Most of what I have written on this blog has focused, in one way or another, on the relationship between civil liberties and the war on terror. Over the last few weeks, however, I have been turning my mind to the financial crisis – trying to understand its causes, get a sense of how long we will feel its effects, and so on – and I cannot get past how many people believe that bankers are in a very real sense holding the government and the country hostage. And as more and more Americans lose their livelihoods and homes, it is easy to see why wealthy bankers would end up in the crosshairs of our country’s most talented public intellectuals and social critics. But I think something genuinely new is afoot, something much more interesting and important than populist rage at income inequality.

The basic criticism of the bankers is easy enough to sketch. If you have had the pleasure of reading Matt Taibbi, who writes for Rolling Stone, or have casually glimpsed at any of the major economic blogs, outrage literally jumps off the page. The critics usually ascribe to four claims about modern investment banks. These powerful institutions:

(1)     knew that the financial instruments they were creating manipulated the underlying default risks away (i.e., the risks created by subprime mortgages that formed the bases of the complex products the bankers sold);

(2)      implemented very sophisticated hedging strategies to avoid taking huge hits on those risks;

(3)     orchestrated and then relied on the federal government’s bail out funds as a form of premium-free insurance. This led to a situation where profits were privatized and risks were socialized, as many critics have pointed out; and then

(4)     without changing or modifying their internal operations, incentive schemes, approach to suspect financial instruments, or oversight procedures, gave truly shocking compensation packages to their most valued employees.

This is a far cry from populist rage or unsupported leftist rhetoric. The first two claims, taken together, comprise something akin to a theory of fraud: the bankers knew understood the risks underlying the sophisticated financial instruments they peddled so clearly that they employed shrewd hedges to avoid the inevitable collapse of the subprime mortgage market.

The fourth observation – relating to the huge disparity between earnings on Main Street and those that continue to prevail on Wall Street – may appear to be ordinary populist anger, moored deep in the human heart’s tendency to covet what it doesn’t possess. But look closer, because it isn’t. The substantive complaint is that the compensation packages at banks like Goldman Sachs create an insipid, irresistible moral hazard: by throwing gobs of money at these bankers, the U.S. government has sent a signal that their pre-crash behavior is no cause for concern, and in fact is something to be celebrated. The market failed, but the bankers deserve handsome compensation for doing their jobs. The crash, dear friends, wasn’t their fault.

Perhaps the most interesting indicator of today’s Zeitgeist is the third claim, which relates to the cozy relationship that has developed between Washington and Wall Street. Matt Taibbi has famously called Goldman Sachs the “great vampire squid,” an entity that is interested in one thing only: money. Taibbi’s way of speaking about Goldman is raw (some might say shrill), but he does get one thing absolutely right: Americans do not like the idea that a small cadre of powerful bankers could conscript the U.S. government into adopting policies that do not reflect the real interests of the electorate.

The electorate is increasingly hostile to the fiscal policies that Washington has adopted to address the crisis. No mere populism or candy-store Marxism lurks beneath the ire that ordinary people feel today; this hostility is predicated upon serious thinking about how Washington has responded to the financial downturn. I would even venture to say that if the Obama Administration keeps coddling Wall Street, bowing before the every wish and caprice of the banking class, he could find himself facing a diverse group of citizens (Republicans, Democrats, and Independents) with the political clout necessary to torpedo his chances at a second term. But more importantly, Obama should remember that a strong economy – one with healthy job growth and meaningful access to credit – provides the essential foundation for effective government. A desperate and disaffected population, after all, is itself a national security risk.

No related posts.