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Posts Tagged ‘Wall Street’

Ross Douhat and Jeff Maximos had the following remarks on the peculiar kind of meritocracy at work at both the Ivies and Wall Street, a new model of leader combines great intellect with a great sense of entitlement, and a very meager sense of civilizational responsibility.

Ross begins:

I don’t often plug my first book, Privilege, but I think it’s worth mentioning here because when you read about how the American leadership class acquitted itself at Citibank, or on Wall Street in general, I think you can see the dark side of meritocracy at work – the same dark side that shadows an instititution like Harvard, where a job in investment banking became, for a time, the summum bonum of meritocratic life. The mistakes that our elites made, and that led us to this pass, have their roots in flaws common to all elites, in all times and places – hubris, arrogance, insulation from the costs of their decisions, and so forth. But they also have their roots in flaws that I think are somewhat more particular to this elite, and this time and place. Flaws like an overweening faith in technology’s capacity to master contingency, a widespread assumption that the future doesn’t have much to learn from the past, and above all a peculiar combination of smartest-guys-in-the-room entitlement (don’t worry, we deserve to be moving millions of dollars around on the basis of totally speculative models, because we got really high SAT scores) and ferocious, grasping competitiveness (because making ten million dollars isn’t enough if somebody else from your Ivy League class is making more!). It’s a combination, at its worst, that marries the kind of vaulting, religion-of-success ambitions (and attendant status anxieties) that you’d expect from a self-made man to the obnoxious entitlement you’d expect from a to-the-manor-born elite – without the sense of proportion and limits, of the possibility of tragedy and the inevitability of human fallibility, that a real self-made man would presumably gain from starting life at the bottom of the socioeconomic ladder (as opposed to the upper-middle class, where most meritocrats starts) … and without, as well, the sense of history, duty, self-restraint, noblesse oblige and so forth that the old aristocrats were supposed to aspire to.

Jeff adds:

Bereft of a sense of tragedy and their own finitude, and possessed of no intuition that they ought to impose upon themselves the discipline of self-limitation, both for the good of our common society and for the good of their souls, and eschewing obligations to their ‘inferiors’, most of our meritocrats embody the vices of the nouveau riches and the ancien regime without any of the counterbalancing virtues. They have been the worst of both worlds, sort of like liberaltarians celebrating the most loathsome excesses of the culture while hymning the most calamitous excesses of creative destruction.

I think both of these observations are useful. I realized in criticizing Bush’s crony capitalism coupled with my later suggestion that Wall Street would do well to return to the WASPy values of understatedness, modesty, and a strongly developed sense of noblesse oblige that there is a tension if not an outright contradiction between these two ideas. After all, the kind of technocratic efficiency by which talent from all races, countries, and parts of the globe is channeled to a handful of institutions is quite unlike the era of the “Gentleman’s ‘”C” and the Country Club. There is a difference, though. At the realm of law and policy, things should be neutral and this was an important Anglo-American ideal that the Rockefellers, Morgans, and other so-called Robber Barons embraced, even as they cultivated themselves into a kind of self-conscious American aristocracy in the late 19th Century. The American elite did not enshrine itself with legal privileges, government largesse, and the kind of “free for all” that elites in Latin America induldged.  The self-respect of the American WASP elite depended in part upon its accessibility to outsiders who conformed to the elite’s standards. Self-limitation and ostracism coupled with neutral rules defined the mainstream of American business culture well into the 1970s–think of the “IBM Uniform”–but this culture also demanded some regard for community, loyalty, patriotism, and civilizational leadership almost entirely absent on the Wall Street. Ross Perot spent some of his enormous sums of wealth in the early 1980s to find and rescue POWs in Southeast Asia.  It’s hard to imagine this kind of eccentric and selfless act from anyone on today’s Wall Street, let alone something more mundane like joining the Kiwanis or coaching a soccer team.

Bush straddles the new meritocracy and the old elite. He is after all a Harvard MBA, but he stands in sharp contrast to his father. Like his father, he’s not particularly ideological. But unlike his father, he has little sense of propriety, as evidenced by crude self-interested acts like threatening vetos over an oil sheikdom’s right to run a U.S. port, his indifference to the working class’s vulnerability to immigration, or his excessive concern for loyalty. In the latter sense, he is a unlike the new Wall Street elite, who instead embrace a set of facially neutral rules that happen to benefit “guys like them.”  In this model, the more layered requirements of the old WASP elite are replaced solely with the sheepskins.  They believe the group in general–smart, Ivy educated, upper middle class in taste, not particularly brave or admirable–is entitled to rule the world, even though this would not necessarily be so for any particular individual among them. The idea that that group owed anything to the broader society or to God, however, is completely missing, and this is what seems to seperate them from the Henry Fords and John D. Rockefellers of yesteryear.

