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Politics Foreign Affairs Culture Fellows Program

The Big Short Fingered Vulgarian

Donald Trump and a delayed reckoning for the Wall Street crash
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In the 1980s, SPY, a New York-based satirical magazine, routinely referred to Donald Trump as a “short-fingered vulgarian.” Subject line here is a shout-out to the Eighties.

Anyway, where was I? Yes, so, John Podhoretz has a theory of Trump: that his rise (and Bernie Sanders’s rise on the left) is a delayed reaction to the economic meltdown of 2007-08. Excerpt:

In September 2008, after months of uncertainty following the collapse of Bear Stearns, the financial system went into its terrifying tailspin. A disastrous recession shrank the overall economy by 9 percent, and the unemployment rate rose to 10 percent a year later.

Now imagine that the meltdown had taken place not in September 2008 but rather in September 2006. Imagine that housing prices and stock prices had fallen in the same way—such that the wealth invested in the 63 percent of home-owned American households and in the stocks owned by 62 percent of all Americans had declined by 40 percent.

Further, imagine that serious proposals arose that the 8 percent of homeowners who had defaulted on their home loans be forgiven their debts—the very proposal in 2009 that led investor Rick Santelli to call for a new “tea party” uprising on the part of the 92 percent who paid their bills on time. Only this time Santelli’s comments had been spoken in 2007. Imagine all these things. And then imagine the presidential race that would have followed. Does the rise of Trump and Bernie Sanders suddenly make all the sense in the world? Of course.

Pod starts his piece talking about Steve, a New York businessman friend who is for Trump.

When I asked why, he explained he was tired of political correctness and sick of Wall Street bankers getting away with murder. And then he told me about the stresses of his business—specifically, that he works with people who sign contracts featuring non-compete clauses with major corporations. When their time is up and they’re ready to move on, their employers threaten them with legal action due to the non-compete clauses. These claims are without merit, Steve says, but litigating them would cost hundreds of thousands of dollars. So his people stay where they are. It’s unfair, he says.

What on earth, I asked, does he think Trump would do to help him and his clients with a non-compete problem? What does this have to do with anything? It’s the big guys, Steve said. The big guys are lording it over the little guys.

Pod says Trump is an emotional outlet for people who are sick and tired of being screwed by the system. It doesn’t matter that Trump’s policies make little or no sense. They want to strike a blow against a system that is rigged against people like them.

Last night, I rented the 2015 film The Big Short from Amazon streaming. It’s a terrific movie. It’s based on the Michael Lewis book that tells the story of several guys, all unknown to each other, who recognized early on that the housing market was a massive bubble, and who ended up making fortunes “shorting” that market — that is, betting that it was going to collapse. The film is about the blindness of optimism (nobody imagined that the housing could collapse), about the blindness of greed (nobody wanted to question what they were doing, because they were making too much money), and how the financial system is based on fraud. The bond agencies were in the tank for the investment banks. Federal regulators had a very cozy relationship with the banks they were to regulate. Banks routinely lied to themselves and to each other about what they were doing, because the fraudulent system was making them all very rich.

When it all came crashing down, the US taxpayer bailed out the banks, Congress refused to break up the big banks or to meaningfully reform them, and nobody went to jail for what they did.

It’s all true. Watching the film (trailer below) brought back all the memories of those days. It brought back the $60,000 we lost selling our house in the wake of the crash, when we moved. (“You’re lucky,” said a friend from DC who had to sell his at the same time. “We lost close to $200,000.”) It is still incredible to me that there was no political reckoning for that. Wall Street never suffered a thing. The politicians who protected them from radical reform, including breaking up the Too Big To Fail banks? They’re still there.

As the credits rolled last night, the idea of voting for Trump or Sanders made a hell of a lot of emotional sense. That’s not the same thing as being actually rational. But I can entirely understand why a voter would say, “To hell with it,” and vote Trump just to stick it to the Man. Here’s a quote from the real Michael Burry, an investor played by Christian Bale portrayed in The Big Short. It comes from a story in Vulture:

“I felt I was watching a plane crash,” Michael Burry tells me. “I actually had that dream again and again. I knew what was happening, but there was nothing I, or anyone else, could do to stop it. The last day of 2007, I couldn’t come home. I was in the office till late at night. I couldn’t calm down. I wrote my wife an email and just said, ‘I can’t come home, it’s just too upsetting what’s happening,’ and I didn’t want to come home to my kids like this … I am shocked that executives at some of the worst lenders were not punished for what they did. But this is the nature of these things. The ones running the machine did not get punished after the dot-com bubble either — all those VCs and dot-com executives still live in their mansions lining the 280 corridor on the San Francisco Peninsula. The little guy will pay for it — the small investor, the borrower. Which is why the little guy needs to be warned to be more diligent and to be more suspicious of society’s sanctioned suits offering free money. It will always be seductive, but that’s the devil that wants your soul.” All of them pointed to the current bitter, mistrustful political atmosphere as a direct result of Americans’ loss of faith in systems.

In the film, Steve Carell’s character, I believe, has a short speech in which he talks about how the crash is really about the collapse of authoritative institutions in American society. You could not trust the banks. You could not trust politicians. And you still can’t, though you have to trust them to some extent, because you cannot live otherwise. Me, I see the sex abuse crisis in the Catholic Church as Catholicism’s version of Wall Street’s 2007-08 crash (and by the way, I am told that the recent indictments of Franciscan priests in Pennsylvania on charges related to sex abuse are just the beginning there). I find it impossible to trust nearly any religious institution as a matter of course, having seen how flagrantly men of God are willing to violate every sacred thing to protect themselves and the system from which they profit. Senators, investment bankers, government regulators, cardinals, bishops — I find it hard to believe any of them. This may be unfair, but when you see what they’ve all gotten away with … .

