Posts Tagged ‘Enron. The Smartest Guys in the Room’

Inside Job (2010)


After the Second World War, the veterans came home to parades and to the GI Bill that rewarded them for the sacrifice of years of their lives in the service of their country.  One of the greatest benefits of this bill was a free education and cheap home ownership.   A GI could buy a home with little money down, and without much ado, a piece of the American Dream was theirs.  That is….if this GI was white.  Thanks to the GI Bill, thousands of average white males were able to achieve middle class status but the many men of color who had also fought for democracy were “redlined.” To be “redlined” was to be defined as less than creditworthy due solely to the color of one’s skin.  A man of color might possibly get a loan, yes, but it would be at a higher interest rate and the monthly payment would be higher than that of his white counterpart.  The higher the payment, the harder it is to keep up the monthly payments, forcing a self-fulfilling prophecy from the banks upon the veteran of color.  Fast forward sixty years and “redlining” is renamed “sub-prime,” and hereby hangs our tale.

Inside Job, brought to you by the same man, Charles Ferguson, who made No End in Sight: The American Occupation of Iraq (2007), continues the sordid tale of redlining aka sub-prime.  The other significant documenter of the follies of our time, Michael Moore, is more sardonic, more sarcastic than Mr. Ferguson but the sheer lunacy of the actors in what is nothing less than the Financial Crime of the Century is so unbelievable that the audience was howling with incredulous laughter.  By now, most Americans have a dim idea of how a handful of New York bankers lost an unfathomable amount of money. Combining reckless and immoral behavior within the financial sector with the equally inexcusable passage of tax cuts while two unnecessary wars were being fought entirely without funds resulted in the Mother of all Meltdowns.  If you were middle class and had any money in your house, your pension, or your stock portfolio, chances are all your investments are gone, never to return.  We know what happened: we have only to look at—or should I say for—our vaporized retirements accounts. What we don’t understand is why did this happen?

Getting back to redlining—this was a bank practice to “safeguard” the bank’s “risk” but the bank’s policies were underwritten and supported by the American government, making redlining, not a private decision, but public policy.  The field of public policy was not the full-blown academic pastime it is now but whether or not such practices are named (or not), they amount to social engineering of the general public by private interests on a massive scale.  The bankers and the government had two choices.  One, you can argue that to allow as many people as possible access to the American dream gives the participants a stake in the society, as the result of a literal investment in the nation’s future.  If, as the result of social inequities, a certain group of people were disadvantaged, it would make sense to help them participate, by giving them a lower rate of interest and lower payments over a longer period of time.  It would be important to incorporate everyone into society for the benefit of everyone.  Or two, the public policy could deliberately exclude as many potential players of color as possible, thus creating a permanent underclass of color, disenfranchised and disaffected, alienated and unable to support itself, costing the government great expense in the short and long run.   The post-war public policy of the banking industry and the American government chose the second path, which led to a decade of riots and protests in the Sixties from people who could see the American Dream as lived by the whites and yet capriciously denied to them.

Public Policy is an academic discipline but it is clearly an ideological position.  If a government is deliberately created an underclass of color, the reason cannot be an economic one in terms of the benefits to the nation as a whole.  An underclass is not cost-effective. So why create and perpetuate one?  A better question would be qui bono? Who benefits?  For a start the white middle class benefits, not necessary financially, because it will have to pay the cost of crime, welfare, and the huge price of controlling and maintaining a large group of very discontented citizens, but in terms of a warm feeling of superiority.  The white middle class elevated itself at the expense of divesting the people of color of their rightful share, as citizens, of the American way of life.  Of incalculable cost is the loss of talent and national productivity by not allowing a large percentage of people to participate in the nation’s growth.  What happened was not economic policy but a belief system, an ideology of inequality and superiority.

But why did redlining return?  After the Civil Rights legislation forced a positive public policy upon the nation, the middle class of color grew and a growing number of Asians, Blacks, and Hispanics achieved bourgeoisie status.  By the beginning of the Twenty-first Century, we knew full well how much America had benefited from allowing an Oprah or a Mario Rubio or a Stephen Chu rise to their potential.  Why repeat the same mistake by rolling out the sub-prime one more time?  The answer to the question of why a government would introduce and enforce bad deleterious public policy is that wealthy financial interests would benefit.  In other words, so that a few thousand people could get massively wealthy, the rest of us had to lose everything.  And these few rich people—old white males for the most part—are more powerful than all of us put together.

