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.”