More Money Than Brains (26 page)

On Wall Street, experts run things at a remove from the commoners. Arcane specialized intelligence triumphs over common sense and hard work, and diabolical geniuses use their wicked gifts to flummox the average Joe. In market
parlance, “smart money” refers to the big traders, firms like Goldman Sachs, which employ hired brains, complex computer programs, and sophisticated formulas. “Dumb money” is your average investor, small-timers sinking their savings into some stocks, the kind of guys and gals whom politicians talk about when they talk about the economy. Dumb money usually loses. Smart money usually wins.

Let’s look at those anti-nerd allegations I listed in the first chapter, and see how many of them accurately describe the moneyed brains who brought you the market meltdown.

In February 2008,
CNBC
reporter Rick Santelli, broadcasting from the floor of the Chicago Mercantile Exchange, went on a rant about government plans to assist people who could not pay their mortgages. He was outraged that the government was promoting bad behaviour. He suggested that it allow people to vote online, holding a referendum to see if folks really wanted to pay “the losers’ mortgages.” Santelli argued that the government should give money to those who know what to do with it, rewarding the “people that can carry the water, instead of drink the water.”
⁷

The traders cheered and applauded. They are the winners, the water-carriers, the ones who create value. The rest of us simply cannot be trusted with nice things like money or houses. This blame-the-victim explanation for the fiscal crisis was quite popular. It was the least knowledgeable participants who had crashed the system. The suckers and losers, the foreclosed folks at the bottom of the housing pyramid, were the
bad guys. The experts who created and sold those mortgages, and then chopped them up and bundled them into complex investment instruments that supposedly made risks magically disappear, were not responsible.

But the losers who got mortgages they could not pay, who gambled on their houses and lost, were enthusiastically encouraged to do so by ostensible experts: mortgage brokers, the stock market, the government. Throughout the housing bubble, governments and markets told everyone that they were entitled to own a house or exploit the value of their home. The losers just drank the water that the traders, and their friends in the government, carried.

Who were the bigger losers? The family who lost their home or the swaggering geniuses who lost other people’s billions, who raised and razed the value of North America’s pension funds and stock portfolios?

The people who caused the crisis argued that they were the only ones expert enough to fix it. It was crucial to keep providing large salaries and bonuses, else the talent take their expertise elsewhere. Winners and water-carriers are entitled to lavish compensation because they are winners and water-carriers, regardless of how many losses they generate or how many wells they poison. Which brings us to …

Matt Taibbi, a political reporter for
Rolling Stone
, has written a series of articles about the frauds that riddle Wall Street, describing the market as a “mountain of paste.” He goes on to say: “Innovations like the ones that triggered the global
collapse – credit-default swaps and collateralized debt obligations – were employed for the primary purpose of synthesizing out of thin air those revenue flows that our dying industrial economy was no longer pumping into the financial bloodstream.”
⁸
Making and marketing decent products is sooo last century. Now money makes money from money. The money-minded made oodles of money placing bets on bets, selling and reselling money that was not really there or theirs, trading loans that consumers could not pay and banks could not cover.

We treat the stock market like a reliable indicator, something that shows us how the economy is really doing. But the economy of the finance sector has become increasingly estranged from the economy that most of us live in. Unemployment and foreclosure rates are still high and consumer confidence is still low, but so long as the Dow is above 10,000, all is right with the world. Hooray, bank profits are back up again too! Their big revenue generator? Overdraft fees.

The creation of wealth and the creation of value are two different things. Traders can generate vast paper fortunes that do not contribute anything to the economy, that do not get ploughed into the creation of new businesses or jobs. Bets on bets based on purely notional assets may make the smart money a quick buck, but they do not create work or good products or value. Instead, they simply Hoover up the dumb money and funnel it to the smart so they can gamble among themselves and generate more chimerical wealth by placing meta-bets on bets on
IOUS
.

The money-minded are much more powerful than the average nerd. It’s hard to imagine any group of nerds causing such widespread panic and urgent government action and costing citizens so much. For example, the scientific community has been warning us for years that Earth’s ice is melting. We hem and haw about that problem, and so do our governments. But when it was money that started melting, it was a serious crisis, prompting immediate, drastic measures. The imaginary money, the fortunes wrought of paste, are important enough to require public protection and care. The planet? Not so much.

The great deregulation that commenced in the 1980s has given money three freedoms that make it extraordinarily powerful. Free marketeers are free from oversight and rules concocted by petty bureaucrats. But they are also free to intervene in public policy and free to draw on the public purse. The money-minded have been insulting government for nearly thirty years, but every time the moneyed lose vast sums, they traipse to the capital for emergency capital. More often than not, their bailout wishes are granted. And those infusions of taxpayer dollars – yet another example of dumb money slurped up by the smart – free the market to start creating its next crisis.

Remember the Internet boom and its prognostications, such as Dow 36,000? When the Internet bubble popped, at
least we still had porn and Google. But Greenspan and company got America out of that bubble by creating another one – a worse one, which has bequeathed nothing but piles of bad paper and foreclosed subdivisions ruled by cougars and gators.

In 2005 David Lereah, chief economist for the National Association of Realtors, released the housing bubble version of Dow 36,000: a book with the girthy title
Are You Missing the Real Estate Boom? The Boom Will Not Bust and Why Home Prices and Other Real Estate Investments Will Climb Through the End of the Decade – and How to Profit from Them
. Lereah appeared frequently on
CNBC
and was beyond bullish. In January 2007 he said that things had finally hit bottom. He was shit-canned that same year.

