Blowing Bubbles
by Lewis H Lapham
Harper's Magazine Notebook (November 2007)
Men have an indistinct notion that if they keep up this activity of joint stocks and spades long enough all will at length ride somewhere, in next to no time, and for nothing; but though a crowd rushes to the depot, and the conductor shouts "All aboard!" when the smoke is blown away and the vapor condensed, it will be perceived that a few are riding, but the rest are run over, - and it will be called, and will be, "A melancholy accident". --Henry David Thoreau
Reading the reports from the scene of August's melancholy accident in the country's credit markets - the bursting of the home-mortgage bubble, banks sinking into the sand of subprime loans, hedge funds losing 100 percent of their imagined value in a matter of days, the Dow Jones Industrial Average dropping 250 points in the space of half an hour - I was struck by the resemblances between the speculation floated on the guarantee of easy money on Wall Street and the one puffed up on the promise of certain victory in Iraq. To buyers of highly leveraged debt the promoters of the "All aboard!" money schemes issued PowerPoints similar to those concocted in the White House and circulated with former Secretary of Defense Donald Rumsfeld's proviso that "there are known unknowns ... But there are also unknown unknowns". A surplus of both commodities was found in the luggage of the travelers run over in August on the road to El Dorado. A number of them deserve to be rendered as military acronyms:
The "NINJA Loan" - Extended to borrowers possessed of no income, no job, no assets - comparable to the predatory lending of the United States Army to the freedom-loving sheikhs of Iraq.
The "Neutron Loan" - Designed to remove the occupants but leave the property intact. Within the next year over a million American home mortgages are due to foreclose. In August 80,000 people were "displaced by violence" from their houses and neighborhoods in Iraq; another 2.2 million Iraqis have been obliged to flee the country.
The "Teaser Loan" - An adjustable rate mortgage (ARM) sometimes requiring no money down or up front but in all variants offered at a low introductory rate that adjusts only in an upward direction. The American liberation of Iraq was originally priced at $50 billion over a span of seven months; the expenses now run to $2 billion a week. Joseph Stiglitz, the Nobel Prize-winning economist, estimates the eventual cost of the Iraqi investment at $2 trillion.
The "Liar Loan" - Requiring no documentation attesting to the borrower's net worth, annual income, or intention to repay - the same terms on which the CIA accepted the story about Saddam Hussein's weapons of mass destruction from the Iraqi defector code-named "Curveball".
SIV - "Structured investment vehicle" that "securitizes" subprime loans, thus creating credit with "access to liabilities". Soon after the invasion of Iraq the infatuation with a similar method of transforming loss into gain prompted the Pentagon to welcome terrorists arriving in Baghdad and Anbar province from everywhere in the Middle East. The bundling of America's enemies into one target supported the notion that the war on terror could be won at a single blow. Rush Limbaugh delivered the good news to his radio audience in the summer of 2003: "We don't have to go anywhere to find them! They've fielded a jihad all-star team".
"Toxic Waste" - Degraded financial material added as ballast to higher-quality assets contained in a mortgage-backed bond or security.
AAA - Bond rating affixed by Moody's and Standard & Poor's to SIVs transporting "toxic waste". The certifications correspond to former CIA Director George Tenet's assuring President Bush that finding WMDs in Iraq was a "slam dunk".
Risk Assessment Models - Systems of stock-market trading quantified as mathematical algorithms and engineered to guarantee the perpetual motion of profit. They bear comparison to the Pentagon's arsenal of high-technology weapons - the ones incapable of losing a war.
Model Misbehavior - Inexplicable displays of insubordination on the part of the algorithms, believed to account for the August loss of $5.5 trillion in the global stock markets. The Bush Administration attributes its failures in Iraq to model misbehavior on the part of the think-tank construct (computer-generated, ideologically enhanced) of a constitutional democracy in Iraq.
CDO - Collateralized debt obligation. A coalition of the willing assembled with debt instruments of a strength equivalent to the armed forces sent to Iraq from Albania.
Bubble - Employed as a verb in eighteenth-century London. "To Bubble" - that is, to cheat, swindle, perpetrate a fraud. In contemporary American military parlance, a noun - the "surge" of liquidity in the form of 30,000 troops restoring calm to the Baghdad market in civil obedience.
