician with those aspirations.

The film also shamelessly deploys some blatantly partisan semantic dogwhistles. In Vennett’s initial pitch to FrontPoint Partners (the hedge fund run by Mark Baum who was played by Steve Carrell), he uses a jenga tower to explain the CDO. In his explanation, he says old fashioned mortgage-backed securities were backed by the government and were safe. But then along comes private market subprime bond securitization which introduces all these risky instruments into the system! Got that, proles? Government = safe and boring. Private market = unregulated, risky, unbridled, rapacious greed

If only it was actually true.  Let’s take a look at what Cameron Cowan of the American Securitization Forum had to say to the House of Representatives Subcommittee about the role of legislation and GSE’s on the expansion of the subprime mortgage securitization market back in 2003:

As part of the Tax Reform Act of 1986, Congress created the Real Estate Mortgage Investment Conduit (REMIC) to facilitate the issuance of CMOs. Today almost all CMOs are issued in the form of REMICs. In addition to varying maturities, REMICs can be issued with different risk characteristics. REMIC investors—in exchange for a higher coupon payment—can choose to take on greater credit risk. Along with a simplified tax treatment, these changes made the REMIC structure an indispensable feature of the MBS market. Fannie Mae and Freddie Mac are the largest issuers of this security.

Add to this home ownership mandates from HUD, the FHA and pieces of legislation like the Community Reinvestment Act, and you’ve got a pretty clear set of government mandates and incentives which provided more than enough fuel for a housing bubble.

The film is playing a very simple game of misdirection. Just because subprime mortgage bonds were underwritten by private institutions does not mean that private institutions created the conditions for the housing bubble.  Both the film and the book make no effort to distinguish between mortgage loan origination and securitization and the moral hazard that accompanies this separation. 

Just like the book, the film turns a completely blind eye to the role that monetary policy played in inflating the bubble. In a particularly revealing scene, a Goldman Sachs employee informs the “garage band hedge fund”, Cornwall Capital that they can buy credit default swaps because “If you give us free money, we’ll take it.” 

Of course, the filmmakers wanted to portray the dirty, evil greedy bankers as unscrupulous thieves.  But if you just reorient that statement and apply it to the relationship between the Federal Reserve and the banks, it’s actually remarkably accurate.  The Fed dispenses “free” money, and the banks take it

The film’s biggest partisan offense is McKay’s decision to swap Cornwall’s visit to the SEC with a visit to the Wall Street Journal. Cornwall wanted to expose the imminent housing collapse and they made their initial pitch to the press. In the film, their pleas are met with indifference by a Wall Street Journal reporter who’s so deep in the tank with the bigwigs, he can’t jeopardize his position to do the right thing.  Of course! Those bootlickers at the Journal aren’t going to have any courage. They’re toadies for the bankers! They were completely oblivious to the possibility of a housing bubble!

In the book [1] however, the WSJ connected them directly with the enforcement division of the SEC. And guess what?  Their case was treated with total indifference. 

They tried to make up for it in a scene involving a female college friend recently departed from the SEC.  In a poolside conversation at an extravagant industry conference in Las Vegas, the former SEC employee is basking in the sun in a sexy bathing suit listening to the impassioned pleas of Jamie Shipley and Charlie Geller. She confides that the SEC wasn’t pursuing enforcement actions because the funding dried up. 

Come on, guys. This is a bald-faced lie. Not only did SEC enforcement actions escalate during the Bush administration with nothing to show for it, but SEC agents were busy watching porn when the economy cratered. The SEC are not exactly the indispensable watchdogs that many politicians would lead you to believe.

They even sneaked in a line of incredulity when their friend flirts with a shirtless hunk from Goldman. “You mean there isn’t a law which prohibits you from seeking employment in the private sector?!”

Yes, we get it, McKay. You’re doing your best to include all the requisite talking points.  

