In defense of incivility

Hooh, boy.

There’s a nice spat a-brewing between two people I hardly know, but nevertheless consider friends. The Epicurean Dealmaker offered some thoughts on financial reform, and in particular “resolution authority”. Yves Smith took exception. TED took exception to her exception taking. I suspect the sparks have just begun.

Me, I’m a lovah not a fightah, so I’ll split the difference. TED is right that constructive ambiguity and discretionary power are prerequisite to an effective, non-public-raping resolution regime. But Yves is right to take him to task for leaving things there, because whatever gets writ in the ex post memoirs, there are predictable and repeatedly observed incentive problems that prevent regulators from using discretionary authority until it’s too late (and then they whine to stenographers about how powerless they were). Read Michael Pomerleano and Andrew Sheng, or watch Richard Carnell, or check out l’il ol me. To be fair to TED, I know he is cognizant of these incentives; elsewhere he has offered ideas on how to change them. (See e.g. his reformist manifesto. I believe TED has also proposed adopting the Singapore model, conjuring an extraordinarily well-paid, independent regulatory caste that would be structurally resistant to capture and could recruit talent competitive with Wall Street’s finest. But I can’t find that link.)

TED is right on here:

Ms. Smith appears to advocate “root and branch reform” of the system, which makes her, by definition, more radical than me. As befits my nature as an investment banker, I am a pragmatist and an incrementalist. I think the prospect of true root and branch reform of the domestic financial system—not to mention the global one with which it is inseparably interconnected—is such a vast and daunting task to undertake in our current sociopolitical environment as to be unlikely at best. Notwithstanding the theoretical attractions of radical reform—which I personally would favor, by the way—I would much rather cobble together a partially effective, imperfect resolution authority today than wait the ten or twenty years serious reform might take… Sympathetic or not, however, I would also like to caution Ms. Smith. Like many radical reformers, I suspect she would be surprised how little common ground she has with other would-be radical reformers. It is always a revelation to discover, as revolutionaries always have, just how little agreement you have with your peers when it comes to deciding just exactly which roots and branches of the ancien régime need to be trimmed.

As, um, a proponent of root-and-branch reform, these are the questions that keep me up at night. For the record, I think we will end up with root-and-branch reform, but I fear we’ll get it hard and painful following a much more serious crisis that we have already failed to avert. I think the Great Financial “Panic” of 2008 has shrunk into another LTCM or Enron, a moment we will someday look back upon and wonder why we failed to deal with problems that were so fucking obvious, but for now all we hear is “It worked!” I’m a middle-aged Jewish guy who thinks and writes about finance, makes much of his living as a speculator, and avoids honest work. The tail risk I worry about is that I’ll get to see the sort of financial reform I advocate from a wonderful vantage high atop a lamppost.

But that is precisely why I want to take issue with TED here:

Like many other econobloggers opining on the state of affairs in the world of finance, Ms. Smith has gotten into the nasty habit of using the term “banksters” to refer to members of the financial services industry. (It is in the title of yet another post of hers today.) The overarching metaphor behind this coinage—which, I emphasize again, is neither original nor limited to Ms. Smith—is that commercial bankers, investment bankers, insurance company employees, and presumably everyone else in the financial industry are uniformly engaged in a vast, intentional, and irredeemably criminal enterprise. Ms. Smith reinforces this metaphor often, including in the post dissected herein (with the crack of “financiers [looting] taxpayers”), and implicitly in the title of her new book, ECONNED.

Now, I am all for the charms of expedient exaggeration. (Although mine tend to be limited to sarcastic and humorous uses, rather than bitter and humorless character assassination.) It can be funny, and it can emphasize important points. But uniformly and universally excoriating millions of people who work in finance as gangsters, thieves, looters, and con men is just fucking dumb. It’s like saying all management consultants are morons, or everyone from Iowa is a hick. While there certainly must be examples of moronic management consultants and hayseed Iowans among the myriad constituents of each of those groups, no honest or intelligent person would believe all of them are that way. Why, then, do so many bloggers writing today tar the entire finance industry with the same tired, thoughtless old brush?

