The Bubble Economy and the Rationality of Irrationality: Recapitalizing Virtue

For all the talk of Wall Street reform and consumer protections the problem of predatory lending has not been eliminated.

Subprime lending continues in the auto financing industry and elsewhere, and unlike conservatives’ criticism of the housing market there are no federal subsidies to finger. Policymakers have, indeed, caused the problem but for reasons other than what many of us have been led to believe. True, Freddie and Fannie Mae advocated for the dream of home ownership even as it floated out of Americans’ reach. However, this reality only begs the obvious but lesser asked question: Why is the American Dream drifting out of reach in the first place? And might the answer to this question reveal that the hollowing-out of the middle class bears a reciprocal relationship to market volatility?

Like so many things, the makings for crisis have not been quite as partisan or straightforward as mainstream media pundits, among others, have made it out to be. Take the Financial Modernizat­ion Act of 1999. The legislatio­n to undo among the last of the Depression­-era separations between commercial and speculativ­e banking was spearheade­d by a Republican­, Sen. Phil Gramm, and signed into law by a Democrat (President Clinton). Both the Right and the Left have been complicit in the sin of short-sighted gains at the expense of long-term sustainable growth. And yet, for all the harm the nation has suffered, many policymakers are unwilling to soften their deregulatory dogma.

For conservatives, in particular, a core free-market assumption holds that participants are inherently rational when they pursue self-interest. The mid-Century writer and philosopher Ayn Rand posited that when individuals pursue ego-driven self interest it benefits others, too. Objectivism and its outgrowth, rational choice theory, attracted fierce devotees including former Fed Chairman Alan Greenspan.

Decades would pass before Greenspan acknowledged the “euphoric bubble” — the group-think of irrationa­l exuberance­ — that erupted with the subprime mortgage securitization frenzy from 2003 through 2007.  Still, Greenspan’s devotion to Randian ideals remains unshaken.

Do we have Rand to thank for our proclivity for great, grand global delusion?

Intangible Risk

What is appreciated far too little, nearly four years into this lingering economic malaise, is the rationalism of loss. The process of placing side bets on underlying assets is referred to as the financial derivatives market. As depicted in “House of Cards“, Wall Street has figured out how to profit when we’re on the upswing and to benefit when we’re on the downswing. When it is possible to “win by losing” the incentive for straight-up commerce declines. Consequently, ours is the era of the “Bubble-Ba­sed Economy”. And it explains a lot about our uncertain economic and employment outlook.

In a pessimistic climate businesses don’t want to expand. Consumers don’t want to spend. Volatility spooks investors. And the self-perpetuating slide contributes to lesser demand, greater unemployment and protracted austerity.

The real economy consists of productive and tangible goods and services. The speculative (shadow) market consists of a bet a trader places on whether commodities and assets will prosper or fail. Over the past 30 years we have gradually inverted the market. According to a piece on “Seeking Alpha”, there are more paper-based IOUs in the Wall Street casino than the entirety of Main Street — and, indeed, all the sovereign wealth in the world — can make good on. This inside-out-upside-down international economy began not only because it was legal to engage in casino gambling but because it is increasingly attractive to do so in the face of economic atrophy — that is, an eroding middle class.

When traders have a competing incentive to speculate on failure, a “bipolar duality” emerges between forces that benefit when the economy is built up and forces that gain from tearing it down. It is rational to gain. It is rational to lose. The so-called moral hazard depends on where you sit. In fact, market relativism may be a prime yet largely unheralded reason why prominent economists disagree on the cause of the crisis.

All market activity transfers wealth. The question we have to ask ourselves is whether or not we want to siphon wealth out of the productive class and into the speculative class. Because that’s exactly what we’ve been doing to the mind-blowing tune of quadtrillions of dollars worldwide.

Tangible Capitalism

Restoring a robust middle class has nothing whatsoever to do with the socialist aim of taking from the wealthy to redistribute gains to the less fortunate. Rebuilding Main Street is about counteracting the next bubble before it blows. It’s about putting an entire generation of young war veterans and college grads on the path to prosperous productivity through better and more numerous jobs.

Ours is a time to return to market fundamentals — the three “Rs” of a real economy: Rational Reinvestment. Reasonable Regulation. Realistic Rewards.

Essentially, we need a 12-step program to recover from “speculation addiction” and its economic enablers who made reckless risks not only possible but deceptively attractive. We need a worldwide intervention in which we come to terms with the fact that the credit crisis is but a symptom, not the underlying disease process. The disorder is inequitable trade agreements and the middle-income earners that egregious economic policy and careless commerce elbows out of the productive class to the peril of all who remain. The economic pathology is the proliferation of highly concentrated, specialized markets in which the West consumes and the East produces; small businesses’ lack for capital and competitive entry into increasingly monolithic markets; big businesses that cannot be permitted to fail and, increasingly, advances in technology that we have uncritically embraced.

Capitalism must recapitalize —- not merely liquidity and credit but values, virtue and opportunity.

If we want to improve the employment outlook and lower the odds of one boom-and-bust cycle after another in today’s hyper-connected small world, we have no choice but to outlaw off-the-books trading in securitized debt, reign in the institutional speculator and to regulate over-the-counter financial derivatives on the whole.

A healthy free market is based on the diversification and dispersion of real enterprise.

The “job creators” — the haves and the have-nots — should not be defined on the bets they won but by their creative and concrete contributions to society. The only cap on trade should be the casino variety. The only free market we ought to uphold is the Real Market — not its derivatives’ doppelganger.

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Resources

Out of Control: The Destructive Power of the Financial Markets | Spiegel Online

Middle-Class Areas Shrink as Income Gap Grows, Study Finds | New York Times

As New Graduates Return to Nest, Economy Feels Pain | New York Times

With MF Global Money Still Lost, Suspicion Grows | New York Times

Paul Ryan and Ayn Rand | New Republic

Greenspan: Financial Crisis Doesn’t Indict Ayn Rand Theories | ABC

Ayn Rand: Conservatives’ Abortion-Rights, Anti-Religion Inspiration | NPR

Why Ayn Rand Is Wrong (And Why It Matters) | Amazon

Why Ayn Rand and Her Legion of Followers are Hopelessly Wrong  | AlterNet

The Trouble With Liberty | New York Magazine

Harvard Professor Plays the Race Card

Harvard Professor Henry Louis Gates Jr. cried foul when a neighbor’s call to the police resulted in his arrest at the door to his own home, the Chicago Tribune reports.

Refusing, allegedly, to identify himself to a responding Cambridge, Massachusetts police officer didn’t help law enforcement appreciate that the director of Harvard’s W.E.B. Du Bois Institute for African and African American Research was the rightful owner of the home — a far cry from the intruder his neighbor feared.

Professor Gates Jr. may not have intended to bait the officer into arresting him, but that’s the effect his apparent refusal to cooperate had.

“Is this what it means to be a black man in America?”, the professor rhetorically opined.

If “what it means” refers to negative racial assumptions applied to oneself — ascribing to the color of one’s skin the power to draw negative and unfair treatment — then yes. But in very real way, who or what is proposing the racism — the past or the present? Someone else — or the professor himself?

Psychologists call the phenomena of blurring the lines between the motivations of self and others “transference“. It’s no secret that sometimes we project our own assumptions on others, in this case an officer caught between a nosy neighbor and a prejudicially-minded professor.

To view this situation through a racial lens is tempting, but to anyone without skin color on which to blame such a snafu, far less personal explanations would undoubtedly occur: A) Install a motion-sensor light so that neighbors can appreciate that the shadowy figure attempting to enter the house is, in fact, the homeowner vs. an intruder; B) Note to self that it is time to actually get to know one’s neighbors so that they know I belong here and vise versa; and C) Attend and/or organize a Neighborhood Watch meeting. After all, how can we look out for each other’s personal property when we don’t even recognize each other?

Had the professor been someone whose livelihood was not so enmeshed with the burdens of history, perhaps a more telling question would have emerged from his experience: Is this what community breakdown looks like in America?

What’s wrong with society when we don’t recognize our neighbors? When we don’t bother to introduce ourselves? When we are too busy to have a life that connects in any way, shape or form with those who live, in many instances, a few feet away?

The professor’s statement is troubling at a number of levels. True, one can ascribe troubles in life to history, economic background or just about any perceived barrier. And yes, such conclusions may even be justified. But when we interpret life through this perceptual filter, who suffers for those determinations: the people or circumstances that shouldn’t be the way they are — or ourselves?

When we blame skin color, looks, family, kids, spouse — what we are really doing is giving away our personal power. We are acknowledging, essentially, that “something” or “someone” controls us. If we want race, gender, creed, age or any number of other factors to wield that level of influence, we will find ample evidence suggesting that it can and does.

As we think, so we see — and so we do. This clashes with the prevailing notion that as life is, so we perceive, so we react. Pointing out a racial slight is not an offensive against racism — it is to feed into the idea that racism has a life of its own apart from us. This succeeds only in breathing new life into old stereotypes.

It isn’t the responding officer who set out to express his or her racism. The professor seemingly supplied plenty of his own assumptions. And therein lies the problem with the way in which academia promotes multicultural and ethnic awareness in general: the perverse perpetuation of history’s uglier sentiments. Like a communicable infection, once we embrace “the grudge” — over-identifying with the victim or the victimizer —we’ve incorporated their attitudes into our own.

History isn’t static. We are its vectors.

To learn about the past is one thing. To invite the painful aspects of the past to dominate the present day is another. There is a world of difference between acknowledging a problem at the societal level as opposed to fanning the flames of hostility at a personal level — particularly when those sentiments may not have been motivators in the first place. In this instance, had the police officer “racially profiled” the professor by intentionally stopping in front of the professor’s house while on routine patrols — even while ignoring a number of non-black neighbors entering their own homes — Professor Gates Jr. would have due cause for alarm. But the facts as they have been portrayed simply don’t support this conclusion. If anyone or anything is to blame at all, it is a problem all too common in modern America: Neighborhoods so devoid of community that nobody knows any better, and the most basic of social connections are unduly neglected.

Victim status does nothing to change the past, but it may skew our individual trajectories in life. And while victimization may not begin with a choice, it dies or lives to see another day for highly personal reasons. Victimhood is a form of self-fulfilling prophecy about our lives, relationships, ethnicity or potential as it relates to a recollection or dominating influence. That doesn’t mean powerful influences and limitations don’t exist, or that racism, in this instance, is a thing of the past. Yet when someone as esteemed and educated as Professor Gates Jr. points a finger, everyone sits up and takes notice.

This is not his finest moment.

The professor’s job is to convey history — not to repeat it. Like an actor who has over-identified with his character, it would appear that Professor Gates Jr. is in need of detox. The antidote to victimization is not more talk of victimization, but forgiveness. We forgive not so that we can forget, but so that we may reclaim authority and ownership in our lives. To the extent we call upon the past to explain the present, we are beholden to the act of looking over our shoulders — the somebody-or-something-is-out-to-get-me mentality.

That’s no way to live life. Or in Professor Gates Jr.’s case — no way to teach us to lead ours.

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Resources:

Juan Williams on African American Victimhood | NPR

Social Isolation Growing in US, Study Says | The Washington Post