Topping off this turd pile of talking points is the parting speech Mark Baum gives as he’s persuaded into selling FrontPoint’s position in credit default swaps just as the economy grinds to a halt. He anguishes over the decision because he knows that the crisis will be blamed on “immigrants and minorities.”  That’s right, you dirty conservative bastards.  Not only do you sanction unscrupulous Wall Street thievery, but you’re xenophobes and racists and you’ve screwed everything up for people who are just trying to get a modest piece of the American Dream.  Now shut up and get in line. 

The book and the film are remarkably unwilling to assign any real criticism towards the government. Both Lewis and the filmmakers seem intent on having you believe that the government played no role in encouraging mortgage securitization, home ownership, leveraged finance or excessive household debt.

In the last scene, Mike Burry as played by Christian Bale is typing up his final letter to his clients after banking $720 million from credit derivatives. In a voiceover, he inveighs against fraud and following authority.  On the surface, it’s a powerful screed, but like the remainder of the film, it’s shallow and slightly misleading.

Surely, we should repudiate fraud in business dealings, but if you aren’t going to discuss government fraud or how it contributes to a culture of fraud, the moral lesson seems unnecessarily selective and intellectually dishonest.  Unquestioned deference to authority is something that each person should challenge, but if your story about the 2008 financial collapse doesn’t question any government authority and heaps all of the blame at the feet of Wall Street, you might just be a partisan hack. 

[1] p. 166, The Big Short


Michael Lewis: The Big Short

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Michael Lewis is a talented writer. He succeeds in being entertaining and informative while rendering historical events into a compelling story.  I got many chuckles from the detached bemusement he held towards his tenure at Salomon Brothers in Liar’s Poker. All of his storytelling gifts are on full display in his account of the housing crisis, The Big Short. However, make no mistake, Lewis is also a polemicist and the bemused tone of Liar’s Poker has metastasized into a smug preachiness which points the finger of reproach in one direction. 

The Big Short recounts the housing crisis from three different vantage points. Each of these individuals saw the illusion at the center of the exuberance before everyone else and capitalized on it by shorting the housing market when no one really knew how badly the whole thing would fail.  As a narrative, it is very entertaining. As a polemic, it suffers from confirmation bias and an extreme case of intellectual dishonesty.

Lewis isn’t so interested in getting to the real roots of the housing crisis as he is in spinning an entertaining yarn.  In this respect, he’s every bit as deceptive as the bankers and the industry he smugly ridicules.  His account focuses almost exclusively on the quirks and quips of his colorful characters and the sordid details of their improbable journey leading up to the collapse of 2008.  Unfortunately, he devotes little attention to the incentives bred by legislative agendas, GSE’s, regulatory agencies or monetary policy which created an environment of such extreme moral hazard in the first place.

Measured in terms of storytelling appeal, The Big Short is very successful.  Lewis does a great job of fleshing out the details and motivations of his central characters by portraying them as eccentric, scrappy underdogs that you want to cheer.  Mike Burry is the antisocial doctor with Aspergers turned investment savant who made his name running a portfolio of straight up value investments which outperformed spectacularly in a falling market.  Burry spent countless hours scouring mortgage bond prospectuses and saw a grand opportunity for the short of a lifetime.  Steve Eisman is the brusque Oppenheimer analyst who made his bones being a truth speaking contrarian in an industry of sycophants and dittoheads.  Like Burry, he smelled the rot in the subprime mortgage market and set out to get to the bottom of it.  Rounding out the cast are Duetsche Bank trader, Gregg Lippman, and the “garage band hedge fund”, Cornwall Capital. 

As a piece of finance history, The Big Short is fairly successful and reasonably informative. It distinguishes itself by recounting events from its unique point of view. The book is also a decent short study of structured finance and credit derivatives. Lewis does a good job of unraveling and demystifying CDO’s and credit default swaps.  A recent college graduate told me that this was required reading in his finance class. This book has some merit as historical document, but let’s not get carried away, folks.

The book also succeeds in portraying how difficult it is to stand alone and hold on to an investment thesis when the chips are down. When things began to unravel in the subprime market, all of the players apparently faced incredible pressures from every side to stick to their convictions. Lewis apparently took some liberties describing the pressure Joel Greenblatt placed on his most successful disciple, Mike Burry.  Just as any other life endeavor, sticking to your guns when the world is shouting you down is never easy. 

