Interview in The Straddler

By James Kwak

The Straddler, an online interdisciplinary publication, has an extended interview with me, of all people, so you can see what I talk like.

This is one section I’m proud of:

“Middle class wages have been declining for ten years and stagnant for thirty years, and if you have a financial system that allows people making $15,000 a year to take out $400,000 mortgages, I don’t think that’s the fault of the guy making $15,000.  I think it’s the fault of the financial system.

“But, let’s say I’m a guy who makes $15,000 a year.  I realize, wow, I can get a $400,000 mortgage and I can live in this house for a few years, and if housing prices go up, I can flip it and I can actually make a couple hundred thousand dollars.  And let’s say I’m really clever, and I say, if housing prices go down, I’ll just walk away and I will have gotten to live in a really nice house for three years at no cost to myself.  I mean, that’s the worst, most cynical spin you can put on it, right?  But this is exactly what people on Wall Street do.  The person who is criticizing the janitor for doing this is the same person who thinks that businesses should exploit every legal opportunity to make profits.  So even if you attribute the worst possible state of mind to the guy making $15,000, he’s still just doing what any businessman should do under the circumstances.  But our national ideology somehow doesn’t allow us to think about it in those terms.”

Enjoy.

42 thoughts on “Interview in The Straddler”

  1. Mr. Kwak wrote:

    “So even if you attribute the worst possible state of mind to the guy making $15,000, he’s still just doing what any businessman should do under the circumstances.

    But our national ideology somehow doesn’t allow us to think about it in those terms.”

    “We are here to make limbo tolerable, to ferry wounded souls across the river of dread to point where hope is dimly visible, and to stop the boat, shove them in the water and make them swim.”

  2. James,

    When you say:”This is one section I’m proud of:…”, you should be proud. That is a very tight and solid bit of argumentation. Well said and so true.

  4. The question is whether it would be better for business to behave like individuals or individuals to behave like business. The former is a nice world; the latter is more and more like the world we live in.

  5. September 25, 2008

    “Why does the American government consistently fail to foresee the future results of its own actions? Because it is incompetent. It is managing the financial crisis Wile E Coyote style.”

  9. From the “us” versus “Wall Street” point of view… Well said.

    From an ethical point of view, the $15k guy is as big of a scumbag as the slime on Wall Street. Grant you, the $15ker’s blast radius is a microcosm of ole Elmer Fudd’s (aka Blankfein), for example. But the intentions are exactly the same. Take what you can get away with taking – at others expense.

    But on the other hand… maybe Blankfart has a free pass from God? Doing “his work” and all.

  10. CLASSIC!!! Yeah, when the guy in the suit and tie does that he’s “maximizing his utility function”. When the blue collar guy who works with his hands on a below average salary does it, he’s a “bum” or a “deadbeat”. I’m glad someone gets it. Mr. Kwak is one of the few with a public voice who gets it. Republicans get it (but will never admit it). Bungholes like Rick Santelli, Newt Gingrich, John Paulson and Goldman Sachs get it also, but they will never admit it in a public arena.

    In fact, it is large banks’ “flipping” of CDOs and selling “insurance” on those CDOs (the “insurance” being Credit Default Swaps) that instigated this crisis, not the flipping of individual residential properties.

    Not to mention Repo 105s and 108s (large bank creations) which had nothing to do with low-income blacks in Cleveland, Ohio looking for an opportunity for home-ownership. Not to mention blacks who were thrown out of rental properties even though they had made every single rent payment, because their white landlord wasn’t making payments on the apartment building.

    But I guess for some CNBC commentators/bank lapdogs if it doesn’t raise housing prices in Wheaton, Illinois they have no interest in it.

  12. I WOULD LOVE TO HEAR MR. KWAK’S OPINION ON SECURITIES LENDING.

    I was working for one of the largest life insurers in the world when the crisis hit and it was the “securities lending” unit that gave all of us who were watching a real scare. However, I have never heard a single person talk about these types of financial arrangements and the danger they imposed on our system.

    For those of you who are not familiar with how securities lending works: an insurance company is heavily regulated and there are very stringent rules on how reserves can be invested. As such, insurers are heavily invested in bonds – historically a nice, safe investment.

    What insurers were doing is “lending” these securities (bonds), for varying durations, to other institutions. The insurance company would receive cash for the face value of the security plus 2 additional percentage points. When the contract expires, the insurance company returned the corpus, but kept the two percent.

    Here’s the kicker… the same security is reported on BOTH the insurance company’s books AND the books of the second party. Nice, eh? That takes double dipping to a new level.

