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.”


Johnny E

Lockheed was anything but a private enterprise. It was a major defense contractor while the military-industrial complex was in the midst of a war in Vietnam and the Cold War. Lockheed and the government had a symbiotic relationship.

60726x

You might be navigating by looking in the rear-view mirror on this one. If the downfall of American capitalism is caused by government engagement, can you point to a global economy that has been successful by remaining true to it's capitalist roots?

The fascinating aspect of this economic trauma and the subsequent navel gazing is the lack of attention paid to the success of China's centrally-planned economy. We've lost our manufacturing to a country that doesn't have freedom of the press or free elections. They don't have a culture of the individual cowboy, either.

As the latest issue of the Harvard Business Review points out, we can't even manufacture the high-technology items that we consider our bread-and-butter. Apple Computer tries to whitewash this fact by labeling their products: "Designed in California, Manufactured in China"

Perhaps, at some point, we will take a moment to get out of our own mythology and look around and other ways of organizing society. When the Soviet Union collapsed it was a clear indication of the superiority of consumer capitalism over centrally-controlled economies. Is that still true?

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AK

"The fascinating aspect of this economic trauma and the subsequent navel gazing is the lack of attention paid to the success of China's centrally-planned economy."

There is no "central-planning" aspect to China's manufacture of iPods or other exported consumer goods. The Chinese government doesn't set quotas for industrial production in a Soviet-style Trabant sense. In fact, when it comes to the export market, the Chinese government is comparatively hands-off.

China's economy "works" because the Chinese government encourages western investors (and its own plutocrats) to set up shop in China, producing what the west wants. It can produce these products cheaply because it does not have any meaningful labor or environmental standards. China is getting rich not because their central planners are better at central planning than Moscow's, but because they're letting businessmen do whatever they want with their labor and environment.

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AaronS

I was especially moved by the notion that capitalism tried to "reset" things several times, but that we artificially delayed matters.

I'm not saying that a bailed-out company cannot truly fix all the root problems. I'm simply thinking it is utterly unlikely.

There is a tendency in our nation to think that the Wall Street bigwigs, the CEOs, etc. are the real capitalists. Instead, we find that they are the kings of welfare--whether that welfare is in bail-outs, stimulus money, or advantageous tax advantages that are virtually unreachable by small businesses or common folks (after all, hiring a world-class tax attorney to shelter a $50,000/year salary would likely take $50,000).

No, it is the small folks, the ones that make the hard decisions every pay day about whether it'll be T-bones or Hamburger Helper this week, whether it's TV or the theater, THEY are the ones who are most true to capitalism.

And if these small folks--I call them the poorletariat--have to occasionally receive unemployment or foodstamps to survive, you can often trace the cause back to some CEO who, living at the top of the heap, wants to go even higher, so ships jobs offshore, and so forth.

As hard as cowboy days were (think the Great Depression before all the programs kicked in), we likely gained a spiritual strength of endurance, even though we suffered from a lack of money and goods. Today, because of too many too-big-too-fail issues, we are losing that spiritual edge that made the most important difference.

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bobby

What a crock. The government has been involved in giveaways and subsidies to the 'moneyed interests' as Teddy Roosevelt called them, since the founding fathers acquired cheap land from the govt and created a speculative real estate bubble in the Ohio ('Northwest') territories in the 1790s.

Railroads, canals, airlines, telegraph and telephone, cattle grazing on the public lands, water projects, roads, highways, bridges, military bases, navy yards, yadda da yadda da, ALL were subsidies to some moneyed interest or another. The list of government windfalls to this interest or that in our history is endless.

The very word 'Pork Barrell' refers to an actual rip-off of the government in the 19th century.

So let's cut the 'self reliance' BS and ditch this self destructive myth once and for all.

It's been nothing but a smokescreen for the interests to take the resources of the community. Socialism for the rich and capitalism for the poor was and still is their real MO.

Let's start talking about community and how we can support a better life together.

The sooner we let go of this hollywood myth the better off the country will be. Even if it DID once exist, and it DID NOT, it is utterly irrelevant to the 21st Century.

