Alone in a Dark Room With a Pile of Money: What Would You Do?

Review of Michael Lewis, Boomerang: Travels in the New Third World (New York: W.W. Norton, 2011)

Michael Lewis, author of Moneyball and The Blind Side, first came to prominence with Liar's Poker, his memoir of going to work for the Wall Street bond trading firm Salomon Brothers in the mid-1980s (a book I finally read this summer). Liar's Poker is a hillarious send-up of the big shots who ran Salomon by someone who saw their greed and recklessness firsthand. Lewis was close enough to be on the inside, but critical enough to keep his distance; his account turns out to be readable introduction to Wall Street, specifically the bond market, in the 1980s.

An art history major at Princeton who ended up making a tremendous amount of money shortly after graduation, thanks to Salomon Brothers, Lewis maintains a bemused and detached tone throughout Liar's Poker. It's as if he never believed that he was smart enough to work there. His detachment was evident when he quit while he was still young. (Of course, it didn't hurt that he had a nice financial cushion.)

Twenty years later, his knowledge of the global bond market--including the introduction of mortgage-backed bonds--would help him later unravel parts of the global financial crisis of 2007-2009. His first book on the crisis, The Big Short (reviewed last year in this blog), explained how several smart investors predicted the crisis and were able to "short" collateralized mortgage bonds when their value crashed. ("Shorting" is basically betting that the value of an asset will fall in the future, by borrowing it and selling it in the present. If indeed the investor is correct, then they benefit by buying the same asset at a lower price in the future.)  Hedge fund investors like John Paulson and Kyle Bass made out like bandits when the mortgage-backed bond market collapsed, because they had essentially shorted these bonds by investing in credit-default swaps.

Lewis starts Boomerang by confessing that he ignored some of what Kyle Bass, a Texas-based investor, had told him back while he was researching The Big Short. Bass had told Lewis that the next big crisis was going to be in the market for government bonds (sovereign debt). At the end of 2008, Bass was predicting that Greece would probably default within two years and possibly cause the Euro currency to collapse. "He was totally persuasive. He was also totally incredible" (xv). How could some guy in Dallas figure this out when almost no one else could? The guy seemed a little crazy. So, as Lewis puts it, "I made my excuses . . . and more or less dismissed him. When I wrote the book, I left Kyle Bass on the cutting room floor." (xvi).

But Bass was right. It turned out that private bank debts were becoming public debts in both the US and Europe, as the Fed and the European Central Bank bailed out private banks. Iceland and Ireland had already crashed. And Greece was the tipping point.

What happened? Lewis travels to Iceland, Greece, Ireland, Germany, and California to tell their stories before and after the collapse of the global bubble. In each place, he singles out cultural factors that make each place unique. This cultural approach is quite simplistic, but it does help explain how different countries react when they are "left alone in a dark room with a pile of money" (the pile of money being a huge expansion of bank lending). It also roots the financial problems in a larger context than mere government regulation. It turns out that we all have a cultural and moral problem.

Greece, on Lewis' view, simply lacks any public spiritedness and is so corrupt that even a group of Greek monks participated in the corruption. No one pays taxes and everyone is looking to bilk the government.

In Iceland, he contends, a male-dominated fishing culture led to excessive risk-taking. Once the fisherman of Iceland got rich, they needed to find something else to do. International banking and speculation was it.

"But while the Icelandic male used foreign money to conquer foreign places--trophy companies in Britain, chunks of Scandinavia--the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was buy Ireland. From each other" (84, emphasis in original). In other words, Ireland had a massive real estate bubble that has now popped. According to one estimate, "Irish bank losses alone would absorb every penny of Irish taxes for the next four years" (85). Ouch! But the Irish are buckling down and embracing austerity to pay down the debt (quite in contrast to Greece).

The Germans, being so-rule oriented (or so Lewis argues), trusted the bond credit ratings agencies that said that mortgage-backed bonds and collateralized debt obligations were AAA (the safest of any bonds), so they ended up getting stuck buying lots of these. Too bad for them.