On the other hand, one detects the unmistakable stink of partisanship throughout the book and the reinforcement of leftist caricatures and narratives.  A particularly egregious example is his account of Cornwall Capital’s attendance at a Bear Stearns hosted client conference in Las Vegas.  In their ongoing attempts to get to the bottom of CDO machine and confirm their bearish thesis, they attended a target practice session at a firing range.  The Bear Stearns salesmen were surrounded by “men in tight black t-shirts who appeared to be taking the day off from hunting illegal immigrants with local militia”.  He goes on to describe how the targets were pictures of Osama bin Laden, al Qaeda terrorists, a black kid attacking a “pretty white woman”, and an Asian “hoodlum waving a pistol”.  That’s great, Lewis. Corrupt white investment bankers making piles of money exploiting the working class and indulging their irrational gun nuttery and racist proclivities on a firing range.  Just sprinkle in some stuff about white privilege, white supremacy or gun control and it’s Salon ready.  Stereotypes get created for a reason and there’s usually granules of truth to any stereotype you can name.  Maybe all of the worst assumptions Lewis infers from his description are true, but it’s difficult to view these details serving any other purpose but to reinforce smug, elitist contempt for gun owners and investment bankers alike.

Given the overarching disdain Lewis heaps on the finance industry throughout the book, his remarkable unwillingness to pile a comparable level of contempt on the central banking and regulatory apparatus which shaped it is very revealing. One wonders what, if anything, he ultimately wants to affirm with this book. He speaks of a naïve “hope that the government would intercede to prevent rich corporations from doing bad things to poor people” and unironically calls America a “free market”.  Yet, he reveals the ineptitude and disconnection of the government at various points throughout the book.  Between the scathing critique of banking and, when it occurs, failure of government oversight, what is Lewis promoting here beyond self-righteous disdain and knee-jerk cynicism for American finance? 

Lewis is forthright about both the failure of the SEC to intercede when Cornwall Capital exposed the imminent CDO calamity in their own offices as well as the false triumphalism of Fed propaganda as it was blared from its CNBC megaphone. And yet, he has the audacity to assert that Wall Street uniformly opposes regulation in boom cycles but “insist” on being rescued in a market collapse.  Based on what was revealed in Hank Greenberg’s lawsuit against the government, one can hardly say that the government’s confiscation of the majority of common shares in AIG was a product of pleading from AIG leadership.  It’s not even completely clear that AIG needed a bailout in the first place. The TARP cash that was dispensed in the aftermath of the crash wasn’t exactly as willingly and eagerly taken by banking executives as Lewis would lead you to believe either.  With regard to monetary policy, the ultimate source of all of the loose credit in the first place, he makes only one passing mention of it through the words of Steve Eisman. 

Michael Lewis seems exclusively focused on heaping all of the blame for the crisis at the feet of the industry, and in this respect, The Big Short succeeds wildly. Individuals are responsible for their actions, and investment bankers certainly deserve their share of the blame.  However, by refusing to point any finger of blame at the government power which shaped the industry or the central bank which pumped all the credit into the system in the first place, Lewis seems engaged in a game of self-deception of his own.  He speaks of government “forcing” change on the financial industry as though government is this bastion of moral rectitude and virtue and that passing laws and regulation is some kind of unalloyed good.  He bemoans industry consolidation and its transformation from a collection of private partnerships to publicly traded corporations, but leads you to believe that this too was the byproduct of capitalism’s inexorable march towards Armageddon. 

Lewis also seems to be taking some unnecessary self-satisfaction in portraying Eisman et al as the Prescient Ones while everyone else was asleep at the wheel. This idiotic self-delusion is at its nauseating worst at the beginning of the last chapter where he has the gall to insert a quote from goddamn Pope Benedict XVI.  Positively loathsome. Why doesn’t Ron Paul’s speech from 2001 count?  He seemed more attuned to the situation than Paulson, the Wall Street establishment, the Fed or the SEC.  What about Peter Schiff’s numerous warnings?  What about the warnings of several other libertarian thinkers and economists?  Even if it wasn’t his primary intention, Michael Lewis is affirming American state capitalism with this book. The Big Short is kind of a postmodern Horatio Alger story. Amidst a sea of industry-wide self-deception, several clever and enterprising individuals made a fortune as Rome burned. Murica, motherfuckers!