    When the crisis hit, I called a buddy in investment accounting who said their was a run on these contracts and everyone wanted their money back… NOW. The problem was that the insurance company had taken those funds and invested them in whatever they wanted! To sell them at that time would have meant fantastic losses!!!

    At the end of the day, the silver tongued devils (i.e., management) were able fend off the masses and slowly unravel the mess. Yes, a bullet dodged, but wtf?

    Sorry to hijack this thread, but I didn’t know any other way to get the question out there.

  14. Purchase money mortgages (and every other flavor of mortgage) in excess of $100,000. should be made fully recourse. Also, the borrower should be REQUIRED to have the advice of independent legal counsel prior to executing the indenture(s). Finally, such debts should not be dischargable in bankruptcy.

    Allowing relatively uneducated and uninformed people to sign off on half-million-dollar or million-dollar events guarantees the arrival of an incurable systemic crisis.

    “We’re in the American dream business.” Remember that?

  15. I agree, James, that was my favorite part, and you should be proud. All together it was not exactly my idea of a “conversation,” but if there’s going to be a monologue, at least let it be by someone as smart and interesting as you are!

    What an great advocate you could be for the democratization of money, if only you were so inclined.

    Well, at least you’re moving in our direction…keep it up. Maybe you’ll join us, yet.

  16. @Russ Abbott–I don’t think that’s the question at all. I think the question is what is the purpose of money (wealth)? Is money a scarce resource to be bestowed upon and hoarded by a tiny few, keeping the many in virtual servitude? Or is money a public utility that we should (could) wisely use to improve the circumstances of people and our planet?

  17. Then why not also make the debts of the Wall St. crowd fully recourse against them personally, and not dischargeable in bankruptcy? Why such restraints upon the little guy but not upon the ruling class?

    I have a better idea still. Abolish debt financing altogether. By allowing people to buy houses, cars and other things with pretend money, all we do is bid up the prices of things that people want and could afford out of savings if they didn’t have to compete with people being fueled with pretend money. Debt just blows up bubbles. It makes people into slaves. Then when the bubbles burst, we all get screwed. See 2008-2010.

    The only people who benefit from a debt-driven economy are financiers. Let them figure out an honest way to earn a living instead, like finding good projects to actually _invest_ in. What a thought!

  18. I think our national ideology DOES lump all those people together.

    Wall Street bankers who cynically and unethically exploit the government guarantee on their solvency AND people who default on their ultimately government guaranteed home mortgages are two peas in a pod. Everyone knows that.

    If you detest one, you detest the other.

  19. The investment banks used to be partnerships and worked this way, the partners were fully liable. However this system did not give them enough capital to do what they wanted to do so they went public. Perhaps they should revert to a partnership with the a public limited partner, and active employees above some level general partners. It would make being a partner much more scary than now. (Likley also make their wives worth a lot more, and a big opportunity for Cayman and other offshore banks)

  20. Ted,

    When it comes to “instigating the crisis” I suppose one could go back at least as far as the Great Depression and build a causal case that adds nuances of understanding. But without getting quite that involved I think it is worthwhile to go back to the Bush tax cuts. What seems frequently misunderstood, or overlooked or maybe avoided, is that cutting taxes during 2 wars was made affordable by foreign inflows. The trade surpluses and other dollar holdings that are recycled back through the US in of course mostly T-bills is a clever way of minimizing competition from foreign investment. This ‘recycling’ takes vast sums of dollars in foreign hands and puts this capital in US hands at a very low cost. This allowed the US government to fund its obligations which in turn made the tax cuts doable and that allowed US investors increased capital formation.

    What this also does is to keep dollars out of global circulation and thereby boosts the dollar’s value. Combine an artificially inflated dollar though with excessive foreign inflows and the result is too much liquidity flowing through the economy in relation to wages/incomes.

    So… what you are citing as the instigator of the crises was instead a reaction to the excess liquidity. Without the liquidity many of the ‘innovations’ would not have been possible due to interest-rates being too high. Part of the underlying cause was dollar hegemony taken too far. This though of course is too revealing and embarrassing in regards to US relations to ROW so it is ignored, but it is fairly obvious.

    One could also say more broadly that the US became too dependent on its financial services sector, and of course excessive leverage played a role. But it is important to recognize that the nations that put too much faith in their ability to rely on lending are resorting to desperate measures. Insofar as that desperation relates to the US, dollar hegemony caused too much liquidity to flow into the US economy at the expense of other developing economies and now global AD is coming up short. Put simply, the over-consumption in the US, and the trillions that vanished from assets, could have provided the development needed to sustain and further global AD. But the fault lies only in part with Wall St. It also lies with our government and ultimately with that part of the part of the citizenry that never has enough. Those citizens who don’t want to know how much of their success is coming at the expense of those less fortunate. These US citizens also frequently seem to be those who don’t notice that Americans are overweight to the financial detriment of their economic efficiency while more than billion people are malnourished. I suspect that it is more than dollar hegemony that was overdone, it seems that the long-term advocating of selfish behavior as an acceptable norm may have some very serious side-effects.