August's misfortunes in the credit markets produced a good deal of collateral damage elsewhere in the economy-severe losses in the construction and retail trades, to school and sewer districts, in the hotel and travel industries, to the 1.7 million families forced to flee their homes - but the proofs of Wall Street's stupefied greed didn't rouse the news media or the season's presidential candidates to exclamations of anger and disgust. Throughout the whole of its history, the American commonwealth has been subject to the depredations of what George Washington knew to be "a corrupt squadron of paper-dealers"; a hundred or even fifty years ago the brokers of the fast shuffle might have been seen in savage cartoons like those drawn by Thomas Nast (top-hatred dancing pigs) or pilloried in the language once voiced by Walt Whitman ("canker'd, crude, superstitious and rotten ...") and E L Godkin ("a gaudy stream of bespangled, belaced, and beruffled barbarians").
Once upon a time in galaxies far, far away, we recognized the character of the risk in what was known to the first Dutch settlers in seventeenth-century New Amsterdam, many of them participants in land or stock-jobbing ventures, as "The Feast of Fools". It wasn't that the new arrivals on the American shore didn't believe or delight in the expectation and promise of fairy gold. Understood as the most demotic of economic activities, expressive of a yearning for freedom, the game of speculative finance aligns with the American passion for gambling and matches the spirit the bet placed by the Declaration of Independence on the wheel of fortune set up with the slots marked "Life, Liberty and the Pursuit of Happiness". But we used to know that sometimes the numbers crap out.
The knowledge began to disappear from the American consciousness and vocabulary during the dawn of the new "Morning in America" that Ronald Reagan perceived on the horizon of the 1980s when he set up his rose-colored telescope on the White House roof. Convinced that "the difference between an American and any other kind of person is that an American lives in anticipation of the future because he knows it will be a great place", Reagan brought with him the preferred attitude that the dealers in rainbows seek to instill in the minds of the customers shopping for financial salvation and political romance. Everybody a winner; the flowers never die.
The attitude has been sustained over the past twenty-five years by the corporate news media's increasingly messianic testimonies to the wonder and wisdom of the free market (Alan Greenspan as infallible as the Pope), by the entertainment industry's loudly applauding the miraculous transformations of frogs into princes (Donald Trump the hero of our time), by the government's policy of providing the banks with infusions of cheap credit on which to float speculative bubble baths (in 1987, 1998, 2001, again in 2007), by a steadily multiplying herd of eager buyers, their number now estimated at one in every two Americans acting either as independent agents or as participants in mutual and pension funds, seeking to acquire, at steadily rising prices, beach front property on the coast of Utopia.
Together with the promises of an always brighter tomorrow (available on the Internet, delivered within twenty-four hours) , the widely distributed faith in the philosophers' stone (that is, the one with which medieval alchemists supposedly turned lead into gold) accords with the revelation bestowed on a correspondent for the New York Times in the autumn of 2004 by a White House sage identified at the time as "a senior adviser to Bush" but now generally assumed to have been Karl Rove, President Bush's recently retired man-for-all- seasons. Disdainful of the meager and obsolete truths that informed the thinking of "the reality-based community", the sage opened a wider-angle lens on the vision beheld by Ronald Reagan.
Guys like you, he said, "believe that solutions emerge from your judicious study of discernible reality. That's not the way the world really works anymore. We're an empire now, and when we act, we create our own reality. And while you're studying that reality - judiciously, as you will - we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors ... and you, all of you, will be left to just study what we do."
Which didn't mean that the study would be easy to pursue. The Bush Administration's obsessive hiding of its actions and motives (from itself as well as from a public audit) rules against the handing-out of brochures illustrated with the four-color posters of imperial fantasies decorating the walls at the White House, the Pentagon, the Office of the Attorney General. On Wall Street the hedge against having to tell the truth is formed with exemptions from state and federal regulation that yield the elixir of "opacity". Highly valued by the speculators in the nineteenth-century stock swindles engineered by Commodore Vanderbilt and Daniel Drew, opacity allows the private-equity operations to bubble both the government and their clients, empowering the dealers in SIVs in the same way that it serves the creators of new realities in Mesopotamia and assists the poker players in the Las Vegas casinos. Unfortunately, as with the water in the tale of the sorcerer's apprentice, too much opacity sloshing around on the trading floors makes it impossible not only to see what cards the other players hold in their hands but also to know how much money is on the table. The government in March stopped publishing the figure that measures the extent of America's money supply, possibly because by some estimates the financial risk exposure in the global markets for leveraged derivatives now stands at a sum somewhere in the vicinity of $60 trillion, four times the size of the American economy.