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Hetty Greene

Once upon a time, there was something called free land, where one could farm -- and survive --and then there were too many people in Europe and lo and behold more underpopulated free land and lots of beaver to kill and fish to catch easily....

however, parents always took care of their children, the young took care of the old, the healthy took care of the sick -- maybe we don't really have a nanny state after all.
(and it was illegal to free slaves once they were old and couldn't work anymore ---)

In NYC it's illegla to go up to the roof to grow veggie thanks to the insurance companies and probably also to city council -- and it's legal and free to park your car on the street -- instead of parking places-- why not growing places -- maybe we can introduce deer into Central Park or more squirrels or teach pigeon trapping in school..

You can apparently grow tilapia in the bathtube --

this is about self-reliance and feeding oneself n'est-ce pas?? mushrooms under the bed anyone.??

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todd

You'all don't even _remember_ the Chrysler bailout. Right after it Chrysler started making fuel efficient autos (k-cars etc) and was the best auto company until the effects of the 'bailout' wore off. It was downhill from the time they because free-market again and worsened when Daimler bought them.
The reality is exactly the opposite of what you so eagerly and hopefully described.

hen3ry

This was very interesting. Thank you for giving me another point of view and something to think about. I have been wondering why we decided that companies who would not provide the American people with products that were what they wanted, were allowed to have a much more benign experience with bankruptcy than most of us will ever have.

What I don't understand is how we can say our economy is consumer driven when companies put dangerous products on the market and get away with it by making all sorts of disingenous claims.

David

Risk and reward. Trial and error. Moral hazard. Such basic concepts, yet we need to give it nuance and spin. Ritzholtz is pretty spot on and the best cooperation/association behavior in human beings takes place when they are competing with other groups. Soviets made crappy cars (to sell to themselves), but had some pretty good sports teams to show up the capitalists.

tigger

That GM's stage-managed takeover by the government is "bankruptcy" is as big a myth as the lone cowboy. The US government is chiefly interested in preserving the union contract and union jobs as long as possible. That will allow it to say to the unions that helped elect it that it did its best. Unfortunately, the rule of law will be trampled to further near-death as secured creditors, unsecured creditors and others who dealt in good faith according to rules they thought were legally enforceable see their legitimate claims confiscated, and the value they thought they owned parceled out to the unions.

Wonks Anonymous

If the sins of Capitalists were paid for only by Capitalists then all of these laissez-faire arguments might make some sense.

As a matter of fact for every Capitalist who fails and is reduced to poverty there are scores of other Capitalists, equally foolish and dishonest, who dodge the bullet and live in relative wealth and prosperity.

At the same time there are thousands of ordinary workers and investors whose main crime was being unlucky enough to take a job from or place trust in the scoundrels.

Then some clown like Rinholtz comes along with 20 20 hindsight and preaches to us about what we should have done and why it is all our fault.

At which point a situation that was merely purgatorial becomes really hellish.

hunkerdown

Every time I hear someone from Moody's talking ratings on the Bloomberg channel, I think FRAUD in capital letters. Everyone else I have discussed this with, granted a small sample, reacts similarly.
You would think they would at least change their name to let us think that they think that we are not total idiots...

Homer

I would love to hear his thoughts on the healthcare market. I've long held that the best way to reform the system would be to eliminate mandatory emergency care. How are you supposed to price a service that must be given for free to the person who is unable to pay?

If eliminating emergency room access is unpalatable to most Americans, then it's time that they admitted it, and accepted that there must be even greater government intervention in that market to enable the coverage that we think everyone in the country deserves.

JMB

@ "Bailout Nation is a lament for the early days of our country, a system that was both ruthless and ruthlessly efficient, a system that no longer exists in the United States."

That system is alive and well for individuals.

