In which I foolishly read a Brooks column
Posted by clubsodaandsalt on January 25, 2008
Tyler Cowen generally runs one of the best blogs out there, so when he praised a David Brooks editorial this morning, I decided to have a look. Now, by Brooksian standards, I suppose the column isn’t that bad, but still… I’m going to have to be more careful with Cowen links going forward. This made me nauseated:
The Greed Narrative goes something like this: The financial markets are dominated by absurdly overpaid zillionaires. They invent complex financial instruments, like globally securitized subprime mortgages that few really understand. They dump these things onto the unsuspecting, sending destabilizing waves of money sloshing around the globe. Economies melt down. Regular people lose jobs and savings. Meanwhile, the financial insiders still get their obscene bonuses, rain or shine.
Talk about your strawman. The condescension is practically dripping from the paragraph (‘zillionaires’? Really, dude?). No-one this side of Dennis Kucinich (or Ben Stein) is actually making the argument that the subprime crisis is entirely driven by some evil fat cat banker conspiracy (the bankers have also lost a ton due to this crisis, and will probably lose a lot more). Rather, the argument made by sensible people is that *some* bad actors acted irresponsibly, and that irresponsibility was both aided and exacerbated by the complexity of MBS. I’m sorry, but when large commercial banks are running ads talking about “how much more house you can afford” with their ridiculous teaser rates, they are partly responsible when things go awry as rates creep up. When you have brokers and banks treating stated income like an actual tax return, well, they bear some blame for the problems down the road.
Here’s the thing: the real Greed Narrative is right. The refi boom dried up in 2004/5, and originators needed to keep the transactions flowing, so they started writing a bunch of – pardon me – shit. Thanks to MBS, they didn’t have to hold it, so they didn’t care how shaky the loans were. Besides, as long as prices kept rising, people would refi before defaulting, right? You don’t have to be a communist to see that greed and a bad memory (the 90s, people!) were behind a lot of the current mess. So when Brooks breaks this drivel out,
When a new instrument enters the market, it takes a while before people understand and institutionalize it. Whether the product is high-yield bonds or mortgage-backed securities, there’s a tendency to get carried away.
I have to roll my eyes at his naivete. They weren’t being greedy. They just got a little carried away! Give me a break. Did David Brooks not see the ads IN HIS VERY OWN PAPER for mortgages with like 1.5% teaser rates? With the Teaser Rate Dancers? Also, can we please drop this nonsense about MBS being some brand new idea? They have grown in complexity, but the basic structure of a collateralized obligation has been around since the 80s (did Brooks not read Liar’s Poker?).
And of course we get a whole speech about those brave soldiers of Fairfield County:
As Sebastian Mallaby of the Council on Foreign Relations has pointed out, time and again hedge funds have dampened market instability. If a currency, a company or a stock market starts to spiral downward, deep-pocketed funds, smelling bargains, will come in and stabilize its assets. If a company’s price is rising to unsustainable levels, contrarian funds bet against the hype.
1) No-one was talking about hedge funds, Brooks. Nice non sequitur. 2) Why is any of this unique to a hedge fund? Only hedge funds buy things that look cheap? What is David Brooks talking about? Why am I reading this? I can feel myself getting dumber. Soon I’ll be talking about how Joe Lieberman is a model Senator, or something. Yet I cannot look away. He also trots this out:
Then, finally, maturity sets in. Those who have lost great gobs of money get fired. People still find the new product useful, but within parameters and with greater safeguards.
The lesson of the Ecology Narrative is that, in most cases, the market corrects itself. Maybe this year banks will change their pay structure so there’s not so much emphasis on short-term results. Maybe companies will change their boards to improve scrutiny over complex new instruments. In short, markets adapt.
Yeah, maybe. And maybe this is the year that the Knicks will go all the way. How is it that after 7 years of Bush’s corporate government, people still think that our corporations can self-police? Hey, maybe the market will magically get rid of carbon emissions too. After all, markets adapt.
Seriously, can we please stop this? The market gave lenders a STRONG incentive to write bad loans. The need to produce flow resulted in comical teaser rates, high LTVs, and no documentation all being given a pass. The tendency of humans to make errors meant that everyone forgot that house prices can go down, and that when they do, people start walking away from their negative equity. This forgetfulness meant that people were willing to buy the crap that lenders were producing. And, unfortunately, the lack of understanding of complex structures meant that many borrowers didn’t really get just how much risk they were taking. The point is, the market failed. It does that sometimes. I don’t think that we need a massive overhaul of the SEC or OFHEO, but some controls over brokers and teaser rates might not be a bad idea, and could help the market work better.
Look. I don’t disagree with Brooks’ conclusion, which is that the financial innovation of the last couple of decades has been immensely beneficial to the economy, and that we shouldn’t let this crisis lead us to create bad legislation (no more SOX, please). But this point has been made far more sensibly elsewhere. On the other hand, part of the innovation process is that when things go awry, we can learn from it, and build structures that help the market work more smoothly. That’s part of the product maturation that Brooks loves so much. All that an article like this is going to do is FURTHER convince liberals that the pro-market crowd doesn’t get it, and generate even more support for like, banning ARMs, or whatever other stupid nonsense Congress has planned.
So, in conclusion, I wish David Brooks would stop writing things about my industry (stick to the McCain worship), and I really hope Marginal Revolution works on its quality control in the future.