When the smoke was blowing away and the vapor being condensed at the scene of the August wreckage, the fear of ghosts in the Wall Street attic precluded any movement in the markets for social conscience. The headlines flowed from the springs of panic, not from the wellheads of rage, the concern expressed for the concentrations of America's wealth (its safety, comfort, and good grooming) rather than for the health and wellbeing of the American citizenry. Together with most everybody else in the society, the big-ticket print and electronic media are heavily invested in the virtual realities that not only sustain the opulence of the country's rentier classes but also shape the course of the country's politics, sponsor its shows of conspicuous consumption, control the disposition of its armies. God forbid that the emperors of ice cream should be seen standing around naked on the reefs of destruction.
The financial press rounded up expert witnesses to cite the canonical distinction between risk ("present when future events occur with measurable probability") and uncertainty ("present when the likelihood of future events is indefinite or incalculable"), to implore the Federal Reserve for a surge of more money (Jim Cramer shouting into the camera at CNBC, "We have Armageddon!... This is not the time to be complacent!"), to say of the SIVs destroyed by the financial equivalents of improvised roadside bombs, "It is not the corpses at the surface that are scary, it is the unknown corpses below the surface that may pop up unexpectedly". "Corpse" in its Wall Street usage refers to a non-performing financial instrument, not to a dead human being.
In the context of the war in Iraq, the word refers to a non-performing geopolitical instrument. If over the past four years Wall Street's deployment of lethal paper has increased the country's mortgage debt to $9.5 trillion, the Bush Administration's deployment of lethal weapons has outsourced or exhausted much of the country's military capacity, meanwhile reducing the credit rating of the All Aboard! American superpower scheme from an investment-grade security to that of a junk bond. By the end of August both speculations (the liberalization of America's capital markets, the liberation of the Islamic Middle East) were losing "tactical momentum" in the reality-based community. The Washington politicians faced difficulties similar to those faced by Wall Street's squadron of paper dealers - how to "securitize" the subprime loans backing the Iraqi civil war, where to find leverage in the imaginary numbers attesting to the soundness of the Anbar province ARM, what degree of protection was left in the hedge of opacity.
The preoccupation with derivatives forecloses debate about the worth of the underlying investment - the value or non-value of the war as a thing in itself - and shifts the discussion to the positioning of the political risk. Process, not product. Not why or to what end do we continue to kill our own soldiers (the known unknowns) as well as Iraqi civilians (the unknown unknowns), but which artful dodge stands the best chance of beguiling the voters in next year's elections while at the same time preserving the bubble floated on the belief that America's invincible military power serves as collateral for the $2.5 trillion debt to foreign central banks that America has neither the means nor the intention to repay.
Among speculators in the commodity pits trading geopolitical futures, the rumors speak, as they do among the speculators following the play in the stock markets, to the coming of "the next big thing". Soon after the Labor Day weekend the financial press was unanimous in the opinion that the Federal Reserve was bound to step up the flows of liquidity to the Wall Street banks in order to sustain the world's faith in the American dollar. Informed sources in Washington were predicting a preemptive military strike against Iran. Three Navy battle groups were known to be present in the Persian Gulf, the president was casting the Iranian Revolutionary Guard in an increasingly evil light (terrorists, enemies of civilization), and how better to replenish the credit lost in Iraq than with a weapons-grade CDO spreading the risk to investors everywhere within range of a melancholy nuclear accident. With us or against us; buy American or lose the chance of a lifetime.
_____
Lewis H Lapham is the National Correspondent for Harper's Magazine and the editor of Lapham's Quarterly.