The banking industry is already nearly universally hated, and yet, Michael Lewis seems solely concerned with throwing gasoline on a fire that’s been stoked for years by politicians and demagogues alike.  Just like the heroes of his own story, he’s having his cake and eating it too. Because even as he shows you all the financial arsonists who set Rome on fire, he’s earning a tidy sum by giving you the requisite dose of cynicism that government officials count on in order to keep the game rigged for themselves. Casino capitalism is great when you’re tacitly betting for the house to win.  The only house which presents itself as too big to fail is the government, and in every hand, the house wins. 

It’s sadly unsurprising that The Big Short has been dramatized for the big screen. It’s not the chronicle of the financial crisis the American public needs, but it’s the one that it gets. If anyone in television or film had any guts, they’d adapt The Great Deformation for the screen. Hollywood loves feelgood pablum, and Lewis is a very capable purveyor of the liberal agitprop that’s Hollywood’s stock in trade. So enjoy this smug moralizing disguised as definitive financial history while you queue up for the ballot box to vote for Hillary or Bernie, proles.  The finance industry is filled with opportunities for skewering and Lewis has proven that he’s more than happy to turn a buck plying his brand of elitist cynicism. 

Spotlight (2015)

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Besides being a surprisingly engaging dramatization of the Boston Globe spotlight team’s exposé of the child sex abuse epidemic of the Catholic Church, Spotlight is a soaring testimony to the importance of free speech and a free, independent press.  With freedom comes great responsibility, and just as this film affirms these principles, it also reminds us that the pursuit of the truth takes real courage. 

Spotlight falls solidly in the tradition of films such as All The President’s Men.  It’s another great example of how a story of individuals in the press who doggedly pursued the truth and real moral virtue in the face of institutional opposition and threats of ostracism can make compelling screen drama. 

All of the elements of this film click.  Everything from the casting to the writing to the details of the victims to the quintessentially Bostonian vibe of the film, Spotlight epitomizes intelligent, economical cinematic storytelling. Out of all the films that have billed themselves as Boston Films in recent years, this and Black Mass were the most successful in terms of their portrayal of the scenic details, accents, personalities and provincial attitudes. 

The tension of the film centers around the ever escalating opposition and stonewalling the team faced as they deepened their investigation. An especially great scene which captured the courage that each player had to muster was Marty Baron’s first meeting with Cardinal Law; roles played by Liev Schreiber and Len Cariou respectively.  Prior to the meeting, the Globe lawyers filed a suit to unseal public records pertaining to past abuse cases. Baron is a model of composure as Law tries to seduce him into the conspiracy of silence between institutional powers.  “Things go well when our institutions work together, don’t you agree Marty?”, asks Law.  “Actually, I think the press works best when it stands alone.” BOOM! Fuck off, Law. 

It’s difficult to imagine anyone coming out of this film with anything other than a deep-seated contempt for the Catholic Church hierarchy. The enormity of the damage done to the lives of the victims is harrowing all by itself, but what is even more galling is the combined sense of denial and above-the-law entitlement exercised over many years.  The scale of the scandal beggars belief. 

The most abiding message of the film is its fearless affirmation of free speech and a free, independent press. Good journalism is an invaluable public service and having the courage to suspend confirmation biases, challenge institutional power and pursue facts wherever they lead should be the guiding principle for any journalist and the standard to which journalists are held accountable.  Since we live in an era of sensational clickbait journalism, academics who obscure reality by cloaking theories in pretensions of impenetrable profundity and publications which pursue an agenda driven interpretation of “facts”, the film reminds us that there are objective, verifiable facts and obtaining them is often more difficult than any of us imagine.