In a
Wall Street Journal
interview, Lereah claimed that he was just following orders when he enthused about housing prices going up forever. The
NAR
pooh-poohs that, stating, “Realtors are the most trusted source for real estate information.”
⁹
That’s like calling crack dealers the most trusted source for crack-related inquires.

In my first book,
Your Call Is Important to Us
, which came out the same year as Mr. Lereah’s, I said that there would be
beaucoup de
foreclosures when Greenspan’s low, low interest rates rose. I’m not bragging. I know next to nothing about the real estate market and absolutely nothing compared to an expert like Mr. Lereah. But I knew that there would be a housing bust because I know that interest rates go up as well as down. And that house prices go down as well as up.

The people who said that this boom would never go bust did so for two reasons. Some were just being deceitful, hucksters churning up hype to sell more junky investments and tricksy mortgages. But others were delusional and they actually believed their own hype. The narrow technical proficiency that helped engender investment instruments like credit-default swaps and derivatives blinded marketeers. They lost sight of the big picture, the broader economic and social trends, which eventually rattled and wrecked everything they had built based on their complex theoretical models.

Sadly, no. Would that this were so. The money-minded have the opposite problem. Trading happens faster than ever, thanks to new computer models that move capital in milliseconds. The moneyed, like the media, are always seeking the new new thing. They never learn from their own history. Instead they forget the crashes and collapses of the past, whether they are as recent as the dot-com bust or as old as tulipmania. Or they claim that the old rules of finance no longer apply, acting as if we now live in an alchemical economy that can transform bad debts into good assets and spin gold from clutching at straws. All those New Deal fiscal regulations that Clinton and Bush repealed were put in place to prevent speculative excesses and market instability. But the money-minded argued that the regulations were outdated, antique, nothing but a drag on the brave new economy with its new technologies and trading formulas.

One whistle-blower, Brooksley Born, a lawyer who briefly chaired the Commodity Futures Trading Commission, tried to warn the government that derivatives were exceedingly risky, but she was elbowed out of office by Greenspan and his posse. Born was flabbergasted by Greenspan’s breezy attitude towards fraud.
Let the market sort it out
, the head of the Fed said.
It isn’t the government’s job to regulate that. The market is the best judge of the real and the fake
.
¹⁰
Look where that thinking got us.

If only. Again, the money-minded have the opposite problem. They are great fans of positive thinking, spending heaps of cash on motivational speakers and yes-you-can seminars. They are never negative about their own bailiwick, about the imaginary world of credit and investments. They reserve their negativity for the losers who are dumb enough to actually buy their spurious mortgages and investments. Or they wax negative about every other field of human endeavour.

It is preposterous that a group of people who enrich themselves by making meta-bets on bets on assets that do not exist get to serve as the arbiters of reality, the judges of the useful and the useless. How dare these paper-churners, whose trades take place in milliseconds, denigrate institutions that have lasted for more than a thousand years or texts that have endured for centuries?

Free marketeers claim that the market is the ultimate reality, the serious business of the world, precisely because it has become so unreal. Market fundamentalists need to impugn the reality of the liberal arts, of the sciences, so that their ideals,
illusions, and delusions prevail. They hate any competing interpretation of the world, any ranking or hierarchy that is not monetary. This is why they detest government and do everything in their power to lobby and infiltrate it, to ensure that democratic values do not interfere with market values. This is also why they hate grades, and mock them constantly. How dare a nerd like me judge someone, based on my imaginary expertise? It’s the market’s job to figure out who is smart and who is stupid.

In February 2009 the
New York Times
ran an article called “In Tough Times, the Humanities Must Justify Their Worth.” When ever the economy tanks, as it did during the Reagan recession, enrolment in the liberal arts drops. And budget cuts at universities generally start with the so-called frills like reading, writing, and history. Hell, even the American Association of Universities and Colleges recommended scuttling the old ivory-tower view of education and emphasizing the practical (i.e., fiscal) benefits of a liberal arts degree.

This is an understandable reaction to the cost-cutting climate, but it is also capitulation to the ignorance and anti-intellectualism that currently prevail. Nerds had nothing to do with this crisis. They have nothing to apologize for or explain. Why should disciplines that have existed for thousands of years, books and ideas that humans have deemed valuable for centuries, have to justify their existence to the money-minded? And how can they, when they have such radically different values? The narrow, calculating, attention-deficit-disordered
priorities of the moneyed make it impossible for the humanities to justify themselves without tossing their own values and joining the technically brilliant, ethically vacant idiots on Team Money.

If there were more liberal arts nerds, fewer business majors, and less social pressure to become a business major, then the 2008 market crisis might not have been so complex and sweeping. Another
Times
article, from March 2009, wondered, “Is It Time to Retrain B[usiness] Schools?” Note that the business schools, which got us into this mess, need not justify
their
existence. They offer a popular product, so they have every right to be. The article went on to say that M.B.A. programs were chock full of cheaters. M.B.A. students cheat more than students in any other discipline; one study showed that the majority, 56 per cent, cheated on their assignments. Why did they cheat? Because everyone else was cheating, so whatevs. Cheating was the only way to get ahead, and getting ahead is the only thing that matters.

The popular opinion that the economic world is the only real one, and that economic freedom is the only substantive freedom, is ignorant and destructive. Hannah Arendt calls this confusion of free enterprise and human freedom a “monstrous falsehood.” She writes: