Salvos Too Smart to Fail

Notes on an age of folly

Thomas Frank

The “sound” banker, alas! is not one who sees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows so that no one can really blame him.

           –John Maynard Keynes


In the twelve hapless years of the present millennium, we have looked on as three great bubbles of consensus vanity have inflated and burst, each with consequences more dire than the last.

First there was the “New Economy,” a millennial fever dream predicated on the twin ideas of a people’s stock market and an eternal silicon prosperity; it collapsed eventually under the weight of its own fatuousness.

Second was the war in Iraq, an endeavor whose launch depended for its success on the turpitude of virtually every class of elite in Washington, particularly the tough-minded men of the media; an enterprise that destroyed the country it aimed to save and that helped to bankrupt our nation as well.

And then, Wall Street blew up the global economy. Empowered by bank deregulation and regulatory capture, Wall Street enlisted those tough-minded men of the media again to sell the world on the idea that financial innovations were making the global economy more stable by the minute. Central banks puffed an asset bubble like the world had never seen before, even if every journalist worth his byline was obliged to deny its existence until it was too late.

These episodes were costly and even disastrous, and after each one had run its course and duly exploded, I expected some sort of day of reckoning for their promoters. And, indeed, the last two disasters combined to force the Republican Party from its stranglehold on American government—for a time.

But what rankles now is our failure, after each of these disasters, to come to terms with how we were played. Each separate catastrophe should have been followed by a wave of apologies and resignations; taken together—and given that a good percentage of the pundit corps signed on to two or even three of these idiotic storylines—they mandated mass firings in the newsrooms and op-ed pages of the nation. Quicker than you could say “Ahmed Chalabi,” an entire generation of newsroom fools should have lost their jobs.

But that’s not what happened. Plenty of journalists have been pushed out of late, but the ones responsible for deluding the public are not among them. Neocon extraordinaire Bill Kristol won a berth at the New York Times (before losing it again), Charles Krauthammer is still the thinking conservative’s favorite, George Will drones crankily on, Thomas Friedman remains our leading dispenser of nonsense neologisms, and Niall Ferguson wipes his feet on a welcome mat that will never wear out. The day Larry Kudlow apologizes for slagging bubble-doubters as part of a sinister left-wing trick is the day the world will start spinning in reverse. Standard & Poor’s first leads the parade of folly (triple-A’s for everyone!), then decides to downgrade U.S. government debt, and is taken seriously in both endeavors. And the prospect of Fox News or CNBC apologizing for their role in puffing war bubbles and financial bubbles is no better than a punch line: what they do is the opposite, launching new movements that stamp their crumbled fables “true” by popular demand.

The real mistake was my own. I believed that our public intelligentsia had succumbed to an amazing series of cognitive failures; that time after time they had gotten the facts wrong, ignored the clanging bullshit detector, made the sort of mistakes that would disqualify them from publishing in The Baffler, let alone the Washington Post.

What I didn’t understand was that these were moral failures, mistakes that were hardwired into the belief systems of the organizations and professions and social classes in question. As such they were mistakes that—from the point of view of those organizations or professions or classes—shed no discredit on the individual chowderheads who made them. Holding them accountable was out of the question, and it remains off the table today. These people ignored every flashing red signal, refused to listen to the whistleblowers, blew off the obvious screaming indicators that something was going wrong in the boardrooms of the nation, even talked us into an unnecessary war, for chrissake, and the bailout apparatus still stands ready should they fuck things up again.

Keep on Dancing Till the World Ends

My aim here isn’t to take some kind of victory lap or to get in the granite faces of our eternal pundit corps one more time—honestly, who really wants to read a twenty-part takedown of the social philosophy of, say, Jim Cramer?

Nor is it to blame Republicans for our problems. It is true that, from the scandal of CEO pay to the scandal of lobotomized regulators, each of the really monumental mistakes of our time arose from the trademark doctrines of the political right. And, yes, it was the Bush administration that installed as National Archivist a scholar much criticized for his questionable research methods, that muzzled government scientists, and that declared war on organized intelligence in a hundred other ways.

But the problem goes far beyond politics. We have become a society that can’t self-correct, that can’t address its obvious problems, that can’t pull out of its nosedive. And so to our list of disasters let us add this fourth entry: we have entered an age of folly that—for all our Facebooking and the twittling tweedle-dee-tweets of the twitterati—we can’t wake up from.

Besides, the reign of corruption has taken plenty of right-wing scalps, too. In fact, one of the most interesting comments on the machinery that is making us stupid came from the libertarian Doug Bandow of the Cato Institute, after he had temporarily lost his job (he got it back a little while later, don’t worry) for puffing clients of Jack Abramoff in exchange for the lobbyist’s largesse. But what was the big deal? fumed Bandow in a 2006 cri de coeur called “The Lesson Jack Abramoff Taught Me.” Living in Washington was expensive; and besides, everyone was basically on the take:

Many supposedly “objective” thinkers and “independent” scholar/experts these days have blogs or consulting gigs, or they are starting nonprofit Centers for the Study of . . . Who funds their books, speeches or other endeavors? Often it’s those with an interest in the outcome of a related debate. The number of folks underwriting the pursuit of pure knowledge can be counted on one hand, if not one finger.

Bandow had been caught, yes, but he wasn’t the only culprit, he insisted—with some accuracy. All opinions are paid for. Everything written in this city—everything in this land that is thought and tweeted and toasted with a hip hip hooray . . . is Abramoffed. We are all slaves to the market; there is no way to stand outside that condition.

I can remember the contempt I felt when I read Bandow’s essay, back in 2006. Of course there was a place where ideas weren’t simply for sale, I thought—it was called the professions. Ethical standards kept professionals independent of their clients’ gross pecuniary interests.

