The Nanny Nation

Once upon a time, America was a wild, unsettled country. Enterprising men and women eager for land of their own literally ran for it. They spent their lives working from dawn until dusk on lonely homesteads to build a better life for themselves and their children.

The distance between survival and total failure was small, and families behaved accordingly — protecting against risk with great caution.

Barry Ritholtz, in his new book Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy writes, “The iconic image is the American cowboy. You can picture him on a cattle drive, wearily watching over his herd. All he needed to get by were his wits, his horse — and his trusty Winchester.”

Americans are proud of this heritage, proud of being a country of “determined, self-reliant individuals” where hard work, not government handouts or family connections, promised a shiny future. Ritholtz’s book seeks to explain how the United States, once so proud, became “a nanny state for well-paid bankers.”

Ritholtz may be just the right person to explain the transition to both the disillusioned amateur and the finance junkie. He doesn’t pull his punches or bury the truth in layers of finance-speak, caveats, and disclaimers. Since he began blogging seven years ago, in-the-know readers of his popular blog, The Big Picture, have turned to Ritholtz for his prescient, refreshingly honest commentary on the economy. Anyone interested in understanding the roots of our current crisis should check out the book, but while you wait by the mailbox, here are some highlights.

Ritholtz On Bailouts

Unlike some commentators and economists who have blamed the crisis on a failure of capitalism and free markets, Ritholtz bases his book on the premise that we haven’t had a properly functioning capitalist system since 1971, the fateful year that the U.S. government bailed out Lockheed Martin.

Before 1971, ” … excessive greed, recklessness and foolish speculation were punished by the market.” If an early American cowboy left his herd to pursue a shaky investment deal, he most likely ended up ruined, stuck on a construction crew in some dusty outpost while he tried to scrape together enough money to start again. Meanwhile, the conservative cowboy who stuck with his herd, growing it carefully and cautiously, prospered — and perhaps picked up a few of Cowboy #1’s cattle at a steep discount.

After 1971, all of that changed.

While the United States government had intervened on other occasions to encourage young industries, its involvement had been modest and usually resulted in the delivery of a valuable public good. The Lockheed bailout was different; it was the first government bailout of an individual, private corporation. It also flew in the face of capitalism’s crucial auto-correcting mechanism. Ritholtz quotes the economist Allan Meltzer: “Capitalism without failure is like religion without sin — it just doesn’t work.” A generation of American cowboys had learned that if their business venture failed, their very own red, white, and blue knight would come riding in.

Ritholtz walks his reader through the bailouts of the 70’s, 80’s, and 90’s and stops briefly at the 1980 Chrysler bailout to play “What If” as in “What if the government hadn’t butted its nose into the private sector?” He hypothesizes that the failure of Chrysler might have served as a wakeup call to General Motors, Ford, and the United Auto Works (UAW) union, resulting in more fuel-efficient cars and more sustainable labor contracts. Chrysler’s assets may have attracted investors, Korean manufacturers perhaps, and the company may have reemerged as a smarter, slimmer corporation. “It is quite reasonable to conclude that the bailout of Chrysler in 1980 prevented significant market forces from doing their best to reboot the entire U.S. auto sector.”

Ritholtz on Greenspan

Ritholtz reiterates some well-established criticisms of Greenspan — he kept interest rates too low for too long, he had blind faith in the self-regulating powers of markets, etc. However he also takes the Federal Reserve governor to task for his focus on propping up asset prices, a policy Greenspan affirmed in 1996. Greenspan said, ” … evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.”

To Ritholtz, this new focus on asset prices as a goal of monetary policy explains much of Greenspan’s disastrous actions. He writes:

The Fed’s power to change interest rates as a way to promote and protect asset prices is the key to understanding the Greenspan era. Indeed, it is the crucial economic element that was the precursor to the late 2000 bailouts. Rather than seeing markets as a sign of the economy’s health, the Fed chair tended to see asset prices as an end unto themselves. What this led to was the treatment of symptoms, rather than underlying causes. The markets’ health, rather than the economy’s, seemed to be what was of paramount importance.