These casual, unthinking insults would not bother me if I did not think they lower and coarsen the important conversation we are having in society and the blogosphere about financial reform. Sure, investment banking has its fair share of crooks, but we are no different than the rest of society. Some of us, closer to the top and more successful, perhaps, probably do have a more highly developed sense of entitlement and aggressiveness than your average bear. But we are not criminals. We work the system, hard, to advance our own and our families’ personal and professional interests, but 99.9% of us are not out to rape and pillage the commonfolk of their daily bread. To think otherwise is just plain stupid.

I myself don’t use the term “banksters”. And I sympathize with TED. I like financial industry professionals, personally. I enjoy meeting bankers. They are usually smart, interested in the arcane crap I’m interested in, and assholes of the sort that I enjoy sparring with. Bankers are great fun, and they are not bad people.

But we are who we are collectively as well as individually. Large organizations can and do evolve to do evil things while isolating people individually from illegal or morally uncomfortable acts. That capacity can confer tremendous advantages over smaller, more personal and accountable, collectives. It’s harsh, but we don’t get a pass just because the particular lever we are paid to pull only shifts a cog in a vast machine whose overall function we don’t control. As moral agents, it is not enough to follow the law and let pecuniary incentives guide us. We have to take responsibility for the behavior of the collectives to which we belong.

We are all dirty. Seven years ago I supported a war that has been responsible for hundreds of thousands of deaths, and that has not achieved any of the positive ends I thought it would achieve. That was a moral error I’m not sure I deserve to have survived, and I’m a terrible hypocrite, because I don’t live like Mother Theresa to atone, but carry on as a comfortable American. I won’t point a finger at anyone and claim moral superiority.

But I am responsible, and it’s important that I know I am responsible. We all have an obligation, not to self-flagellate like monks, but to be aware of the systems in which we are situated, and to work a bit, at the margin, to correct them. Obviously, so long as there are badly skewed incentives, a bit at the margin won’t be enough. I won’t hold a grudge against some mid-level banker who put together crap CDOs because everyone was doing it, and who knew housing would collapse?, and it was very lucrative. But neither will I abstain from using words like “fraud” and “looting” to describe organized practices which, innocuous act by innocuous act, do in fact serve to extract wealth from many and distribute it to a well-organized, well-placed few. And if you work in the industry and that makes you uncomfortable, it should make you uncomfortable, even if your accuser is a hypocrite and morally reprehensible himself. We can and should make better rules and fix perverse incentives in the financial system. But we won’t be able to design a game so perfect that self-interested amoral agents plus an invisible hand ensure decent outcomes. We need industry participants to take responsibility for the organizations and practices in which they participate, and to take an active, serious role in policing those practices. That will require a cultural shift, an understanding that actions that are legal and profitable can be illegitimate and disreputable, and should be avoided even if competitors will profit from your scruples. If context makes that impossible, if behaving well implies that you’ll be fired or your firm will go bust, you (like Chuck Prince!) must try to alter that context.

Calling out misdeeds by hard names helps. Words like “looting”, “theft”, “fraud”, and “scam” are fair descriptions of a lot of common practices, even if some of the perpetrators worked 18 hour days putting together pages 120 through 237 of mind-numbing prospecti and meant only to earn a living.

Yves and TED and I all derive sustenance, one way or another, from the financial industry. Many, perhaps most, people with significant savings in the US, nearly all workers whose pension will support a financially comfortable retirement, are beneficiaries of practices that involved shifting wealth from others to us by means of questionable legitimacy. Many of us profited from asset bubbles; we extracted rewards from price signals that harmed the real economy rather than guiding smart decisions. This is not just about “them”. It is about us. We, the savers, the affluent, educated, hard-working “core” of American society have become thieves, or at best unwitting beneficiaries of theft. We ought to be uncivil to ourselves for that, and we ought to be trying to ensure it never happens again. Both Yves and TED are doing a good job, doing more than their parts to make sense of what’s happened and agitate for something better. But as for the people watering down derivatives reform, defending bank gigantism, shoving the CFPA into a cubicle six sub-basements beneath Ben Bernanke’s ass, well, I’m glad as hell to have people like Yves calling them out as “banksters”.