Finally, there are the Americans. California's dire public finances (especially at the local level) are a microcosm of the national struggle to balance budgets. But it's not just the mortgage bankers or governments who are to blame. Public-sector unions also took advantage of the financial boom to wrest huge pension guarantees from governments. And private citizens borrowed to the hilt. The problem, writes Lewis, is "with the entire society."

It's what happened on Wall Street in the run-up to the subprime crisis. It's a problem of people taking what they can, just because they can, without regard to the larger social consequences. It's not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They'd been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans (202).

Lewis, usually a hillarious and light-hearted story-teller, ends up in prophetic mode, issuing a jeremiad: "Everywhere you turn," he writes, "you see Americans sacrifice their long-term interests for a short-term reward. What happens when a society loses its ability to self-regulate, and insists on sacrificing its long-term self-interest for short-term rewards? How does the story end?" (205)

In the end, Lewis' book offers a sober diagnosis of the American character, covering Wall Street bankers, politicians, unions, and households. We're all in this together, but how in the world do we get ourselves back on track in living for the long-term?

Let us know if you figure that out.

"Margin Call" Challenges Wall Street Ethics

I woke up this morning to Kenneth Turan's positive review on NPR of the just-released Hollywood drama, Margin Call, which is based on the collapse of the Wall Street firm Lehman Brothers in 2008. (Also see Turan's review for the LA Times and the HBO film Too Big to Fail.)

That radio story was quickly followed by my reading of A.O. Scott's glowing review in the New York Times. In light of both reviews, I was hoping to see this movie tonight (in violation of my usual policy of waiting until movies make it to the dollar theater or DVD). It's not often that I would willingly part with $9.00 for a movie; I have to be persuaded by multiple sources. Sadly, though, Margin Call isn't playing in our area yet.

That's a bit surprising, because you would think that the continuing Occupy Wall Street protests and the Academy Award winning documentary Inside Job would warrant a nationwide release. While Inside Job marshals enough evidence to outrage even the most indifferent citizen (see earlier posts), Margin Call is said to take a subtler approach. As in Kevin Spacey's portrait of Jack Abramoff in Casino Jack (another ripped-from-the headlines drama), we get to see real people making real choices in morally compromising situations. These are flesh-and-blood human beings--not crude caricatures like Oliver Stone's evil Gordon Gekko in the two Wall Street films.

A very telling exchange quoted in Turan's review is between Kevin Spacey's character and Jeremy Irons' character (the CEO):

Sam Rogers [Spacey]: And you're selling something that you know has no value?

John Tuld [Irons]: We are selling to willing buyers at the current, fair market price.

One lesson of this snippet? The winners are those who can get away with peddling junk; the losers are the ordinary suckers who aren't smart enough to see how the winners have gamed the system. Too bad for the losers: it's a free market. If they lost, it was because they got out of the game too late. They were "the last one holding the bag." They were the fools who bought the junk. Hey, it's a free market; they just failed to do their due diligence. The market punishes fools.

The real lesson: A free market economy full of unethical people like Irons' CEO is no longer a free market. It's a system that allows the slick, smart, greedy, and unethical to dupe unsuspecting, trusting people. Such a system is predatory and enslaving: the opposite of free. And saying this is not "class warfare." It's just describing Wall Street and the global financial system for what they have become: a group of people cloaking their knowing misdeeds in the rhetoric of the free market.

Updates: The Occupy Movement and the J-1 Visa Program

Globalization continues to breed contention. Two recent examples:

The Occupy Wall Street protests mushroomed over the weekend to the point that even my little town of Canton, OH saw a protest downtown, with at least 70 protestors. It looks like we are seeing the growth of a social movement that may rival the Tea Party in its energy. As with that earlier wave, new media are a key part of mobilizing and energizing participants. All in all, it's a fascinating development, worth watching closely.