Charles Ferguson’s film is perhaps the most effective in the last two segments when he discusses the disgrace of the so-called experts and the lack of criminal or social accountability.  Even in Enron. The Smartest Guys in the Room (2005), there was some measure of criminal liability and one of the participants was honorable enough to kill himself. But here, as Inside Job notes, we have lost even that modicum of morality.  All the perpetrators walked away, richer than ever, and completely unscathed, and totally unrepentant.  Max Weber (The Protestant Ethic and the Spirit of Capitalism), who linked the capitalist impulse with the Protestant ethic, would be amazed at the distance between the will to power and profits and common decency. Jean-Jacques Rousseau (The Social Contract or Principles of Political Right), who was the main inspiration for the Declaration of Independence, would be horrified at the extent to which the fabric of the Social Contract upon which America was founded has unraveled.  It will take generations to recover from the moral, ethical, and financial damage done to America by a few greedy people.

The leaders of the financial institutions refused, to a man, to speak to Ferguson, underlining their total disregard for public accountability.  It is quite possible they think they have done nothing wrong.  Ferguson portrays these men as unthinkably isolated from the real world and solely motivated by the profit motive.  Nothing matters to them but short-term gains.  Like five year old boys, and badly behaved ones at that, they were—are—all Id, no Ego and no Superego.   If one replaces morality with the profit motive, if one replaces ethics with answering to the stock holders, then lending money to people who could never pay even the first mortgage payment for the sake of a brief burst of cash, then having to strong arm the government to bail out a few banks is a mere temporary inconvenience.  The suffering of the perpetrators was brief, a few moments grilling before a powerless Senate committee.  Martha Stewart was fined $30,000 and was sentenced to five months in prison and five months house arrest.  And her crime?  She lied to the FBI.  For that you go to jail.   Wrecking an entire economy for the foreseeable future?  You get a huge bonus.

I was amazed at the assumption, obviously shared by all of the men of Merrill Lynch, Bear Sterns, Goldman Sachs, Lehman Brothers, et al., that they are smarter than we are.   We could not possibly understand, they insist.  We are not smart enough to regulate them, they state.  We must not fire them, they protest.  We need them, the experts.  Actually, no, we don’t need these men.  And they are not smart.  Even I am smart enough to know that the economy is now a global one and has been for decades.  I was stunned to learn from Inside Job that Hank Paulson, the Secretary of the Treasury, did not realize that letting Lehman fail would have global impact.  Was he too insulted to know that Lehman had foreign branches?  Was he too panicked to think the decision through?  Apparently, Paulson was, if nothing else, so sectarian in his concerns, he did not give his foreign counterparts a heads up and international monetary chaos ensued.   Undoubtedly, the debacle in New York City would have had global ramifications with or without Paulson but his strange lapses in a time of crisis are inexcusable.  Likewise, we have to keep in mind that Paulson and his team, Timothy Geithner and Larry Summers, were the Wall Street insiders who deliberately panicked Congress into bailing out the (their) banks.  Their action is the moral equivalent of asking innocent bystanders to repay a bank that has been robbed by masked bandits.

And these are the Wall Street wizards President Obama has put in charge of what’s left of the economy: Timothy Geithner, who ran (didn’t run) the New York Fed, had the closest proximity to the insanity of his colleagues, and Larry Summers, who thinks women can’t do math.  If I were as irresponsible as they are, I would be fired immediately.  But Obama has put them in the lead of Operation Nothing Will Be Done.  The only gesture of seriousness I have seen from Obama is the appointment of Elizabeth Warren who will attempt, in the face of the Old Boy’s Network, to protect us, the meek and helpless, from the clutches of the likes of Chase.  The gender component of the disaster has been discussed at great length.  Women, it is asserted, are more prudent when it comes to money.  Whether or not this is true, we still do not know, but the behavior of the males was nothing short of astonishing in the levels of irresponsibility and immaturity.  Most normal humans invest in Wall Street more or less blindly, through a variety of pensions (now all gone) and they trust a “broker.”  But, like the film about Enron, Inside Job takes a look at the brokers.  Which brings us to sex, drugs and rock ‘n’ roll—-well, maybe not the rock ‘n’ roll—these guys are too stuffy, but certainly to sex and drugs.

We are told we are too uneducated and ill informed about the mysteries of economics to understand the ways of Wall Street.  But economics is simply common sense.  Ask yourself, who is the typical broker on Wall Street?  A twenty five year old while male, otherwise known as “the Talent.”  Now ask yourself a common sense question: would you give your retirement account to your neighbor’s twenty five year old nephew to invest and to handle?  Of course not.  Ask yourself another question: would you give your retirement account to your neighbor’s twenty five year old nephew, who is high on cocaine because he had spent the night boozing with prostitutes, to invest and to handle?  You just did.  If you had money in Merrill Lynch, Bear Sterns, Lehman Brothers or Goldman Sachs or AIG, a twenty-five year old with a college degree and maybe a couple of years of business school was given your money and your dreams of retiring to play with.  And he was on drugs, and that’s who was in charge of your money— your money that is now gone.   And the twenty-five year old man? Still snorting.