13 Responses to “In defense of incivility”

  1. winterspeak writes:

    Never knew you were middle aged steve. your writing does not seem “middle aged” to me.

    I reject your “we are all dirty” position. Finance professionals are products of their environment, and the regulatory environment today creates a finance industry that is toxic, predatory, and based on fraud. TED invokes the “some of us are good people” clause to prevent the swamp from being drained, but it is a swamp, and it must be drained no matter how decent some of the malaria carrying mosquitos are. You invoke the “there is broader injustice in the world/cast not the first stone” argument to much the same ends. Pity. Lamp posts it is, I guess.

    I gotta add, for a jewish guy, you’re sounding very Protestant these days!

  2. “Many of us profited from asset bubbles; we extracted rewards from price signals that harmed the real economy rather than guiding smart decisions. This is not just about “them”. It is about us. We, the savers, the affluent, educated, hard-working “core” of American society have become thieves, or at best unwitting beneficiaries of theft.”

    People who sold against the bubble helped push prices to a more efficient level and made a bad situation less bad. Smart, ethical investors make money in a win-win way. They increase smart high return investment and thus long term growth. It’s just they can only do so much. So much also depends on the government to allay the long established in economics severe inefficiencies that come with pure free markets, inefficiencies like externalities, asymmetric information, moral hazard, large transactions costs, inability/impracticality to patent, giant economies of scale yet the problems of monopoly power, inability/impracticality to price discriminate, etc., etc.

  3. EmilianoZ writes:

    Let me quote a guy named Steve Randy Waldman:

    “An enduring truth about financial regulation is this: Given the discretion to do so, financial regulators will always do the wrong thing.”

  4. JKH writes:

    I lean more to the “just fucking dumb” assessment of TED.

    “As moral agents, it is not enough to follow the law and let pecuniary incentives guide us. We have to take responsibility for the behavior of the collectives to which we belong”

    But you’re on the outside of the tent pissing in. It’s a free put option for you, Steve.

    And in your speculation activities, aren’t you depending on the tent and the kindness of strangers that are in it, just a wee bit?

    Time for guilt, Steve

  5. Indy writes:

    Two quick things:

    1. I’m with TED – an incrementalist. But it’s about time we got started with the first few small steps, eh? The first thing I think about concerning the issue of the moral blameworthiness of some financial system participants (or the system as a whole) is honesty, integrity, and good faith. I don’t want to get into the whole “sophisticated parties” or mark-to-market accounting debate, I well understand the positions of both sides, and there’s a good argument for temporary flexibility in the midst of an potential panic.

    But after the passage of months and months and the gradual return of normalcy and stability, the exit of the FED from many of its extraordinary facilities, and the payback of TARP monies, etc… there is no longer any legitimate reason to pretend again all good evidence for as long as the government lets you and report outright fantasies about the value of one’s assets, and indeed, one’s real chances at long-term solvency.

    The FDIC, for example, has admonished banks, big and small, for holding (among other things) second-mortgages on deeply underwater properties (almost certainly worthless, with that certainty growing progressively with time) at face value on their books. The banks respond that if they write-down the (factual, true, as in, a function of objective reality) losses, they’ll go out of business, whereas, if they avoid it for as long as possible, they just might be able to squeeze another year or two of operations out of it before taking the losses becomes unavoidable and the inevitable capital crisis arrives.

    Now the FDIC is proceeding with (gasp!) a free market auction of similar assets that might (gasp!) establish the real price of these assets, and, of course, the banks object

    There is legal, there is moral, and there is just plain *honesty*, with others, and with yourself. Facing reality, and embracing the need for integrity, would, in my view, be a decent start.

    2. Steve, don’t be so hard on yourself with the Iraq war. I don’t want to open up Pandora’s box of passions, just to express what I sincerely believe is the truth as a veteran of that conflict (and one married to another veteran of that conflict). Those truths are two:

    I. I’ve spoken to a lot of educated, even brilliant people at length about the war. People who like to believe they have even tried hard to keep themselves fully apprised through the media of the details of that situation, but who have no direct experience in the military or close friends or relatives in the Armed Forces. Alas, almost everything they think they know is wrong. Not only wrong, but almost the opposite of truth. The failure of the press on the way in, the middle, and the way out, has been a nearly complete one. When I tried to explain to people that we were winning in the surge – not a single person would believe me, or even yield in their confidence that all was lost. Some even questioned my integrity, so convinced were they by “reporting” that they concluded only bad-motives or delusion could produce my assertions. And that hurt. A lot.