For example, the issuances of millions of subprime loans from 2003 to 2007 grossly inflated housing prices and constituted a system-wide market manipulation. It was nothing but a classic pump-'n'-dump scheme. Potential home purchasers during that period faced an impossible choice of paying grossly inflated purchase prices or renting. It isn't realistic or fair to say simply that "They should've rented," because a home isn't simply an "investment" or "asset," but rather is also -- and for many people primarily -- a place to live and raise a family. A family with children, for example, will have to give up significant quality of life for the children if it rents (no assurance of lease renewal, which puts kids in jeopardy for changing schools each year; no jungle gym; no tree house; no planting marigolds or string beans, no marking heights on the kitchen door jamb). So for quite a few prospective buyers, including those with excellent credit who wanted to purchase a modest home with a standard 30-year fixed mortgage, the grossly inflated home prices forced them into an extremely difficult position.

And yet the only "bailout" the Obama administration has offered individual homeowners who paid grossly inflated prices for their homes between 2004 and 2007 is a voluntary one -- the "Making Housing More Affordable" plan that provides INCENTIVES only for banks to modify loans.

Big surprise, the banks are generally choosing to forgo these incentives, and so -- while Obama throws gazillions at AIG and the auto industry -- individual homeowners are left hanging out to dry. This isn't doing anything to help stanch the hemorrhaging of foreclosures.

And if you want to see "ruthlessly efficient," look no farther.

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JohnG

Folks, the cowboy ideal is a myth, pure and simple.

They got land (low cost or free) from the government. The government subsidized the railroads that allowed them to ship cattle at low cost. The governement provided the army to pacify (or exterminate, depending on your point of view) the Native Americans. The government provided law and order.

So, "John Wayne" went to the land office to get his land, used the railroad to ship his cows to market, called in the Seventh (more likely the Blacks of the Ninth or Tenth) Cavelry when the natives objected to their land being taken over by illegal immigrants, and went to court to collect when the packing house didn't pay. Not quite the image of self reliance that Hollywood gave us!

And, if the thesis is true, why did the financial system nearly fail when the Bush Administration let Lehman fail, instead of saying "Thanks. We needed that!"

Johnny E

>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.

Yeah, right. The opening of the Wild West was a series of government handouts. Railroad Barons got rich by getting land grants in exchange for laying track. The settlers got roads, railroads, canals, and navigable rivers to send their products to market. They got cavalry protection from the Indians and Mexicans. They got price supports and land grant colleges and irrigation projects. Homesteaders got free land. Farmers got rural electrification which brought them out of poverty. They got the use of public lands for mining and grazing and drilling leases and timber harvesting. The lone self-reliant cowboy is a myth.

It was all part of Manifest Destiny to unite the coasts and poplulate the region.

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Bill

No one has been held accountable for what has happened to our financial system or the costs to the people.

I think that we may be heading for 60s style unrest unless something is done. The people will tolerate the greed so long as they have jobs and can feed their families. But with U3 at 9.5% and U6 about double and both rising I sincerely hope the government wakes up.

Joe Smith

Close investigation would probably show that the "cowboy" economy of the latter part of the 19th century was a product of, and completely dependent on, the development of the railway system which itself was heavily subsidized by government land grants.

The problem we have is that individual bankers make big asymmetrical bets: if they are right, they get a big bonus, if they are wrong the shareholders and creditors take a bath. Transparency and adequate reserve requirements (ie prudent legislated institutional structures) for all of the banks and quasi-banks would have avoided most of these current financial problems.

PS

Bobby, thank you. Nothing else needs to be said after that comment.

"Socialism for the rich and capitalism for the poor" - it's the American way.

Walid

I like this guy. He expresses well something that is in accordance with nature itself; that a living organism will always slough off its dead cells so that new ones can take its place. Dumping huge amounts of money on things like GM is morbid in a sense. It preserves dead tissue when there are already signs that newer, smaller manufacturers with an updated product are appearing, ready to take GM's place. The flow of dollars to the banks has preserved their sick culture of gluttinous compensation protecting them from the forces of natural renewal at the moment when a new , and as yet uncorrupted generation, is looking for work, acutely aware that the economy can change.
Capitalists crave stability and corporate socialism to protect them from the very forces they espouse when times are good. But morbidity is accumulative and we'll being seeing some of these companies broke again the in the future.

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