Bill Totten http://www.ashisuto.co.jp/english/index.html
Harper's Magazine Notebook (November 2007)
Men have an indistinct notion that if they keep up this activity of joint stocks and spades long enough all will at length ride somewhere, in next to no time, and for nothing; but though a crowd rushes to the depot, and the conductor shouts "All aboard!" when the smoke is blown away and the vapor condensed, it will be perceived that a few are riding, but the rest are run over, - and it will be called, and will be, "A melancholy accident". --Henry David Thoreau
Reading the reports from the scene of August's melancholy accident in the country's credit markets - the bursting of the home-mortgage bubble, banks sinking into the sand of subprime loans, hedge funds losing 100 percent of their imagined value in a matter of days, the Dow Jones Industrial Average dropping 250 points in the space of half an hour - I was struck by the resemblances between the speculation floated on the guarantee of easy money on Wall Street and the one puffed up on the promise of certain victory in Iraq. To buyers of highly leveraged debt the promoters of the "All aboard!" money schemes issued PowerPoints similar to those concocted in the White House and circulated with former Secretary of Defense Donald Rumsfeld's proviso that "there are known unknowns ... But there are also unknown unknowns". A surplus of both commodities was found in the luggage of the travelers run over in August on the road to El Dorado. A number of them deserve to be rendered as military acronyms:
The "NINJA Loan" - Extended to borrowers possessed of no income, no job, no assets - comparable to the predatory lending of the United States Army to the freedom-loving sheikhs of Iraq.
The "Neutron Loan" - Designed to remove the occupants but leave the property intact. Within the next year over a million American home mortgages are due to foreclose. In August 80,000 people were "displaced by violence" from their houses and neighborhoods in Iraq; another 2.2 million Iraqis have been obliged to flee the country.
The "Teaser Loan" - An adjustable rate mortgage (ARM) sometimes requiring no money down or up front but in all variants offered at a low introductory rate that adjusts only in an upward direction. The American liberation of Iraq was originally priced at $50 billion over a span of seven months; the expenses now run to $2 billion a week. Joseph Stiglitz, the Nobel Prize-winning economist, estimates the eventual cost of the Iraqi investment at $2 trillion.
The "Liar Loan" - Requiring no documentation attesting to the borrower's net worth, annual income, or intention to repay - the same terms on which the CIA accepted the story about Saddam Hussein's weapons of mass destruction from the Iraqi defector code-named "Curveball".
SIV - "Structured investment vehicle" that "securitizes" subprime loans, thus creating credit with "access to liabilities". Soon after the invasion of Iraq the infatuation with a similar method of transforming loss into gain prompted the Pentagon to welcome terrorists arriving in Baghdad and Anbar province from everywhere in the Middle East. The bundling of America's enemies into one target supported the notion that the war on terror could be won at a single blow. Rush Limbaugh delivered the good news to his radio audience in the summer of 2003: "We don't have to go anywhere to find them! They've fielded a jihad all-star team".
"Toxic Waste" - Degraded financial material added as ballast to higher-quality assets contained in a mortgage-backed bond or security.
AAA - Bond rating affixed by Moody's and Standard & Poor's to SIVs transporting "toxic waste". The certifications correspond to former CIA Director George Tenet's assuring President Bush that finding WMDs in Iraq was a "slam dunk".
Risk Assessment Models - Systems of stock-market trading quantified as mathematical algorithms and engineered to guarantee the perpetual motion of profit. They bear comparison to the Pentagon's arsenal of high-technology weapons - the ones incapable of losing a war.
Model Misbehavior - Inexplicable displays of insubordination on the part of the algorithms, believed to account for the August loss of $5.5 trillion in the global stock markets. The Bush Administration attributes its failures in Iraq to model misbehavior on the part of the think-tank construct (computer-generated, ideologically enhanced) of a constitutional democracy in Iraq.
CDO - Collateralized debt obligation. A coalition of the willing assembled with debt instruments of a strength equivalent to the armed forces sent to Iraq from Albania.
Bubble - Employed as a verb in eighteenth-century London. "To Bubble" - that is, to cheat, swindle, perpetrate a fraud. In contemporary American military parlance, a noun - the "surge" of liquidity in the form of 30,000 troops restoring calm to the Baghdad market in civil obedience.