    It’s even worse for Afghanistan. The secrecy-obsessed and politically-sensitive military is largely to blame for not correcting disinformation, and permitting an atmosphere where agenda-driven or lazy journalists need never fear push-back. It’s a damn, damn shame. My point is though – be willing to seriously question your opinion on the war and to taste your own beliefs with many grains of salt.

    II. Putting politics, motives, agendas, policies, and all that aside, I assure you, from the bottom of my heart, and in admittedly simplistic (but genuine) terms, that we have done tremendous good and prevented or eliminated unspeakable evils over there – and that the net bottom line (for them and us) is now clearly positive despite the crushing costs we have all endured. I’m not trying to “justify” what has happened, or the decisions that were made along the way, but it has turned out better than most people are willing to believe. So, I only ask, that you too be willing to believe it.

  6. […] Posted in Uncategorized by Mike on March 9, 2010 I like Steve Waldman’s post getting between the arguments of The Epicurean Dealmaker (TED) and Yves Smith over the issue of […]

  7. […] “Making grandiose, nonsensical pronouncements that all bankers are crooks just doesn’t help matters, and it focuses attention and energy away from real problems which need to be addressed posthaste.”  (The Epicurean Dealmaker also Interfluidity) […]

  8. […] like Steve Waldman’s post getting between the arguments of The Epicurean Dealmaker [TED] and Yves Smith over the issue of […]

  9. zerobeta writes:

    Nice piece Steve. Great addition to the conversation.

    I think the econoblogosphere in general took a turn for the worse when a certain bearish blog came out of the woodwork early last year and substituted the objective “what is” in explaining what is wrong with the system with a more conspiratorial tone.

    Joe Weisenthal made a great point yesterday when he talked about the influence that this is having on the mainstream media. I believe it has had a major influence on other bloggers as well, including Yves.

    While I do agree with you that many of the agents’ roles in the system are akin to a thieves, a viruses or leeches, but the blogosphere must be careful not to fall into the trap of slandering those in the system we wish to enlighten. A “bankster” who is earning what he perceives to be an honest living in a toxic system isn’t as likely to take such criticism of himself as seriously as he may a well-reasoned assault on the system that he is working in. The “banksters would be more likely to write off the criticism, rather than reflect and possibly help change the system from within.


  10. zerobeta writes:

    Oops screwed up the xhtml in the comment. Third paragraph should begin with “I think Joe Weisenthal had a great point…”

    [I’ve fixed the overzealous link in the previous post. — Steve]

  11. Morgan_03 writes:

    Thoroughly enjoyed the post. I’m sure bankers don’t mind being called “banksters”, nor having their work called “looting”, “theft”, “fraud”, and “scam,” just like many in the media (and bloggers) don’t mind being called “empty-headed,” “dim-witted”, and bitter that they couldn’t make it in banking. Just think, if we declared war on banksters 7 years ago we might not be having this conversation today. Let’s hope this gets us moving in that direction.

  12. […] interfluidity » In defense of incivility […]

  13. A search for “accounting control fraud” at TED yields zero hits.

    A search for “accounting control fraud” at Naked Capitalism yields seven hits, including a cross post from a subject matter expert from the S&L crisis.

    See William Black on accounting control fraud here.

    Analytical FAIL, Ted. Analytical WIN, Yves.

    “Banksters” it is. The system is dirty. Investment banksters like TED have had every opportunity that wealth and privilege can bring to turn their good intentions and desire to avoid rape and pillage — not, of course, performed by them personally, but by their much less ethical colleagues. Naturellement — into action. Zip. Zilch. Nada. And if banksters like TED don’t want to invest the time in action, they can cash in, get out, and move their families into an environment that’s not criminogenic. Surely that would be healthier for everyone?