The New York Times reported today on the foreign student cultural exchange visa program that contributed to a work stoppage at Hershey's Chocolate company earlier this year. (For details see earlier posts.) The subcontractor that brought students over, the Council for Educational Travel USA, comes out looking pretty bad. All in all, it looks like the kind of program that was open to abuse, subjecting some of the young people from overseas to some rough treatment. All along, though everyone agrees that they got an all-too-accurate picture of American culture in the process. As one participant was told,

“You wanted a cultural exchange . . . . This is America and this is the way we do things here.” 

Indeed. Subcontracting and exploiting workers? Guess it's just part of our culture.

Occupy Wall Street: Social Movement or Flash in the Pan?

In the last week, anti-Wall Street protests have begun to attract more media attention. The Occupy Wall Street movement may just catch on, but it's too soon to tell. Two things about Occupy Wall Street bear directly on globalization.

First, one of their key slogans "We are the 99%" capitalizes on the startling fact that the top 1% of income earners in our society earn a significant share of national income--a dynamic that the growth of the financial sector (Wall Street) has aided and abetted.

Second, the Occupy Wall Street page explicitly claims inspiration from the Arab Spring movements--perhaps one of the first times in history that young people in a Western democracy were inspired to go out into the streets by young people in the Arab world. This feedback loop from the Arab world to the United States suggests that global media do have some power to spread contagious ideas of protest and freedom in multiple directions around the globe.

For a little sense of the rather chill vibe down in the financial district in lower Manhattan, check out this video:


Right Here All Over (Occupy Wall St.) from Alex Mallis on Vimeo.

Not exactly violent or scary. It does seem a little vague and unfocused.

Nonetheless, I suspect we'll be hearing more from this group in the weeks to come, as they clarify what it would take for them to go home. See the Occupy Wall Street page for more up-to-date information.  And for a list of specific demands, see this page.

For now, it isn't clear that these protests will rise to the level of being a significant social movement or whether they will fizzle out. Will they drive real political change in our governmental institutions or policies? Or will they occupy unemployed hipsters until the cold weather hits? Either way, I'll be watching them closely.

Update on Hershey's Funky Globalization

In my previous post, I discussed the State Department's J-1 visa program, which brings over foreign students for alleged cultural exchanges. The program was tied to a series of abuses at Hershey's packaging facility that led to a walkout by student workers and two stories in the New York Times.

What's the deal with this visa program? In reality, it turns out to be a way to import cheap workers for the summer, on a larger scale than I realized.

According to an op-ed piece by Fordham University law professor Jennifer Gordon in the New York Times, this program

has become the country’s largest guest worker program. Its “summer work travel” component recruits well over 100,000 international students a year to do menial jobs at dairy farms, resorts and factories — a privilege for which the Hershey’s students shelled out between $3,000 and $6,000. They received $8 an hour, but after fees and deductions, including overpriced rent for crowded housing, they netted between $1 and $3.50 an hour. Hershey’s once had its own unionized workers packing its candy bars, starting at $18 to $30 an hour. Now the company outsources distribution to a non-union company that hires most of its workers from the J-1 program.

Why would employers like Hershey go for such a program? Gordon writes,

the J-1 program is attractive to employers because it is uncapped and virtually unregulated; companies avoid paying Medicare, Social Security and, in many states, unemployment taxes for workers hired through the program. One sponsor authorized by the State Department even offers a “payroll taxes savings calculator” on its Web site, so potential employers can see how much they would save by hiring J-1 visa holders rather than American workers. Visa holders can be deported if they so much as complain, and cannot easily switch employers.

Well, that explains it. Companies get compliant summer workers and save on payroll taxes. The sponsors and contractors who arrange it all make good money. But the young people have little or no recourse to alter their situation and are stuck here (at least for the summer). Everybody's happy, it seems, but the foreign students who were expecting cultural exchanges. And if they don't like it, they can get deported.

As Gordon points out, these students are getting a taste of today's corporate America, which relies on outsourcing and subcontracting to avoid responsibility. It turns out that they do get real cultural exchange, a real taste of real America. Unfortunately, it's a bitter taste, not all the sweetness of Hershey's chocolates they were expecting.

Students, welcome to America!

Funky Globalization in Hershey, PA

Americans love Hershey chocolate bars and think of them as all-American. But some funky globalization-related things happened recently at the packaging facility that ships Hershey candies in Pennsylvania. And these happenings were definitely not all-American.

It turns out that Hershey, Inc. has been subcontracting with subcontractors who partner with another subcontractor to bring over groups of foreign university students to work in packaging facilities in the summers. The students coming over this year under the State Department's J-1 visa program were expecting to see the USA, earn a little money, and participate in cultural exchanges.

Instead, the only American culture these poor students were immersed in was our corporate culture. The 400 or so students were surprised to find themselves working physically demanding jobs at a packaging facility for Hershey, wrapping up Kit-Kat bars, Reese's candies, and Almond Joys. Many of them were forced to work on the night shift, and all of them were forced to work eight hour shifts under pressure and surveillance. Still, it wasn't the jobs that put the students over the edge. According to the New York Times, "the students said they decided to protest when they learned that neighbors in the apartments and houses where they were staying were paying significantly less rent."

Fed up, then, the students went on strike. While their immediate frustrations with their jobs caused them to walk out, their larger frustrations were with the brokers who promised them visions of cultural exchange, who forced them to pay up to $4,000 to come to the U.S., and who then over-charged them for rent. Many of the students were expecting to make a little money but now expect to return home having lost money on the deal. And all they got to see was Hershey Chocolate World! : (

How is globalization demonstrated here? For one thing, America's sales culture has been exported abroad: These foreign students learned all too well that you should never trust strangers who make big promises. Meanwhile, the students' desire to visit America is an interesting case study of international migration, as is the State Department's J-1 visa program. A cynic might say that the U.S. government is allowing the temporary migration of cheap guest workers for corporate interests, but the State Department classifies the J-1 visa as an Exchange Visa, which suggests an original intent to promote those exchanges. Students expecting to work in Willy Wonka's chocolate factory were expecting to participate in some global cultural exchange (Hersheys Chocolate World doesn't count).

And the most interesting globalization aspect in this story is the use of multiple subcontractors, a classic corporate and government tactic for outsourcing ultimate responsibility. After the story was published, the followup story pointed out how four different companies all blamed each other. This is what makes globalization so frustrating to people: no one is taking responsibility! This passage was especially telling:

The Hershey Company said it had contracted day-to-day operations at the packing plant to Exel, a logistics company. “The Hershey Company expects all its vendors, including Exel, to treat employees fairly and equitably,” said Kirk Saville, a spokesman.

Exel contracted with a local labor supplier, SHS Staffing Solutions, to provide temporary workers, including the J-1 students, for the summer months when work is at a peak, said Lynn Anderson, a spokeswoman for Exel.

SHS Staffing said its main function was to handle payroll and schedules for the students.

Along with the non-profit organization that recruited the students to come to the U.S., the Council for Educational Travel U.S.A., we have four organizations with a hand in this. Of those four, who is responsible? Hershey? Exel? SHS Staffing Solutions? The Council for Educational Travel? The students? All of the above? It isn't clear.

In any case, we know about this story because the students and the labor union friends decided to create some noise. Whether or not their complaints are justified, this is a fascinating dimension of globalization. How many of these J-1 visas are granted every year? And how many of these foreign students come over expecting cultural exchange only to get stuck working in miserable summer jobs? And how many of those jobs could be filled by young American citizens? In a time of high unemployment, it makes you wonder.

Do readers out there have any experiences with foreign young people in summer jobs on these J-1 visas?

Chesterton's Defense of Repetitious Rituals

The British writer G.K. Chesterton (1874-1936) was one of the most eccentric and famous twentieth century converts to Christianity. After a brief sojourn in the Church of England, he ended up in the Roman Catholic Church, a counter-cultural perch that informed his quirky views of just about everything toward the end of his life.

In researching my book, a friend recommended that I read a volume of his collected writings on economics, including a book he published under the title Outline of Sanity, which I did read and did enjoy. There, Chesterton defends his philosophy of Distributism, which he and his friend Hillaire Belloc framed as an alternative to both socialism and capitalism. In Chesterton's view, there was little difference between the two, because both led to giant bureaucracies with monopolies. (A contemporary Chestertonian would challenge anyone to identify major differences between navigating through government red tape and cellphone or computer companies' red tape. Both are giant, anonymous, remote, and have you over a barrel.)