August's misfortunes in the credit markets produced a good deal of collateral damage elsewhere in the economy-severe losses in the construction and retail trades, to school and sewer districts, in the hotel and travel industries, to the 1.7 million families forced to flee their homes - but the proofs of Wall Street's stupefied greed didn't rouse the news media or the season's presidential candidates to exclamations of anger and disgust. Throughout the whole of its history, the American commonwealth has been subject to the depredations of what George Washington knew to be "a corrupt squadron of paper-dealers"; a hundred or even fifty years ago the brokers of the fast shuffle might have been seen in savage cartoons like those drawn by Thomas Nast (top-hatred dancing pigs) or pilloried in the language once voiced by Walt Whitman ("canker'd, crude, superstitious and rotten ...") and E L Godkin ("a gaudy stream of bespangled, belaced, and beruffled barbarians").
Once upon a time in galaxies far, far away, we recognized the character of the risk in what was known to the first Dutch settlers in seventeenth-century New Amsterdam, many of them participants in land or stock-jobbing ventures, as "The Feast of Fools". It wasn't that the new arrivals on the American shore didn't believe or delight in the expectation and promise of fairy gold. Understood as the most demotic of economic activities, expressive of a yearning for freedom, the game of speculative finance aligns with the American passion for gambling and matches the spirit the bet placed by the Declaration of Independence on the wheel of fortune set up with the slots marked "Life, Liberty and the Pursuit of Happiness". But we used to know that sometimes the numbers crap out.
The knowledge began to disappear from the American consciousness and vocabulary during the dawn of the new "Morning in America" that Ronald Reagan perceived on the horizon of the 1980s when he set up his rose-colored telescope on the White House roof. Convinced that "the difference between an American and any other kind of person is that an American lives in anticipation of the future because he knows it will be a great place", Reagan brought with him the preferred attitude that the dealers in rainbows seek to instill in the minds of the customers shopping for financial salvation and political romance. Everybody a winner; the flowers never die.
The attitude has been sustained over the past twenty-five years by the corporate news media's increasingly messianic testimonies to the wonder and wisdom of the free market (Alan Greenspan as infallible as the Pope), by the entertainment industry's loudly applauding the miraculous transformations of frogs into princes (Donald Trump the hero of our time), by the government's policy of providing the banks with infusions of cheap credit on which to float speculative bubble baths (in 1987, 1998, 2001, again in 2007), by a steadily multiplying herd of eager buyers, their number now estimated at one in every two Americans acting either as independent agents or as participants in mutual and pension funds, seeking to acquire, at steadily rising prices, beach front property on the coast of Utopia.
Together with the promises of an always brighter tomorrow (available on the Internet, delivered within twenty-four hours) , the widely distributed faith in the philosophers' stone (that is, the one with which medieval alchemists supposedly turned lead into gold) accords with the revelation bestowed on a correspondent for the New York Times in the autumn of 2004 by a White House sage identified at the time as "a senior adviser to Bush" but now generally assumed to have been Karl Rove, President Bush's recently retired man-for-all- seasons. Disdainful of the meager and obsolete truths that informed the thinking of "the reality-based community", the sage opened a wider-angle lens on the vision beheld by Ronald Reagan.
Guys like you, he said, "believe that solutions emerge from your judicious study of discernible reality. That's not the way the world really works anymore. We're an empire now, and when we act, we create our own reality. And while you're studying that reality - judiciously, as you will - we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors ... and you, all of you, will be left to just study what we do."
Which didn't mean that the study would be easy to pursue. The Bush Administration's obsessive hiding of its actions and motives (from itself as well as from a public audit) rules against the handing-out of brochures illustrated with the four-color posters of imperial fantasies decorating the walls at the White House, the Pentagon, the Office of the Attorney General. On Wall Street the hedge against having to tell the truth is formed with exemptions from state and federal regulation that yield the elixir of "opacity". Highly valued by the speculators in the nineteenth-century stock swindles engineered by Commodore Vanderbilt and Daniel Drew, opacity allows the private-equity operations to bubble both the government and their clients, empowering the dealers in SIVs in the same way that it serves the creators of new realities in Mesopotamia and assists the poker players in the Las Vegas casinos. Unfortunately, as with the water in the tale of the sorcerer's apprentice, too much opacity sloshing around on the trading floors makes it impossible not only to see what cards the other players hold in their hands but also to know how much money is on the table. The government in March stopped publishing the figure that measures the extent of America's money supply, possibly because by some estimates the financial risk exposure in the global markets for leveraged derivatives now stands at a sum somewhere in the vicinity of $60 trillion, four times the size of the American economy.