  21. Nicely said, James. Except that our national ideology DID let everyone in on the housing shell game. While housing prices were soaring, every shameless risk taker from the bottom to the top was making money from other people’s money, sharing in the upside but not the downside. And when housing prices collapsed, every shameless risk taker walked away with what they had (or didn’t have) left on the table.

  22. I think our national ideology DOES lump all those people together.

    So you’ve never read the mainstream media or listened to government propaganda? In one sense I envy you that, although it does leave you rather misinformed about the national ideology and the double standards James cited.

    As for who I and my fellow citizens should detest, where there’s an organized mafia stealing trillions from us and committing mass murder, I’d tend to focus on the robbers and killers and not on the guy who spit on the sidewalk.

    Especially since detesting each other for venial sins is exactly what the mortal sinners want us to do.

  23. ditto for me

    wishful thinking on the part of the SELF-proclaimed “virtual” aristocracy

    that never has to prove its mettle, anymore, like in the olden days, or even in any animal tribe – you have to prove you are worthy of “alpha” status,

    so then “alpha” is the dog that, mercifully, puts down the rabid raccoon…

    what makes them “better”? “Financial innovation” and the invention of sociopathic math – More misery for others = more money for ME ME ME?

  25. This is superficially correct but ultimately horses**it. Among the characteristics that created US dollar hedgemony was a RELATIVE lack of corruption and a relatively egalitarian wealth distribution. As recently as the Sixties, those at the bottom engaged in productive labor could enjoy decent lives and middle class aspirations for their children. Everything changed beginning in the Seventies. Corruption of the banking and energy sectors, patrician collaboration with Saudi sheiks, unregulated Eurodollar lending and total abdication of government responsibility destroyed just about everything good in America, hollowed out the industrial base, left behind a culture of pornographic entertainment and frenzied greed. The problems of the undeveloped world are entirely different, insolveable by remote trickle down altruism. In fact, such altruism and the corruption of altruistic impulses have increased them exponentially. We have enough problems right here at home and no apparent impulse to correct them. Just listen to the political chatter of the same shameful creeps half of whom will be rewarded before the day is over if you find this hard to believe.

  29. James, truly excellent !! It is evident to any rational person in these Excited States of America that the whole structure of society and governance is no different than a “banana republic”.

  30. I’d like to “Straddle” the current time frame from “The Time Chronical” [(Vol.MXLV No.101) (United States of America)] dated April 23,1910 (sat) and the comparison of April 23, 1986 applicable to the “Consumer Price Index (CPI)” and “Commodities”:

    April 23, 1910 & April 23,1986 (CPI):

    Loaf of Bread $0.04 / $0.98
    Gallon of Milk $0.34 / $2.34
    Pound of Butter $0.36 / $1.82
    New Ford Auto $950.00 / $9,281.00
    Gallon of Gas $0.09 / $1.07
    New Home (Avg) $3,395.00 / $22,339.00

    Commodities:

    Dow Jones Index 82.16 / 1,523.23
    Oz. of Gold $20.67 / $319.98
    Oz. of Silver $0.54 / $6.12
    Copper $0.13 / $0.62

    Note:
    The only reason for showing this is the very fact that the US 30yr.T-Bond was the norm…not 5yr & 10yrs used today (11/2/10) for home mortgages, and the basket of goods to measure inflation are a terrible indicator of price stability. What wasn’t on the document was the avg. wage. What really stands out is the enormous price disparity of home prices 1910/ 1986/ present? Thanks James and Simon :-) PS. I found this document in an old book shop in the back pages.

  33. Constitutional Convention and Burn the Patriot Act…

    There ARE real Americans left…

    almost unanimous IDEA among the aging hippies with terminal cancer – whatcha got to lose in making that last stand against the “dark”?

  34. I thought this one kind of smarted. I’m not a Floridian but I thought Alan Grayson showed promise to be a great legislator. Mr. Grayson, if you’re out there, I hope you know many Americans even outside of Florida appreciated your efforts against the oligopolist banks, and representing “the little guy” out there. I hope when the tide of this country changes, and you see some daylight peaking through those dark clouds, you’ll make a dash for public service once again. We’ll be watching you hopefully.
    http://www.cfnews13.com/article/news/2010/november/168654/Grayson-concedes-in-District-8-race

  36. Not me. The $15000-a-year guy has been so screwed over I applaud him for getting his share.

  37. Getting what? His share of YOUR tax dollars? MY tax dollars?

    Screw both groups. Excessive greed all around. Let them all burn.