The true alternative to these concentrations of power, for Chesterton, was to foster small, local forms of ownership and proprietorship, as in the Middle Ages. Although he could be accused of idealizing the peacefulness of the medieval economy, he was quite well-read in history, and his criticisms of modern economics are often trenchant (and occasionally tinged with nostalgia). Distributism's solutions are not always realistic, but its critique is spot-on.

More recently, I picked up a library copy of an earlier volume of G.K.C.'s collected works, composed of his writings on his conversion to Catholicism. In a book entitled The Thing: Why I Am a Catholic (1929), he responds to one of the common Protestant objections to Catholicism: the charge that it relies on empty, repeated rituals in its prayer and worship or what Chesterton calls "mechanical repetition." His response is worth quoting extensively, since it is so lively:

[A critic] says that we repeat prayers and other verbal forms without thinking about them. And doubtless there are many sympathizers who will repeat that denunciation after him, without thinking about it at all. But, before we come to explaining the Church's real teaching about such things, or quoting her numberless recommendations of attention and vigilance, or expounding the reason of the reasonable exceptions that she does allow, there is a wide, a simple and a luminous truth about the whole situation which anybody can see if he will walk about with his eyes open. It is the obvious fact that all human forms of speech tend to fossilize into a formalism; and that the Church stands unique in history, not as talking a dead language among everlasting languages; but, on the contrary, as having preserved a living language in a world of dying languages. When the great Greek cry breaks into the Latin of the Mass, as old as Christianity itself, it may surprise some to learn that there are good many people in church who really do say Kyrie eleison [Lord have mercy] and mean exactly what they say. But anyhow, they mean what they say rather more than a man who begins a letter with "Dear Sir" means what he says. "Dear" is emphatically a dead word; in that place it has ceased to have any meaning. It is exactly what the Protestants would allege of Popish rites and forms; it is done rapidly, ritually, and without any memory even of the meaning of the rite. When Mr. Jones the solicitor uses it to Mr. Brown the banker, he does not mean that the banker is dear to him, or that his heart is filled with Christian love, even so much as the heart of some poor ignorant Papist listening to the Mass. Now, life, ordinary, jolly, heathen, human life, is simply chockful of these dead words and meaningless ceremonies. You will not escape from them by escaping from the Church into the world. When the critic in question, or a thousand other critics like him, say that we are only required to make a material or mechanical attendance at Mass, he says something which is not true about the ordinary Catholic in his feelings about the Catholic Sacraments. But he says something which is true about the ordinary Court levee or Ministerial reception, and about three-quarters of the ordinary society calls and polite visits in the town. This deadening of repeated social action may be a harmless thing; it may be a melancholy thing; it may be a mark of the Fall of Man; it may be anything the critic chooses to think. But those who have made it, hundreds and hundreds of times, a special and concentrated charge against the Church, are men blind to the whole human world they live in and unable to see anything but the thing they traduce. (The Collected Works G.K. Chesterton, Vol. 3, [San Francisco: Ignatius Press, 1990], pp. 216-217).

We can boil G.K.C.'s points down to four: 1) the charge of "mechanical repetition" overlooks Catholic tradition, which acknowledges and deals with this very problem; 2) ordinary human societies also have many empty rituals, such as addressing a letter with "Dear" or the rituals of government; 3) many of these secular rituals are quite empty in comparison to repeated practices in worship, which believers find meaningful; and 4) the people who make this charge (ironically enough) are themselves repeating this charge without thinking about it.

To this, one can add another point: all worship practices involve some element of repetition. No low-church evangelicals would propose getting rid of sermons, even though sermons are given every week (empty ritual!). All worship is liturgical in the sense that it involves a set of patterns and practices; and most churches repeat these patterns and practices weekly.

For anyone interested in the liturgical year, this is an interesting defense against the church of "mechanical repetition."