When the smoke was blowing away and the vapor being condensed at the scene of the August wreckage, the fear of ghosts in the Wall Street attic precluded any movement in the markets for social conscience. The headlines flowed from the springs of panic, not from the wellheads of rage, the concern expressed for the concentrations of America's wealth (its safety, comfort, and good grooming) rather than for the health and wellbeing of the American citizenry. Together with most everybody else in the society, the big-ticket print and electronic media are heavily invested in the virtual realities that not only sustain the opulence of the country's rentier classes but also shape the course of the country's politics, sponsor its shows of conspicuous consumption, control the disposition of its armies. God forbid that the emperors of ice cream should be seen standing around naked on the reefs of destruction.
The financial press rounded up expert witnesses to cite the canonical distinction between risk ("present when future events occur with measurable probability") and uncertainty ("present when the likelihood of future events is indefinite or incalculable"), to implore the Federal Reserve for a surge of more money (Jim Cramer shouting into the camera at CNBC, "We have Armageddon!... This is not the time to be complacent!"), to say of the SIVs destroyed by the financial equivalents of improvised roadside bombs, "It is not the corpses at the surface that are scary, it is the unknown corpses below the surface that may pop up unexpectedly". "Corpse" in its Wall Street usage refers to a non-performing financial instrument, not to a dead human being.
In the context of the war in Iraq, the word refers to a non-performing geopolitical instrument. If over the past four years Wall Street's deployment of lethal paper has increased the country's mortgage debt to $9.5 trillion, the Bush Administration's deployment of lethal weapons has outsourced or exhausted much of the country's military capacity, meanwhile reducing the credit rating of the All Aboard! American superpower scheme from an investment-grade security to that of a junk bond. By the end of August both speculations (the liberalization of America's capital markets, the liberation of the Islamic Middle East) were losing "tactical momentum" in the reality-based community. The Washington politicians faced difficulties similar to those faced by Wall Street's squadron of paper dealers - how to "securitize" the subprime loans backing the Iraqi civil war, where to find leverage in the imaginary numbers attesting to the soundness of the Anbar province ARM, what degree of protection was left in the hedge of opacity.
The preoccupation with derivatives forecloses debate about the worth of the underlying investment - the value or non-value of the war as a thing in itself - and shifts the discussion to the positioning of the political risk. Process, not product. Not why or to what end do we continue to kill our own soldiers (the known unknowns) as well as Iraqi civilians (the unknown unknowns), but which artful dodge stands the best chance of beguiling the voters in next year's elections while at the same time preserving the bubble floated on the belief that America's invincible military power serves as collateral for the $2.5 trillion debt to foreign central banks that America has neither the means nor the intention to repay.
Among speculators in the commodity pits trading geopolitical futures, the rumors speak, as they do among the speculators following the play in the stock markets, to the coming of "the next big thing". Soon after the Labor Day weekend the financial press was unanimous in the opinion that the Federal Reserve was bound to step up the flows of liquidity to the Wall Street banks in order to sustain the world's faith in the American dollar. Informed sources in Washington were predicting a preemptive military strike against Iran. Three Navy battle groups were known to be present in the Persian Gulf, the president was casting the Iranian Revolutionary Guard in an increasingly evil light (terrorists, enemies of civilization), and how better to replenish the credit lost in Iraq than with a weapons-grade CDO spreading the risk to investors everywhere within range of a melancholy nuclear accident. With us or against us; buy American or lose the chance of a lifetime.
_____
Lewis H Lapham is the National Correspondent for Harper's Magazine and the editor of Lapham's Quarterly.
Bill Totten http://www.ashisuto.co.jp/english/index.html
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