  38. I never understand why people link porn in to stuff like this. I guess you need something pejorative to associate it with in order to get the “moral majority” outraged.

    Nevertheless, I agree with the rest of your comment.

  39. Nice to see more light directed at some of the egregious selective biases that have accompanied the metamorphosis of orthodox (which now includes Austrian) economic theory into popular political mythology. For more of the same, see comments on Russ’ 18-Oct interview with author Matt Ridley (in that case in response to Ridley’s implicit suggestion that unlike the merely employed, business owners have every right to expect/demand ever-improving returns for their efforts, and are by nature immune from the kind of precautionary spending and saving expectations that are considered prudent for lesser folk). Perhaps champions of this selective bias imagine it to be justified by something like the opposite of the fallacy of composition — call it the Virtue of Capital Accumulation. To restore balance perhaps the rest of us should invoke Howard Gardner (so much more respectable than Freud) to claim that the notion of individual-level merit and responsibility is no less an artifact of the same fallacy of composition; after all, even micro-foundations need (micro-micro) foundations…

    Then, after every man, woman, and child incorporates as a limited liability personal incorporation, we would all be equally at liberty to walk away from any of our unsuccessful schemes with total impunity. Let freedom ring!

  40. Re: @ jake chase___”relatively egalitarian wealth distribution”…”everything changed in the Seventies” – here are some interesting “non-factoids” to bolster your case: #1/3) A families average annual income in 1915 was ~ $687.00/yr (*2 years after the Federal Reserve Banking System was enacted?); #2/3) In 1976 there was $77 billion worth of paper currency in circulation throughout the United States(** ~ a couple of years after Nixon strikes down “Bretton Woods” gold standard and swithes to the “Fiat (***Basket of Currencies??) Currency” as america’s preferred hegemony du`jour, and interestingly as a sidenote…there were only ~375 @ $10,000 bills in (1976) circulation; #3/3) The percentage of “Personal Income Taxes” paid by an average american family has more than doubled since 1953 at 11% to 23% paid in 1976! Why am I bothering with these figures? To drive home a point – that being our Income Taxes…US Dollars in circulation (U.S. $ Worldwide) and the “one family income earner” are gone with the tradewinds – literally to “Hell in a *** Basket”? :-(

  41. “Take what you can get away with taking – at others expense.”

    Let’s say that someone tomorrow offered you a zero-interest, 3-year $40K loan that you could use to purchase Solar Panels. To you as a consumer, you see see that houses with Solar Panels in your area tend to sell 10% above the market of houses without. You also notice that Solar Panels can be easily resold for most of their sale price if well-maintained after 3 years. Finally, you notice that you’ll save money in your energy bills during the interest-free three-year period — by the promise of the lender, they’ll basically pay for themselves.

    That’s not an individual acting unethically. This individual is acting rationally and well within ethical obligations.

    However, 3 years later, this individual ends up defaulting on the loan. It turns out Solar Panels don’t increase the value of your home, and their resale value is nil. It turns out you don’t save that much in energy bills. Through further research, it’s discovered that the reason you were given the loan in the first place is because because the firm that gave you the loan had a big client who had a vested interest in seeing more Solar Panels sold.

    It’s important to note that consumers and businesses act within an economic system. Individual decisions are often made without consideration for their wider, cumulative effects throughout the system. Expecting the individuals to be aware of the cumulative effects in the system is like expecting an individual pollinating bumble bee to be aware of its effect on human allergies.

  42. “Expecting the individuals to be aware of the cumulative effects in the system is like expecting an individual pollinating bumble bee to be aware of its effect on human allergies.”

    Cute. You missed the point though. I am talking about the individual who goes into the deal knowing the way the game is played. Someone who intended, from the beginning, to walk away from the deal when it went south.

    I, in no way, condemn the average Joe who bought a home with the intention of paying for it and then walked away because he had little or no choice. That is understandable.

    In short, I am condemning individuals on BOTH sides (i.e., Bankers and consumers) who were out to play the system for personal gain and had the intention of pawning off the down side on others (i.e., me and you).

    You know, there are a lot of folks posting here who have no desire to create a fair system, they simply want wealth redistribution. That, my friends, is a battle you will never win. You may, however, have a shot at an equitable political and economic reality if you play your cards right. Only if you play your cards right.

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