Institutional Failure

A couple of months ago I saw The Big Short, and it had a powerful effect on me.  Although the heroes of the tale, Steve Eisman (played by Steve Carrell) and Michael Burry (Christian Bale), had personality problems which I hope that I do not share, they were hard-headed guys who didn't trust what anyone else said, and who therefore saw that something was rotten in Denmark when everyone else continued to cut larger and larger slices of cheese.  I envied them, too, not for the money they made, but simply because they were betting on real time events, and the results proved that they had been right--something that can never happen for those of us who write about the past.  I decided to read the book as well, and I finished last week.  It reinforced the lessons of the film, and left me more convinced than ever that virtually all the major institutions of our society share the same rot, which is making it impossible for them to function for the common good, and threatening total collapse on many fronts.  I saw this happening in our colleges and universities during my 37-year career, and it is increasingly clear that what I saw was not exceptional.

I shall not attempt to retell the story of The Big Short, but rather focus on a number of almost random remarks that  pop up here and there through the text.  One such remark came from Charlie Ledley, one of two small-scale traders who had specialized in finding long shots that had a much better chance of paying off than their price seemed to indicate.  He and his partner Jamie Mai, believed "that public financia lmarkets lacked investors with an interest in the big picture.  U.S. stock market guys made decisions within the U.S. stock market; Japanese bond market guys made decisions within the Japanese bond markets, and so on. "There are actually people who do nothing but invest in European mid-cap health care debt,' said Charlie. 'I don't think the problem is specific to finance.  I think that parochialism is common to modern intellectual life. There is no attempt to integrate."  Hmmm.

The tendency towards specialization has wrecked modern intellectual life, especially in the humanities and social sciences.  In my own field of history, and also in literature, there is no expectation that scholars will have any talent for taking a very long view, or understanding how the present actually differs from various periods in the past.   That is why survey courses, which used to be the province of the most distinguished faculty members, are now more likely to be taught by adjuncts.      Because such skills are nearly ruled out of academia, students at elite institutions have no sense of how what is happening today fits into the broader development of western and world civilization.   Economics students, I suspect, learn little about the bubbles and crashes of centuries past, and thus failed to recognize the signs when they recurred.  And that is having consequences potentially as great as the financial crisis of 2007-8.

A second broad point concerns the ways in which the untrammeled free market, the god of our economics departments, business schools, and political parties, has utterly transformed institutions that once served a useful purpose into parasites.  Steve Eisman, one of the main characters in the book, began with the realization that many subprime home loans were going to default at a predictable moment, and found a way to bet against them.  But he followed that insight up the economic food chain, shorting the stock of mortgage originators, home builders, and even the ratings agencies that were certifying bonds based on those mortgages.   And then, reaching the top of the pyramid, he focused on the big banks themselves--Goldman Sachs, Morgan Stanley, Citigroup, and the rest.  "One of the reasons Wall Street had cooked up this new industry called structured finance," Lewis writes almost offhandedly, "was that its old-fashioned business was every day less profitable.  The profits in stockbroking, along with those in the more conventional sorts of bond broking, had been squashed by Internet competition.  The minute the market stopped buying subprime mortgage bonds and CDOs [collateralized debt obligations] backed by subprime mortgage bonds, the investment banks were in trouble."  And because the banks were now traders in their own right, the role of bond salesmen, everyone now understands, isn't to help both sides of a transaction to benefit, but rather "to screw their customers."  The big banks don't want to help industrial and commercial firms establish and maintain their profit streams, they want to build up their own, largely by running a rigged casino.

I could spend a lot of time coming up with analogs for this behavior, but one would suffice: the role of big pharma.  About 150 years ago, Louis Pasteur, Paul Ehrlich, Sir Alexander Fleming and a few others discovered means of preventing or curing often fatal infectious diseases, an extraordinary breakthrough that has saved many millions of lives. The world now desperately needs new antibiotics, but the big drug firms, who have all the money they need to look for them, aren't very interested.  Rather than find drugs, much less vaccines, that would cure or prevent diseases, they prefer developing treatments for chronic conditions like indigestion, or simply pain.  That is how they have managed to hook hundreds of thousands of Americans on powerful opioids.  Hundreds of those Americans, who switched to cheaper, more accessible heroin, are now dying of overdoses every day, but hardly anyone has had the courage to focus on the real cause of this new, often fatal epidemic.   Again, something similar has happened in leading colleges or universities.  They have become gateways into the upper reaches of American society whose endowments have become hedge funds.  Almost none of them have anyone looking seriously at their students' educational experience, much less thinking of ways to improve it.  They are interested, of course, in moving some of their education on line, where they will no longer have to pay live professors to provide it, and they have vastly expanded the role of adjuncts to save money.