As an academic, I was most distressed at the fall of the academics involved in the Collapse.  Cynically, I had thought that the profession of economics could not fall any lower, after the debacle of Reaganomics in the 1980s. I was wrong.  The most horrifying interviews in the film were those of the academics who styled themselves as economists.  Economics is a dismal science indeed.   Inherently a soft and social science, the practitioners have attempted to distance themselves from the mushy softness of the humans (who actually are the actors) by “hardening” the discipline into a phallic pseudo-science in which a barrage of numbers and screen of mathematical formulas which separate actual economic activity from theoretical economic models.  The result is a fatal separation of the real world from an academic discipline.  Economic activity  is at the very heart of society. Ask Marx.  Or better yet, ask Nietzshe.

According to Marx, the economy is the secret engine of any society and it is this driving force that shapes human relations.  Reduced to abstractions, like money, human beings are alienated from themselves and each others and are mere pawns in a system of exchange.  People have been dehumanized and the moral ties that hold us together become weakened in favor of the profit motive.  Echoing Adam Smith, Marx understood that capitalism, unfettered, would benefit the few at the expense of the many.  Nietzsche, writing in state of syphilitic madness, spoke of the Ubermensch, the Superman who seized power because he had the will to do so.  This Superman was above normal beings in his Will to Power and therefore deserved any power he obtained.   The Superman is a celebration of the Id, the rejoicing of the irrational, the acting out of the Dark Side, our Dionysian Other in all its glory.  Sound familiar?  The titans of Wall Street, already rich, already powerful, only want to seize more wealth and wield more power.  Nothing will ever be enough for those people.  The Crash of ’08 is a study of the Irrational Man.

John Rawls wrote his Theory of Justice in 1971, at the end of the Civil Rights era and the period of war protests.  He had every right to assume that there was a social contract, a public morality that was founded in rational thinking.  Doing the right thing for the entire society made moral and economic sense, as the Civil Rights movement and the eventual ending of the Vietnam War seemed to suggest.    There was a time when Rawls was taken seriously and one can only wonder what he would have thought of the sorry spectacle set before us in Inside Job. Unfortunately, Rawls died in 2002, having outlived his time.  By 2002, the forces of irrational behavior had taken over and the nation was on a slippery slide towards the abyss.  Leading the way, were dry and dull economists who might have known better if they had not sold out long ago to the lure of Washington.  Worse than being merely dazzled by their brush with power, is the apparent lack of training and education on the part of the individuals interviewed for this film.  I assume they all have advanced degree.  Business schools offer professional degrees, that is, three more years of specialized training, but academics have different degrees, doctorates, which stress scholarship, research, and rigorous application of theories.  For example, as a professor, I have a combined thirteen years of education, from undergraduate to a doctorate.  I assume the economists in the film have somewhat less graduate education, as art history is a notoriously difficult discipline, but I also assume that these individuals should have mastered the basics, after all, they all have posh jobs at Ivy League schools.  But not so.  None of these men has gotten beyond the high school level in a academic integrity and proficiency.

Up to this point, the audience for the film had been watching the recounting of the horrors of financial inventions, such as CDOs and Derivatives in stunned and subdued silence.  But when the parade of the economists marched on screen, the audience roared with laughter.  To begin with there is the imperious Dr. Martin Feldstein who has been in the service of Republican administrations since Nixon.  He comes across as an unflappable and bemused Gulliver, baffled that the Tiny People are attempting to prick his conscience.  Wrong? He ponders, what me do anything wrong?  How could that be?  And he is a professor at Harvard, teaching impressionable young people.  Presumably the students will get their ethics elsewhere.  Then there is Glenn Hubbard, the Dean of the Columbia University Business School, who puffed up indignantly at the impertinence of inopportune questions about uncomfortable issues such as conflict of interests.  There is a revolving door between these academics and the political establishment, meaning that their so-called scholarship is for sale to the highest bidder.  Hubbard who regretted his decision to grant (in the Kingly sense) an interview, began a countdown: “You have three minutes left.”  The interviewer asked simple common sense questions and caused great offense.  We are left with the impression of a condescending and pompous man, Hubbard, who was convinced that we are unworthy of an explanation.

