Wednesday, March 25, 2009

The Second Great Depression: A Guide

We're probably kidding ourselves at this point if we pretend that we're not in the midst of America's Second Great Depression and a global depression on a scale not seen for at least seventy years. In fact, it has the capacity to be far worse than the initial Great Depression because of globalization's reliance on outsourcing of our native industry, years of lack of growth in domestic industries outside of service and finance, other nations' reliance on our import consumption, and other nations' investment in purchasing debt the Bush administration generated by prosecuting two wars while slashing taxes.

This will probably be a clusterfuck for the ages.

I wish I could break it down, but unfortunately my lack of patience meets my lack of economic schooling with perfect symmetry. What I can do, however, is try to furnish you with digestible and informative links that I've run across in recent days, weeks and months. (I can also implore a friend to start writing for this blog, but I doubt that's going to pay off. Regardless, you, consider yourself implored.)

This video runs under ten minutes and, despite a sometimes awkward voiceover, explains the financing — and gambling — of subprime lending and really nicely sums up how we got here:

I think the video neatly gives the lie to the right-wing canard that government-sponsored lending to poor people caused this crisis. After all, most of the loans made by government-sponsored programs have a far lower failure/foreclosure rate, and the majority of failed subprime loans fell outside the purview of existing regulation. But, most importantly, as that video indicates, the amount of money lost, what has suddenly vanished from the economy, is orders and orders of magnitude larger than the most irresponsible bundle of subprime loans could account for.

Also, now that you've seen this video, you might be able to make sense of the processes going on in this infographic that seems to go on forever. While it's accurate, it's interesting that everything keeps flowing and flowing downward (click to embiggen; or, depending on your PC, you may have to download and magnify):

Hat tip to my friend Jon W. for sending this in.

If you have more time to learn about this crisis, I also enthusiastically recommend this program from This American Life. In many cases, their plodding examination of something — "Places That Have Scarecrows" or some other tedious bullshit — seems drawn out forever. I listened to this program and felt as if only a quarter hour had passed. Toward the end, it also nearly broke my heart. You should also follow it up with this NPR piece on Credit Default Swaps. It asks the question, amusingly so, "Should I be mad, and who should I be mad at?" Both of these are a great, great expenditure of your time. When you have an hour, spend it listening to them. (You won't learn how over 20 dead people in Ohio got mortgages without doing so.) 

Now that you have a more colloquial and familiar idea of the factors at play, you might enjoy picking through an excellent series by The New York Times called "The Reckoning." In it, you'll find profiles of Greenspan's role, how China's involvement further developed the bubble, and even a profile of the particularly odious Phil Gramm, whose cheerleading for the repeal of the Depression-era Glass-Steagall Act helped to contribute to this enormously. You may remember Phil recently as one of the McCain campaign's principle economic advisors. America dodged a bullet there, but it doesn't alter the fact that having Phil Gramm as an economic advisor during a crisis he helped create was an unintentional bit of black economic humor that could only have been rivaled by David Berkowitz being named police commissioner to track down the Son of Sam killer.

If you can stomach any more horror, I recommend you read some Matt Taibbi, who provides a breakdown of the crisis as a whole in very entertaining fashion before turning his sights on insurance and failure giant AIG. Personally, I find Taibbi sort of an abrasive ass a lot of the time, but the problem is that he's an abrasive ass who's often right. He comes off like a latter-day Hunter Thompson, with the same amount of bile, better research and far less capacity for poetry. Imagine if Fear and Loathing on the Campaign Trail '72 was filed with greater journalistic integrity and factual citation and without a heart that could be broken or without a heart at all. That's Taibbi. The self-importance and the self-aggrandizing are still there, but in place of the requiem for a generation there's a recursion to data and disgust.

Taibbi breaks down the current abortion of the AIG bailout thus:
A short time later, it came out that AIG was planning to pay some $90 million in deferred compensation to former executives, and to accelerate the payout of $277 million in bonuses to others — a move the company insisted was necessary to "retain key employees." When Congress balked, AIG canceled the $90 million in payments.

Then, in January 2009, the company did it again. After all those years letting Cassano run wild, and after already getting caught paying out insane bonuses while on the public till, AIG decided to pay out another $450 million in bonuses. And to whom? To the 400 or so employees in Cassano's old unit, AIGFP, which is due to go out of business shortly! Yes, that's right, an average of $1.1 million in taxpayer-backed money apiece, to the very people who spent the past decade or so punching a hole in the fabric of the universe!

"We, uh, needed to keep these highly expert people in their seats," AIG spokeswoman Christina Pretto says to me in early February.

"But didn't these 'highly expert people' basically destroy your company?" I ask.

Pretto protests, says this isn't fair. The employees at AIGFP have already taken pay cuts, she says. Not retaining them would dilute the value of the company even further, make it harder to wrap up the unit's operations in an orderly fashion.

The bonuses are a nice comic touch highlighting one of the more outrageous tangents of the bailout age, namely the fact that, even with the planet in flames, some members of the Wall Street class can't even get used to the tragedy of having to fly coach. "These people need their trips to Baja, their spa treatments, their hand jobs," says an official involved in the AIG bailout, a serious look on his face, apparently not even half-kidding. "They don't function well without them."
The article is enormous, and, true to Taibbi form, the great lines don't come as little, easily isolated epigrams but rather funny riffs that build on outrage built on further outrage. It's worth the read.

Finally, once you feel more finance savvy and comfortable with the greater trends at work during the crisis, I recommend you read this amazing article by Michael Lewis called "The End." You might recognize his name, because I frequently mention his outstanding book Moneyball, which is about applying market economics to baseball. Lewis was a successful stock trader in the 1980s, made his fortune and left, disgusted by the practices on Wall St. His damning memoir, Liar's Poker, is just as damning today but now also seems quaint because the practices he castigated were inflated to hundreds or thousands of times the size that he witnessed. Reading Liar's Poker now is like reading a pacifist's account of the Battle of Antietam and raising your eyes from the page to look out on Hiroshima a day after the atomic detonation.

"The End" hurts with every successive page. Probably the best description I can think of, for it, is what my friend Devri wrote me after I emailed her the link: "I don't think I've ever said, 'Oh my God' out loud at anything this much before."

To give you an idea of both Lewis' gift for writing and also the severity with which he tackles the subject, consider this (emphasis mine):
Then came Meredith Whitney with news. Whitney was an obscure analyst of financial firms for Oppenheimer Securities who, on October 31, 2007, ceased to be obscure. On that day, she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It’s never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market. Four days later, Citigroup’s C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.

Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer’s campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.
If you don't want to read more now, I don't know what to do with you. Besides slap you.

All of this, all of these links, are worth your time. Most of us don't really know what's going on, and we need a guide. More importantly, we need to know what we're arguing about, lest talking points based on labyrinthian falsehoods on ginned up economic distortions carry the day. The legacy of what went wrong in a virtually unregulated mercenary system still hangs in the balance. If enough voices manage to shout out, "Fannie Mae and Freddie Mac and Barney Frank and Chris Dodd made all these bad things happen!" enough people might believe it.

Don't let that happen. Don't let predators of Wall St. finance try to pave over what happened here before the innumerable corpses caused by them have a chance to go into the hole in the earth they opened up without the slightest remorse.

Anyone who has a neatly comprehensible resource to add to this list, please post it in the comments or email it or IM it to me, and I will be happy to add it to this post and contribute to a growing database of refutations of irresponsible argument and bad economics. Please link this to others and share it however you can, if you think it adds value to the discourse on what has happened. Thanks already to AJ for the BusinessWeek link and to Jon W. for the graphic.