A third major lessons involves the internal workings of the big banks.  Again and again, Lewis's subjects discover, no one, least of all the CEOs, seems to have any real idea of what the assets their firms are creating are really worth, or even what was behind them.  This is another endemic problem in our society, on related to, but not exactly the same as, the Peter principle, which stated almost half a century ago that in hierarchies, people rise to their level of incompetence.  My variation on this theme is that at some point in any hierarchy--firm, university, hospital, or heaven help us, government--men and women reach a point at which they are no longer paid to think.  University presidents, Wall Street CEOs, and many others, doubtless, are prize animals, led around by their handlers from fair to fair to assure everyone that all is well and maintain friendly relations with other power centers.  Having grasped what was happening with subprimes, Ledley and Mai assumed for a long time that the movers and shakers in the big banks knew what they did and were using these instruments to fleece their customers. Eventually they realized that that was wrong.  "The big Wall Street firms," Lewis writes, "seemingly so shrewd and self-interested, had somehow become the dumb money. The people who ran them did not understand their own businesses, and their regulators obviously knew even less.  Charlie and Jamie had always assumed that there was some grown-up in charge of the financial system, whom they had never met; now, they saw there was not."  Many of us, I think, have had similar fantasies about various key sectors of our society, including the one that we work in ourselves.  Another interesting symptom that emerges repeatedly through the book is the willingness of Wall Street operatives to joke about the absurdity and idiocy of what was happening.  I have seen the same kind of smirking on the faces of relatively traditional historians talking about the work of their newer colleagues many times--but they did not recognize it as a serious problem, until one day they woke up to find themselves intellectually isolated in their profession.  I have also seen that smirk on the faces of doctors talking about some of the new SOPs in their profession.  It's never a good sign.

The depth of the intellectual and moral rot at the upper reaches of our society became even more apparent after the crash.  Although Burry, Eisman and the rest reaped huge financial rewards for having seen it coming, they did not win any respect or admiration from their peers, or even from the investors whose money they managed.  Burry had indeed been battling for two years with his investors over his bet against subprimes, which did not seem to them to be likely to pay off, and only the force of his personality allowed him to stick with it until it paid off.  (That is another scene that I have played regarding the content of some of my books, but that's a story for another time.)  Meanwhile, Bury saw well-connected people who had gone with the flow appearing on television and explaining falsely that they had seen the crash coming.  I have seen the same thing in two pundits--one a journalist, the other an academic--who cheered loudly for the Iraq war but no longer hesitate to pronounce it a disaster without the faintest hint of an apology.  Both, of course, still work at the highest levels of their professions.  "What had happened," Lewis writes of Bury, "was that he had been right, the world had been wrong, and the world hated him for it."

Last but hardly least, as Lewis explains in detail in his last few pages, the consequences of the second-greatest crash in American history have been minimal.  The government, of course, bailed out all the major players in the crisis, and despite Dodd-Frank, the culture of the big banks has not changed.  (I have had occasion to discuss that once or twice here.)  "The reason that American financial culture was so difficult to change--the reason the political process would prove so slow to force change upon it, even after the subprime mortgage catastrophe--was that it had taken so long to create, and its assumptions had become so deeply embedded."  Millions of Americans lost their jobs, their homes, and their net worth, but Wall Street used its power to convince the powers that be--led by Barack Obama--that nothing too fundamental was wrong.  They also took care to put a six-figure sum into the pocket of Hillary Clinton, the heir presumptive to the throne, as soon as she stepped down as Secretary of State.

And that leads me, at long last, to the institution that seems closest to complete failure, our political system.  The pretense that it serves the needs of the public, obviously, has worn very thin among the people of the United States, which is why Donald Trump leads the Republican field and Bernie Sanders has fought his way to rough parity with Hillary Clinton.  The establishment in both parties is peddling subprime bonds.  The Republicans claim that making the rich yet richer will help the rest of us, while Clinton argues that prejudice against women, minorities and gays is more important than economic inequality.  Bernie Sanders--truly a man from another era--has proclaimed that the establishment has no clothes, and the message is resonating, particularly among the young, who are being left out of our economic growth.   Yet how well he can do in the campaign--or, for that matter, in the White House--remains a very open question.  The intellectual rot throughout our society is very, very deep, and needs to be cleared away to allow healthy plants to flourish.  That will take a long time.

My own profession must take a huge part of the blame for this.  The men and women who are paid to research, think, and teach have a unique responsibility to our society: to use that time well for themselves, their students, and the world at large.  A few still do, but the leaders in the humanities and social sciences have taken a different path.  Their work, basically, feeds their own egos, helps to create an alternative universe on campuses, and often serves the needs of powerful interests.   That leaves a gap which no other institution can fill.  For several decades I kept an older tradition alive in my books and classes, and for a dozen years I've tried to do the same here.  I am not alone, but it will be a very long time before the Enlightenment tradition can really be revived.