In Dante’s Inferno, the lowest level of Hell is reserved for traitors. The reason for this is that in Dante’s day, people within the cities could never rest for fear that during the night, a traitor within would open the city gates and let the enemy in. Trust was at the core of society. Without that basic social trust, everything fell apart. This is why Dante also holds vows to be sacred.

I’m a dark person on this stuff, I concede. I believe people, especially those in authority, will betray others to save their own butt, or to protect their own status and peace of mind, without flinching. But that pessimism comes from somewhere. Watch The Big Short, is all I’m saying. If Trump were turning his big guns away from immigrants and onto Wall Street (and, by extension, on the big business lobby that wants to keep the immigrant flood rolling across the border), he would be a lot better off. People want an accounting. I don’t believe Trump will give it to us, but the inchoate desire is there.

Finally, here’s an interview with Big Short author Michael Lewis, published around the time the movie version of his book came out. Excerpts:

It’s interesting that you say that, because I’ve talked to some of the guys in the book, and their position is that the system is much safer, that Dodd-Frank really worked, and they kind of disagreed with the end of the movie, which implies that this is all going to happen again.

It sort of worked. One thing it has not changed is the sheer size of these institutions, they’ve gotten bigger rather than smaller. And I don’t understand that , I would have thought that from Too Big To Fail we would have found a way to make them small enough so that it was ok for them to fail. And know there’s all this complicated language about how you can resolve them in bankruptcy but I don’t believe it, and the markets don’t believe it. The bigger thing is — I regarded this crisis at bottom as a problem of incentives. People behaved badly because they were incentivized to behave badly, and the incentives haven’t really changed that much. They have changed a little bit on the margins, like paying people a bit more more in stock rather than just cash at the end of the year. But it’s a cultural problem has been created over a long period of time, because people are not locked into their individual firms for very a long time, and they are very short-term oriented, and the firms are short-term oriented, and The people who ultimately own the company, the shareholders, aren’t anywhere near the company when its making big decisions. It’s a recipe for disaster. I don’t think there’s going to be an identical crisis any time soon, but I think that, the big things that might have been done to make the system safe really weren’t done and I can think of a few things that might have been done. I think they should have broken up the banks.

And in your opinion, why didn’t that happen?

It didn’t happen because the Obama administration decided that it was worse than the course of action they took. They considered it, kind of. If you asked Tim Geithner why it didn’t happen, he would say how am I going to do that? I am going to have to nationalize these banks, and then break them up. Well, we’re really not equipped to run the entire financial system out of the Treasury. And the system is in such disarray and chaos that we are more likely to create more crisis, than resolve the crisis if we do that. Which is not a terrible argument. The problem is, that having profit what we what didn’t bank on, is it’s really clear from his memoir was that having rescued these places that they would turn right around and exert maximum political pressure to have any reform of them. He probably thought if they are going to be downsized they’ll be downsized in a time of peace and not in a crisis environment. But then once they were resurrected they were impossible to deal with politically because they ended up sticking their hands into the regulation to change them right away. Another kind of reform, which would eventually cause them to shrink a lot, would be vastly increasing the capital requirements, which has been floated by people, require them to hold not just about 7 percent or 6 percent but 20 percent, and what happens is they’d become a lot less profitable, they can’t take big big bets and no one would want to invest in them or work for them. But that has been roundly defeated at the regulatory level. I think, beneath that, the bigger problem is, virtually everybody at the table, even well-meaning government employees, when they are talking about what to do about these places, have — even if they aren’t thinking about it consciously, cannot help but consider the likelihood that the way they are going to make a living, a very good living, when they get done with government work, is to go work for one of these places. So nobody who is actually in the conversation has anything but a disincentive to keep everyone in power in the financial sector in place and happy. So I just think it’s like regulatory capture on a grand scale. It’s not just the SEC and the CFTC that’s a problem, because those guys who directly regulate the sector know that they are going to get jobs on Wall Street of they don’t alienate too many people.

My sense is that most people don’t really want to deal with any of this, that it’s overwhelming on many levels.

It’s very complicated and it’s the sort of thing other people are supposed to deal with, so it’s nobody’s problem. I’m reading this book right now, and it’s basically the history of Israel, and the author is talking about how all of Israel ignores the building of the nuclear bomb in Israel, and as momentous as this is, and as much as it’s going to call for a reaction from Arab states to have their own nuclear bomb, nobody really wants to know. It’s a very interesting — in some ways, Democratic societies don’t want to be informed about some things, and why would that be? I would say that much of the pain is numbed by monetary policy; that is true of the financial crisis. Had it played itself out in the way it would have, if the Fed didn’t know what it was doing, like in 1929, we would have had so much pain and so much unemployment, that people would have been forced to deal with it. But people don’t want to deal with unpleasantness. Like they don’t want to go to the doctor. They hope it heals itself.

Story of Wall Street. Story of our government. Story of the Church. Story of our lives as Americans in the 21st century. It’s a cultural problem. We are very short-term oriented, as Lewis said. This is why so many of us Christian refuse to recognize the grave crisis in our churches, and to prepare. We think everything is going to come right again if we just sit still and wait.

[youtube https://www.youtube.com/watch?v=vgqG3ITMv1Q?rel=0&w=525&h=330]

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