That attitude—that the public is too stupid to comprehend the convolutions of economic theory—oozed from every pore of the academics.  However, Frederic Mishkin, a professor at Columbia, was not as smooth and self-righteous and un-self-consciously immoral as Hubbard and Feldstein.  I have seen just enough of Lie to Me to know that if a person says one thing, all the while shaking his head to the negative, that either he is lying to us or to himself.  His subconscious is frantically telegraphing “no, this is a lie, this is not true, don’t believe a word I say.”  Mishkin fled his government post to, as he put it, to “write a textbook.”  Even I, in my lowly academic post at an art college, know that textbook writing is something no self-respecting academic would do—that’s a task for a group of graduate students.  And who writes textbooks anymore?  Even the interviewer, presumably not an academic, did not accept his lame excuse for his Profile in Shame.  Before he was writing his textbook, Mishkin had “delivered a paper” on the state of the three banks of Iceland, huge conglomerates that had gambled the entire nation away.  These banks, unleashed by an unwise government, lost three times the GNP of the country.  But Mishkin, hired for over $100,000 by the Iceland Chamber of Commerce, had given these banks a glowing report.  The interviewer asked how he could have gotten it so wrong.  Well, Mishkin explained artlessly, one trusts one’s friends. In other words, instead of going to Iceland with a forensic accountant and going over the books for a few months, Mishkin took a hundred grand and wrote a report for an agency whose job it was to boost Iceland.  The “report” or the “paper” was really an advertisement and an inducement for investors who would be lured in.  Instead of research, Mishkin produced a document based on gossip.  Not his fault that his “friend” was wrong about Iceland.

The President of Columbia also refused to comment on the University’s integrity and the possible conflicts of interest.  The President of Harvard also refused to comment about loss of integrity over conflicts of interest among the University’s scholars.

One of the best points the film makes is the extent to which leading Ivy League universities have been compromised morally through conflicts of interest such as Mishkin’s ethical failure.  Professors for sale.  Professors who pretend to teach.  Professors who apparently do not know the first rules of research.  Did Miskin at least do a Google search of Iceland?  He might have learned something.  And this man has tenure.  This man is allowed to teach economics and business.   I would have given Mishkin an “F” in my class.  I would have made him do his work over until he learned basic skills of scholarship. In the end, all I can do is to invite the students of Columbia and Harvard to come to my little art college here in Los Angeles.  I, and my colleagues, will teach you how to do research and how to write a real research paper.  As for the professors in the film, undoubtedly, I am beneath their notice, but I came away from Inside Job wondering if I know more about the Dismal Science than they do.  One can only hope that someday, they will find the late-breaking courage of David Stockman and plead guilty to their scams.  In an August interview with Guy Raz of NPR this year, Stockman said that the current Republican economic policy was,

Utterly disingenuous. I find it unconscionable that the Republican leadership, faced with a 1.5 trillion deficit, could possibly believe that good public policy is to maintain tax cuts for the top 2 percent of the population who, after all, have benefited enormously from this phony boom we’ve had over the last 10 years as a result of the casino on Wall Street.

And I blame Paulson on it. I blame the Bush White House. They basically sold out the birthright of the Republican Party when they bailed out Wall Street unnecessarily, in a state of complete panic in September 2008. That’s really, at the end of the day, one of the greatest misfortunes in fiscal governance since the Reagan revolution tried to straighten things out beginning in 1980.

Many people would disagree with Stockman that Reagan tried to “straighten things out.”  Inside Job starts, as do many other observers of public policy, with Ronald Reagan’s social re-engineering of America.  It was in the 1980s that The American Social Contract began to be shredded.  As the movie pointed out, as have many other sources, it was precisely in this era that the income gap between rich and poor began to expand.  The rich were enriched at the expense of the less fortunate who began to lose ground.  It is those left behind who became prey, twenty years later, for the bankers who would talk them into sub-prime loans, which could be bundled into tranches and sold and resold until no one knows who owns the houses that are being repossessed.  The Reagan Administration opened the door for Greed and irresponsibility and the Clinton Administration held the door open.  After the S & L meltdown, deregulation began in earnest and continued with abandon after the Tech Bubble.  Then came the Great Recession and the hounds of the hell of total deregulation have been let loose with the midterm election of 2010.

People have been wondering to which point back in time we have been pushed.  Some have suggested the Fifties.  Wrong.  The Fifties was a decade of government intervention in the economy, building freeways, creating the military industrial complex, fueling the space race.  Some have suggested that, because we are now getting ready to “Hoover” the economy,  we are witnessing the end of the New Deal.  Wrong.  We are re-experiencing the Gilded Age of the Late Nineteenth Century, a time of rampant free-booting and raging and unrepentant capitalism.  Wall Street is now the Wild West and the Outlaws are running the town.  The criminals have taken over the prison.  The inmates are in charge of the asylum.  Inside Job makes it clear that the Obama Administration will not help us get the bad guys.  There will be no punishment for any of the architects of the Tragedy of 2008.

We are on our own.  Welcome to the Ownership Society.

Dr. Jeanne S. M. Willette

The Arts Blogger