Once Greenspan established his willingness to protect asset prices, traders and market participants began to engage in ever riskier behaviors. After all, as long as Greenspan had their backs, what was the downside?

Ritholtz on The Ratings Agencies

Ritholtz doesn’t go any easier on the ratings agencies, a stance which has caused him some headaches. In a recent blog entry, he wrote that he butted heads significantly with McGraw-Hill, the book’s original publisher and the owner of Standard and Poor’s, over his critique of the agencies. Ritholtz eventually returned his advance and found a different publisher for the book.

Ritholtz explains that the ratings agencies were integral players in the creation of the structured products, working to ensure that they received triple-A ratings. It was these triple-A ratings that allowed the securities to spread so thoroughly through the market, leaving even “conservative” investors vulnerable.

More controversially, he also places blame squarely on the purchasers of these products. He writes:

Buyers of these securities should have paused a moment to consider one simple fact: These C.D.O.’s rewrote the laws of economics. They promised to be as safe as U.S. Treasuries, but paid out a significantly higher yield. In other words, for the same exact risk, the reward was much greater. This should have been recognized as an impossibility. In the markets, greater reward always means greater risk. Someone would either be winning a Nobel prize in economics — or going to jail.

Bailout Nation is a lament for the early days of our country, for a system that was both ruthless and ruthlessly efficient, a system that no longer exists in the United States. Ritholtz writes, “As a car guy, I can say without hesitation that General Motors hasn’t designed a dashboard that wasn’t ugly as sh*t since the 1950’s.” He then goes on to point to Toyota’s success in America and concludes, “I am hard-pressed to name any nonfinancial American company that deserves bankruptcy more than G.M.”


Nosybear

The problem with your cowboy metaphor is that it isn't true. The lone cowboy, the lone prospector, the lone sheriff eking out a living with their fists and their brains is a product of Hollywood and a few legendary figures, not the reality of life in the West. The lone cowboy froze to death in the winter. The lone prospector either died on his claim or gave up looking for gold and headed back to the South Platte Valley to farm. And the lone sheriff, well, most of the settlers in the West were civil war veterans, heavily armed and used to fighting. What happened in American business is that business leaders publicly espoused the myth while maintaining the safety net of bought and owned Congressmen. There is nothing wrong with interdependence and public support. The West was built on it. The problem is business leaders who rely on interdependence and public support while claiming to be long cowboys.

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Mark S.

Ritholtz misses the point that even the mythical cattle rancher had to watch the direction of beef and corn prices and the associated futures contracts. Without them the middleman took all of the profit, with them there has to be a regulated market in which they are traded. The situation is no different today, just different instuments and derivatives. If for example Credit Default Swaps and the underlying mortgage backed securities had traded on transparent, regulated markets someone would have been looking at the technical charts and and the short sellers would have been on it a lot sooner. The system works when it is allowed to.

Ritholtz

Thanks for the kind words.

There is lots more blame to go around -- its understand how this happened if we want to have any chance of getting the repairs right.

Joe FItz

You guys are missing the forest for the trees: The book's intro describes the cowboy metaphor as an "idealized version of America."

The issue isn't the specifics of the metaphor, its the evolution, the changes over time in public attitudes and government behavior.

PS: Cattle ranchers did not worry about beef futures 150 years ago, because they didn't exist . . .

M.B.

Great analysis. It makes you wonder what mess is being created with the government throwing money right now, hoping some of it will stick.

charles

I'll have to read the book. It's sad, the mentality I do see these days, personally. Homeowners that feel they need to be bailed out, corporations, people that expect the government to step in and help when they choose to build their houses on a flood plain or in an ecosystem designed to burn, almost comical and falls right in line with the "ugly American" sentiment we get from our friends in Europe. Indeed the risk/reward equation is hosed.

Wouldn't it be wonderful if the government would stick to ensuring transparency (a chore by itself), and enforcing a clear set of ground rules, and refrain from attempting to "fix" things. Centralized planning works inversely proportional to the degree to which the fist squeezes. A bailout is a weak version of centralized planning.

And like fire suppression, the longer you suppress the greater the eventual conflagration is sure to be. Unfortunately, we are terrible at examining the breadth of possible alternative histories that might arise given a set of decisions, and I doubt we will ever be very good at it.

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Mike B

There is nothing wrong with government intervention if it is based on long term views that the private sector often fails to take into account. Just like there are certain types of basic research that require government funding due to the long time horizons and uncertain outcomes, sometimes there is value in a company that goes beyond Wall street and its quarterly profit cycle. Today Lockheed is a critical component of our defense industry and in the aftermath of the 80's bailout Chrysler not only repaid the loan with profits from its highly successful K-cars, but also managed to trick Daimler-Benz into paying off its shareholders and then subsidizing its workforce for a decade. I don't see what's a better government policy than getting Germans to transfer billions of dollars to American workers and shareholders.

Sean Kelly

In the interest of restoring our cowboy culture, maybe we should have an old fashioned neck-tie party for some of the no-good, thieving, rob-you-with-a-fountain-pen varmints that got us into this mess of hurt.

Cathy

I have not read Ritholtz' book but I will. It is about time someone pointed out how we have declined from a nation of doers to a nation of leechers.
It is simply impossible to survive with an economy that relies on service industries vs. manufacturering. And the nail in the coffin for the latter would be the Energy Bill recently narrowly passed by the House

Dan

So our cowboys are really closet-socialists. And thanks to our pay-to-play government, it shall remain that way (unless there is ever true campaign finance reform).

frankenduf

i utterly agree with nosybear- any nostalgia belies the myth of free markets and capitalism themselves- we have never had free markets, as they are much too unstable to build a society around- and we have never had capitalism- what we have is a system of state capitalism, whose corruption has reached the apex from subsidy by taxpayer to downright looting of the taxpayer bank- what we really have is financier outlaws, and we need a sheriff to round 'em up- Cuomo can you here me?... CUUUOOOOOOMMMMMMOOOOO!!!! (to be read as Shane)

b. shavers

Thanks for this column, today. I have never heard of Barry Ritholtz before, But I will buy this book and read his blog. My conception of the modern market is similar to how you describe that of Mr. Ritholtz. I just haven't known how to properly state my ideas.

Though not a goldbug, I also believe that our repudiation of the gold standard , about the same time as the Lockheed Martin bailout, has had a deleterious effect. There is no longer any kind of real baseline. Everything is by fiat which can be dictated by those who can best petition or bribe the government politicians.

Nothing is real anymore; the rules change to benefit small connected segments of our society. I look forward to reading more of Mr. Ritholtz's thoughts on this subject.

billy bob

Good article, but it's too late. Our country will have to learn the hard way again. As you can see there is no real economic perspective among most of the public. An inefficient economy with slow or little growth will be the result of bailouts, continued rent seeking, and government subsidy. We are trading our future away to become debt slaves to the Chinese because we are afraid of some short term pain and don't have faith in the efficiency of the invisible hand.

alewis14151

With a hed like "The Nanny Nation" on the front page, I thought I was going to be reading about finger-wagging Dudley Do-Rights (and municipalities) lecturing us on exercising, eating food with lower cholesterol, stopping already with that smoking habit, etc.

Good points well made, though, even if it wasn't what I expected.

Elizabeth Renant

Can I just add my voice to the rest who are tired of the only-partially valid "cowboy" metaphor? In point of fact, the West was really won by cooperative efforts in towns and communities, not by Clint Walker (much as I loved him, and yeah, I've given my age away) all by his lonesome watching over the heard.

Meanwhile, back at the mechanized, hygienized, four-wheel dependent-21st century-TV-Internet Saturated-Lazy-A** Ranch, a whole lot has changed in the last 150 years and faceless guys in suits sitting at computers were looking at enough money to buy and sell Dodge City - and naturally took it and ran.

Government isn't creating culture, it's reflecting it.

That's why there's so few family ranches and farms being handed down - subsequent generations don't want to work from dawn till dusk and they want nice clean jobs where they can make lots of money and shower before work intead of after work.

The truth is, there have to be regs because human nature is a cesspool of short-term greed (like, Hell-O! Mr. Greenspan!), but it can't be too interfering or we get Stalinism. So somehow a judicious blend of oversight and market vitality that works for who we are now, and not a John Ford cartoon that was never real in the first place, has to be arrived at.

I'm not thrilled with the bailout, either, and I'm a liberal progressive. But I'm not thrilled with it because it allowed a corrupt system to reconstitute itself in much the same form, let the perps go free, had the fingerprints of that crony skank Larry Summers all over it, and gave the banks a real soft landing while it left the rest of us to sink or swim.

Whaddya think of that, pardner?

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Caridad

It looks like "Nanny Nation" shares some myopia with Gunn's take on pioneering days: 19th c. land settlement was available for mainly for Americans of European-descent; present-day banking bailouts are for predominantly white, upper-class oligarchs. Please complicate this picture of the recipients of government largesse.

Stacy Tucker

This analysis seems to miss the point that giant businesses are not lone cattlemen. If a large business fails due to greed or inept management, it doesn't just harm the owner and primary decision-makers. It destroys the economic well being of the employees, as well. These employees may have been just as conservative and hard-working as any frontier pioneer, but will nonetheless be ruined by decisions completely out of their control. And then the businesses that depend on the purchases by those employees will have problems, affecting their own employees, and the cycle becomes more devastating.

We no longer live in a society where individuals can live or die by their own mistakes, because those mistakes affect all of us. Like any system, capitalism has to evolve to acknowledge the new global interconnectivity with which we all live, happily or otherwise.

AK

"Today Lockheed is a critical component of our defense industry and in the aftermath of the 80's bailout Chrysler not only repaid the loan with profits from its highly successful K-cars, but also managed to trick Daimler-Benz into paying off its shareholders and then subsidizing its workforce for a decade."

This comment largely misses Ritholtz's point. Sure, the bailout was good for Chrysler. Sure, the bailout was good for Lockheed. A bailout is always good for the bailed-out.

The real issue is whether these bailouts transformed American industry in a positive or negative way. If you're a Chrysler bondholder, of course you want Uncle Sam to cover Chrysler's debt to you. But when the government does so, it creates two problems: it teaches other industries that they can be reckless, and it hurts competitors.

If Lockheed had failed, we still would have had Boeing. McDonnell-Douglas was an upstart company at the time of the Lockheed bailout, and might still be around today had it not had to compete with Lockheed. Today we're bailing out GM. Great for GM, not so great for Ford, which is limping along. Without competition from GM, Ford would have a greater chance of recovering. But now Ford faces two problems: it knows that Uncle Sam is going to cover its mistakes, and it had to compete with a government-backed competitor.

Businesses must be allowed to fail. Failure sucks, I know. It hurts innocent people. But artificially propping up bad businesses hurts more in the long run.

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marik7

There is no reason to assume that the nation's defense needs could not be served as much by companies that did not receive a bailout as by Lockheed Martin, which did.

The article provided an alternative future for Chrysler at least as attractive as an income transfer from Germans to Americans and K-cars. The article discusses refusing to bailout failing companies. This may be a government policy, but its effects are unknowable in cases when a bailout has actually been made. The question is what good might have come of refusing to bailout Chrysler.

Imad Qureshi

This is great. Although there is always something good on this website to read but its been a while I read something like this. Great analogies and right to the point. I am buying this book.