The Mortgaged Decade: 1998-2008 and the Long Hangover
Angelo Mozilo (left) and Alan Greenspan (right)
On July 11, 2008, Countrywide Financial, a huge California mortgage broker, bankrupted. It was one of many financial industry blowups of that disastrous year. Bear Stearns had already collapsed in March, nearly bringing down its largest Wall Street investment banking rivals, even Goldman Sachs, and by fall epidemic devastation required multi-billion dollar government bailouts. But Countrywide, and its once-admired but henceforward reviled CEO, Angelo Mozil0, perfectly incarnated the financial folly and hubris of the whole preceding ten years.
Countless books and TV documentaries about the 2008 Crash have since appeared, full of explanations and accusations. The best ones have identified most of the proximate causes of the disaster, all including the proliferating ‘subprime’ mortgages and complex derivatives based on them. But most were deficient in providing historical context. The most dubious claim, made by many academic economists and governmental authorities, was that ‘no one had seen this coming’. In reality, lots of people had, including me, with a 2003 Policy Options article, ‘Risky Business and Rocket Science’, about dodgy ‘mathematical’ models to justify many dazzling baubles.
I drew on my studies in the history of science, but also on more personal experience. Ever since 1980, I had spent breaks from academia working with a financial research consulting firm. I had learned on the job, interviewing financial executives and synthesizing their opinions and plans, but also using familiarity with mathematical statistics, and doing much reading, year after year, on all aspects of the money business. I started in 1980-82 , interviewing institutional investors, the administrators of tens of billions of dollars held in Canadian trust, insurance, and pension funds; in later years, I analyzed similar information from institutions worldwide. These big investors made up the ‘Buy Side’ of Bay Street and Wall Street. The ‘Sell Side’ of investment bankers and dealers paid for our independent analysis of their competitive positions among the buyers.
On my first arrival, I found 1970s ‘stagflation’ had filled the Sell Side with gloom. Stock markets seemed in danger of becoming as lifeless as they had been in the 1930s. A 1979 Business Week front page had contemplated ‘The Death of Equities’. But these fears were soon swept away by a double revolution. On the one hand, the new political climate of ‘unleashing free enterprise’ meant the reduction or elimination of regulations accepted for decades; on the other, the arriving new technology in computers and telecommunications promised astronomically larger and faster market transactions. I saw the last of the old world: when I first called on financial industry offices across Canada, they still did things much as they had for half a century. In Toronto and New York, messenger boys still shuttled briefcases stuffed with stock certificates between firms.
The new world of computerization and instantaneous communications fully arrived by the late 1980s. It was in the 1990s, however, with the arrival of the internet, cellphones, and more and more ingenious new market products taking full advantage of still advancing deregulation, that I saw a fundamental change, not only in speed and scale, but in the underlying meaning of what was being bought and sold. By the end of the decade, I feared I was watching a gathering of heedless alchemists discovering a universal solvent, an acid that could liquify the world.
The strangeness of this transformation was little noticed by the newly arriving armies of young men and women, qualified mainly in business courses and law schools, and making a great deal of money. Their enthusiasm enraptured many academic economists and governmental authorities, including Alan Greenspan, long the reigning guru of the Federal Reserve, hailed as the ‘Maestro’ of a Bob Woodward book. I was a wide-eyed Canadian country mouse, viewing American Big Apple rodents with some amazement, supremely confident and sure no cat would ever devour them, and regarding themselves as entitled to all the food in the household. Their eyes were fixed laser-like on a splendid cheese wheel, ignoring visible feline claws behind it.
Even 9/11 and the market crashes of the dotcom and telcom stocks at the start of the new century were soon soon shrugged off. Rising investor wails were muffled by the new and suitably tiresome Congressional Sarbanes-Oxley legislation, supposedly limiting ‘irrational exuberance’. The 1930s Glass-Steagall Act that strictly separated money-lending commercial banks from the share-selling investment ones was undoubtedly obsolete by the 1990s, passed in a time when computers, credit cards, and other innovations were not even imagined. But the 1999 Gramm-Leach-Blilely Act was not a modernizing replacement, but a celebration of ideological libertarianism; in practice, a heavily lobbied hunting license for the biggest banks, near-banks, and investment funds, to devour smaller players, and advance the ‘universal banking’ ambitions of big carnivores like Sandy Weill of Citigroup.
Of course, financial markets had always been marked by episodes of wretched excess, booms also drawing in more charlatans and frauds. But something different was unfolding this time, and I am not sure this is even now fully understood, even by many embittered eventual crash victims. ‘Greed’ was no doubt evident, but no more central than in previous eras. What I saw was more of hubris, not only that of megalomaniac titans like Mozilo and Weill, but extending down to over-confident ‘Quants’, inventing pseudo-mathematical rationalizations of repeatedly traded packages of crap residential mortgages, and the corrupted bond rating agencies that endorsed these exercises in prestidigitation.
The growing ‘financialization’ of the whole economy in the decade leading up to 2008, was not just another ‘rise of a sector,’, like energy or retailing, but a sign that investing and lending intermediaries were extracting more and more income from every kind of activity, papering over a rather anaemic growth in value-added enterprises. Every conceivable kind of credit became one more ‘marketable security’. Washington’s bipartisan ‘good intentions’ Community Re-investment Act [CRA], intended to help black Americans in obtaining mortgages to buy their own homes, had the practical consequence of forcing community bankers and mortgage brokers into making loans to people who would never be able to repay them, from that evolving into loans to anyone who would apply. Investment funds were created that were stuffed with the consequent empty promises; it was the failure of two large examples that finished Bear Stearns.
When the failures became an avalanche in 2008, the Sell Side could find no relief by turning to other areas of the economy. Everything had already been ‘monetized’. Indeed, they had monetized the dreams of home ownership among millions of apartment dwellers; they had monetized the leverage of aggressive real estate salesmen; they had monetized pensions intended for old age. They had further monetized the upper levels of the legal profession. That almost anything can be monetized has long been known to prostitutes and pirates, but those living to an old age can also testify that doesn’t necessarily make it a good idea.
The bankers and brokers were at least saved from a repeat of 1929 by the swift actions of Ben Bernanke at the Federal \Reserve, learning from the 1929-31 ‘crunch’, and pouring liquidity into the system; as well by Henry Paulson, Bush’s last Treasury Secretary, and former top executive at Goldman Sachs, who rammed the multi-billion dollar ‘Troubled Asset Relief Program’ through Congress. Everyone involved, of course, also had to accept a further ballooning of the federal debt, so the future was monetized as well. Paulson later provided the best bleak summary of what he and Bernanke had accomplished: “We saved the economy, but we lost the country.” This remains the most candid and precise encapsulation of what happened in 2008, from a member of the Wall Street/Washington elite. The surface economy recovered over the following decade, but American politics, society, and culture are still showing the effects of being drenched in that universal solvent I watched being brewed over twenty years ago..