So Bush is a defective representative of traditional WASP values, holding on to his family’s power in a world where that class is in retreat–evidenced most dramatically by the rise of the out-of-nowhere Obama–without the counterbalancing effect of other stable, multigenerationally wealthy families that could, once upon a time, constrain even a President.

This new kind of elite built on a peculiar and very recent type of speculative activity will likely have a tough time justifying its power and wealth as the wheels come off. During the long Bull Market of 1982 to the present, one could reasonably conclude that the various financial players were allocating capital intelligently and responsibly through the miracle of markets, even though the details of any one instrument were arcane. After you learn about $60T in CDS obligations and monoline wrapped crap debt turning into AAA paper, it is all kind of hard to swallow. And the huge bonuses don’t make it any easier. The resentment and rage of the middle classes is building up. They feel, as they have felt at other times in history, that the basic contract has been broken to benefit the few at the expense of the many. If too many of these folks disappear and sink too soon, this is a recipe for political radicalism. As in the case of the ancien regime itself, decades of placidity can mask the potential for violent, sudden change. If it’s not Obama, it may be some other extreme on the flip side of his reign.

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Wall Street will always be greedy and profit-minded. That is a given.  But the extent of the rot is really alarming.  The failure of all forms of regulation–internal, public, and market-based, such as bond-rating agencies–will leave a cloud over capital markets for some time.

The fearlessness by participants suggests that non-market considerations–friendships, loyalty, ethnic and religious ties, habit, absent moral compasses, and incompetence by regulators–have at least as much to do with where and how money is spent as ordinary considerations of profit and loss.  Of course, this is not always bad, as Francis Fukuyama pointed out in his research on the importance of trust in risky business transactions. But American business, particularly at the top level, has long been tempered by a broader notion of fair play:  rejection of nepotism and bribery, standardized procedures, meritocracy, some respect for “good birth,” the habits of good education and conscience, and a strong culture of fiduciary duties by officers to shareholders and other stakeholders.

This culture has come undone on Wall Street in particular, where cleverness and deception have displaced wisdom and hard work as the hallmark values.  The real value of investment instruments are increasingly hidden from outsiders through dishonest and opaque instruments, whether “barges” ten years ago or asset-backed-securities today.  Consider the headlines:  A $50B (!) ponzi scheme by Bernard Madoff. A lawyer hocking $380M in fake promissory notes. The scale, brazenness, and long-persistence of these frauds suggests that something is deeply wrong on Wall Street that no regulator alone can fix.  Something must happen to the culture, which likely depends on banning a great many people from any kind of dealings in complex financial matters, revising the famous bonus structure of Wall Street firms, a revolt by shareholders and commercial banks, and sending a great many people to jail for a very long time.

The banker of old was a staid, somewhat humorless, but universally respected symbol of prudence and rectitude.  He made a good living, but his living depended on the survival of the institution with which he was affiliated.  The Wall Street impresario of today is a 30 year old castle collector who went to Ivy League schools and learned how to do regression analysis and also that “God is dead.”  He’ll switch jobs 3-4 times in a decade, and his entire compensation structure is directly proportional to the risks he takes with the money of others.  He represents an alien value system that has taken root on Wall Street.  It is un-American, untied to the broader moral traditions of western civilization, and we are witnessing its self-destruction.  The return of that earlier ethic of sturdy, sober, WASP Americana–an ethic that all social climbers, whether immigrant or “low born,” were expected to follow–is part of the solution to what’s wrong with Wall Street, which for too long has taken the Michael Douglas film as a “how to.”

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I’ve recently become intrigued by the writings of Nicholas Taleb.  They resonate with me because his criticism of mathematical modeling of markets–i.e., the central activity of “econometrics” and the basis of so much Wall Street activity–has long been a theme of the Austrian School of Economics. The same skepticism of predictability that leads the Austrians to reject socialism also casts a shadow over so much of the noise-making activity of Wall Street. 

Stressing instead, the unpredictability of markets, the role of idiosyncratic (and changing) individual preferences, and the heroic role of the entrepreneur and experience-driven gambles about unmet demand, the Austrians have long condemned the idea that the government, central banks, or even individual investment houses could reliably predict market movements in advance. There is a huge “X Factor,” namely, human action.

