How the Wall Street Boom Went Kablooey

Reading Barbara Ehrenreich’s new book Bright-Sided recently, I became aware of Michael Lewis’s November 2008 article for Portfolio, “The End of Wall Street’s Boom,” which offers a fascinating inside look at how bubbles develop, sustain themselves, and then collapse.

Lewis makes an interesting connection with the delusional “positive thinking” mode that seems to be an important component of economic bubbles. This is the source of Ehrenreich’s interest in what Lewis has to say.

The main character of Lewis’s story is Steve Eisman, who built a busines toward the end of the bubble short-selling mortgage originators and homebuilders riding the subprime boom, as well as Wall Street firms and even rating agencies that were complicit.

Lewis relates that Eisman said something both interesting and funny to Brad Hintz, a prominent financial analyst at a conference in spring of 2007. Eisman told Hintz that his group had just shorted Merrill Lynch. Hintz wanted to know why.

“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

Lewis is a former Wall Street hack who wrote the 1989 expose Liar’s Poker about his experiences in the industry in the 1980s.

His 2008 article ends on a curiously touching note as he recounts his recent lunch meeting with John Gutfreund, the ex-CEO of Salomon Brothers who took the company public and then led it during its period of prominence in the 1980s.

In relating his meeting with Gutfreund, Lewis offers an interesting analysis of the shift that took place in the 1980s, led by figures such as Gutfreund:

You can’t really tell someone that you asked him to lunch to let him know that you don’t think of him as evil.

Nor can you tell him that you asked him to lunch because you thought that you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation.

… From that moment … the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished.

The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

AB — 15 January 2010

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Author of ‘Life Inc.’ Bashes Corporatism, Points to a New Way

Recently I’ve learned about a new book, Life Inc., by Douglas Rushkoff, scheduled for release June 2, 2009.

In a recent video, Rushkoff says he believes humanity is at a crucial point, not just a crisis but an opportunity. He thinks this is “probably the first moment in the last couple of hundred years that we’ve had to rebuild our society and our economy on principles that serve humanity instead of killing life.”

Rushkoff says he doesn’t believe banks should be rescued — but that we should let them die “so that we can get on with business.” What he means by that is new forms of business and investment that focus on local communities.

In his new book and in the video talk, Rushkoff advocates ways people can “start investing in one another and with one another and make their towns better, actually earn returns that you’re not going to get from your Smith Barney broker – I promise you that – and see the return of your investment in the place you actually live. That’s not hard to do.”

In the Life Inc. book, and in the video in a briefer form, Rushkoff traces the history of the current economic predicament. He points to the Renaissance as a crucial starting point. During that period, he proposes, the world economy changed fundamentally when monarchs, to stem their loss of power, ceded monopolies to corporations:

The renaissance was not a golden age. It was the end of a golden age. The renaissance was the moment in history when kings decided they were going to monopolize all of the value that people were creating throughout western Europe.

Instead of letting people make stuff and trade stuff, they created chartered corporations ….

 They picked individual businesses to charter and in return for the exclusive control over an industry or over a region, that company would then give the king shares of stock.

People would have to work for corporations. Instead of letting people in different towns make their own money, everyone would have to use coin of the realm. Instead of people creating and trading and selling art, now you would have to have a sponsor, a patron, who would then bring you to court and let you be an artist.

This centralization of economic power has continued as the model up to our time, says Rushkoff, and has resulted in a worldwide “dehumanizing trend,” in which humans are disconnected “from their own labor, from their own consumption, from their own pleasure”:

The society that we built for the industrial age was built to mythologize the mass-produced object, because we needed to create a society of consumers who thought that buying all of this stuff would somehow make them happier.

Here is the entire video talk:

AB — 11 May 2009

Gallup: Americans favor economy over environment

Since 1984, research firm Gallup has been asking Americans whether they think priority should be given to the economy over environmental protection or vice versa. For the first time this year, the trend crossed over in favor of the economy, as you can see on this graph:

Writing for Gallup, Frank Newport comments:

The reason for this shift in priorities almost certainly has to do with the current economic recession. The findings reflect many recent Gallup results showing how primary the economy is in Americans’ minds, and help document the fact of life that in times of economic stress, the public can be persuaded to put off or ignore environmental concerns if need be in order to rejuvenate the economy.

From the Bubbleconomics perspective, this trend is not surprising. People tend to act in the short-term to preserve their personal bubbles, which depend in turn on maintaining the Big Bubble. This tendency is understandable from the human perspective, but in the long term might be leading the world into an environmental catastrophe.

AB — 20 March 2009

Warren Buffet’s simple lifestyle

According to an article in Forbes yesterday, Warren Buffet, the world’s second richest man, prefers a relatively simple life, living in “the same five-bedroom, gray stucco house he bought in 1958 for $31,500.” (See “Homes of the Billionaires.”)

The article includes a series of photos of billionaire’s homes, with Buffet’s gray stucco home by far the most modest — I laughed out loud when I saw Donald Trump’s villa.

The important point to me is that the ambition to live an extravagant lifestyle is silly and selfish — a simple life is much better and more sustainable in the big picture and the long run.

AB — 12 March 2009