Taleb stresses that our social scientific hypotheses and data sets are likely misleading.  We craft comforting narratives from past events, even though these explanations may have little predictive value and can lead to positively dangerous “false positives” going forward.  We are, in essence, stumbling around, looking for answers, with various baffles and blinders. 

Like Taleb’s insights into Black Swans, the nice thing about the Austrian School is that it does not promise utopia.  Instead, it promises the least systemic damage because an authentic free market system–particularly one divorced from central banking and fiat money–is the least systematized.  There may be longer and shorter chains of production, misallocations of capital, and supply shocks, but these problems are dispersed and rooted in the unavoidable uncertainties of market activity.  Unlike the “modern” world of central banking based on fiat currency, temporarily correct but disastrous false signals cannot arise without the harmful pressures of central banking coupled with fiat currency.  Your loss is my gain in a true free market system, and speculators tend to cancel one another out without the false signal of inflationary monetary policy.  Wealth creation might be slower than in the present world of monteary-policy-driven economic bubbles, but so too are the crashes less frequent and less severe. 

Murray Rothbard was fond of pointing to the relatively short-lived 19th Century panics in contrast to the decade-long Great Depression and the repeated multi-year-post-war recessions.

One would have thought the econometricians would have retreated after the failure of Long Term Capital Management in the late 90s, but no such luck.  They returned with the same bravado and cock-sure certainty again, enabled by the same kind of monetary policy that presumes to “create growth.”  Of course, no one can manage the economy, not least the government who, unlike private actors, is concerned equally with social goals and concentrated public choice players as it is with profits and wealth creation.

I was happy to see some criticism of the economists counseling government intervention in today’s Wall Street Journal.  Yet this criticism will likely be drowned out by calls for intervention.  So long as Wall Street’s economists embrace the wrong kind of mathematics in an attempt to predict the unpredictable–with extreme confidence, in fact, backed up by the wrong kinds of statistical reasoning–then the theoretical framework supporting central planning and government intervention will remain.

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I thought Mitt Romney’s op-ed opposing the Detroit bailout had the right combination of free market instincts, industry knowledge, patriotic compassion, and credibility. It reminded me of why I voted for him.  I say that as someone who recognizes the unfairness of bailing out Wall Street while letting this strategically important industry suffer.  But there’s no reason to throw good money after bad.  The Unions have screwed themselves, management has done little more than make excuses, and the only way to get it right is a “cut to the bone” slashing of workers, debt, and other costs in a Chapter 11 proceeding.  I don’t buy the criticism that Chapter 11 is the death of GM or Ford, not least b/c the actual products are decent enough and warranties can always be exempted from the stay, something that occurs routinely in manufacturers’ bankruptcies.  But without changing their cost structure, all these companies are dead, to our collective detriment as their well-paid workers do not have skill sets that can be easily transferred, and there are a lot of reasons America should be making its own cars.

This bearish report by Gerald Celente predicting tax riots and mass homelessness rivals my own bearishness and, sadly enough, comes from a guy that has been right on everything from the Panic of 2008 to the Asian Financial Crisis of 1997.

This analysis of the ebb and flow of “idealism” in American politics was interesting. Some of my favorite homeboys like Burke and Oakeshott make an appearance.  I’m glad the author noted that Obama is at best a pragmatist but, more likely, a purveyor of washed up 60s-era Welfare-statism.  One thing I wish Obama and his supporters would remember is that deficit spending is not wealth-creating, the government rarely “invests” right, and that all this money for bailouts to failed sectors and infrastructure and healthcare must be siphoned out of the healthy parts of the economy, which risk suffocation under the burden of “spreading the wealth around.”

The David Brooks thing on the “formerly middle class” is depressing, but worth absorbing.   I’ve met more such people (or people on the brink) in the last 12 months than I have in my entire life previously.

On a related note, I perused gunbroker.com recently. It’s the ebay of gun buying.  Colt 6920s are now going for $1700.  CMMG, STAG, and other generic M4s are north of $1000.  Thirty round PMAGs have crept north of $20, though they were previously available for about $14.  Ammo prices remain ridiculous, in spite of the drop in commodity prices.  This panic will probably last a while, both from the fear that Obama, the former Brady Campaign/Joyce Foundation board member, will make guns now available banned forever and untransferrable to boot.  I think the overall conditions also suggest fear of increasing crime, disorder, and Depression-era conditions.  My gut instinct on this is reinformed by the ridiculous premiums over spot–20-30%–for silver and gold coins.

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