These days, though, I’m not so sure. Money has transformed every watchdog, every independent authority. Medical doctors are increasingly gulled by the lobbying of pharmaceutical salesmen. Accountants were no match for Enron. Corporate boards are rubber stamps. Hospitals break unions, and, with an eye toward future donations, electronically single out rich patients for more luxurious treatment.

Money has transformed every watchdog, every independent authority.

And consider the university, the mothership of the professions. For-profit higher education is today a booming industry, feeding on the student loans handed out to the desperate. Even the traditional academy, where free inquiry nominally lives, has become a profit center, a place where exorbitant tuition somehow bypasses the adjuncts who do the teaching but makes for lavish executive salaries; where economists pull in fantastic sums for “consulting”; and where the prospect of launching the next hot Internet startup is a gamble that it is worth bending any rule to take.

One of Jack Abramoff’s tricks, you will recall, was to hand intellectuals cash and trips to tropical islands in exchange for such intellectual services as might get the tycoons who owned the sweatshops in those paradises off the regulatory hook. And how different was the Abramoff model of enlightenment from the activities of the Cambridge, Massachusetts consultancy called “Monitor,” with its prominent Harvard connections? According to the Boston Globe:

The management consulting firm received $250,000 a month from the Libyan government from 2006 to 2008 for a wide range of services, including writing [a] book proposal, bringing prominent academics to Libya to meet Khadafy “to enhance international appreciation of Libya” and trying to generate positive news coverage of the country.

“Trying to generate positive news coverage,” by the way, included placing pro-Qaddafi stories by prominent scholars in The New Republic, the Washington Post, Newsweek International, and the Guardian—a record far more impressive than the Bush administration’s suborning of syndicated columnist Armstrong Williams or Abramoff’s own episodic triumphs on the op-ed page of the Washington Times.

Another thing Doug Bandow got right was one of the basic reasons for all this: for most Americans, the building blocks of middleclass life—four years at a good college, for example—are growing scarce and out of reach. For other people and other entities, though, they grow ever cheaper; they are baubles to be handed out as necessity requires. The result is exactly what our nineteenth-century ancestors would have expected. Think of Jack Grubman, the superstar stock analyst of the nineties, who famously upgraded AT&T’s shares in exchange for getting his children into a ferociously competitive preschool. Or the congressional aides on Capitol Hill, surrounded by the inaccessible luxuries of Washington, D.C., who would do nearly anything for a lobbyist in exchange for a shot at a future job on said lobbyist’s staff. Or the actual members of Congress who sold their votes in exchange for little bits of sushi or a blowout party in Hawaii or good seats at sporting events.

And as we serve money, we find that money wants the same thing from us: to push everyone it beguiles in the same direction. Money never seems to be interested in strengthening regulatory agencies, for example, but always in subverting them, in making them miss the danger signs in coal mines and in derivatives trading and in deep-sea oil wells. You can have a shot at being part of the 1 percent, money tells us, only if you are first committed to making the 1 percent stronger, to defending their piles in some new and imaginative way, to rationalizing and burnishing their glory, to exempting them from regulation or taxation, to bowing down as they pass, and to believing in your heart that their touch will heal scrofula.

So money gives us not only the bond-rating scandal of 2008, in which trash investments were labeled super-wholesome so that the rating agency in question could win more business from the manufacturers of said trash; and not only the Enron scandal of 2001, in which head-spinning conflicts of interest were overlooked by Enron’s accountants in order to preserve the nice ka-ching those conflicts delivered to everyone involved; but also the analyst scandal of 2002, in which Wall Street insiders pushed certain corporate securities on their sappy middle-American clients in order to win those corporations’ business—and then while it is corrupting all the watchmen, money also dashes off an enormous body of literature assuring those sappy middle Americans that they are in fact financial geniuses who can outsmart any possible combination of Wall Street insiders, because together the saps reflect the wisdom of markets or some other such reassuring bullshit. And all of it—the airy populism of the market and its simultaneous complete negation by reality—is as determined by the current distribution of wealth as gravity is by the mass of the planet. Both of them will continue indefinitely regardless of the constant violence the one does to the other simply because that’s the way money wants it, and every dollar in the nation will strain at its leash to ensure that financial naïveté persists on into infinity in complete ignorance of financial fraud.

If You’re One of Us Then Roll With Us

It’s not that Americans revel in our folly: having been “right” about the debacles of recent years still seems to carry some modicum of value. The reason Newt Gingrich likes to claim that he warned his one-time client Freddie Mac of the dangers of the subprime lending market, for example, is because he believes that there is something honorable about having seen it coming, something that sets him apart from the wild-eyed politicians who shared the stage with him during last year’s presidential beauty contests.

Of course, Gingrich’s claim to the title is based on no verifiable historical data, and if what we know about Freddie Mac’s relationships with its hired hands holds true in his case, the work for which Gingrich received his million-plus payday was not ringing the mortgage company’s alarm bell but the opposite: helping to minimize resistance to the outfit’s operations among his fellow Republicans—doing what money always wants “consultants” like him to do.

Still, there are others who might rightfully claim the laurels Gingrich covets: the economists who warned of a bubble in real estate prices and the handful of journalists who figured out that crazy retail lending practices were inflating the profits of the Wall Street banks.[*] Were society to honor these people, however, just think about who we would be lionizing: a handful of uncelebrated business reporters; economists like Dean Baker, who has spent much of his career deriding consensus economic wisdom; and out-of-the-way publications like Mother Jones, the Pittsburgh City Paper, and Southern Exposure (“Journal of the Progressive South”) that stumbled across the big scoop because they happened to be interested in sweaty, wretched subjects like predatory lending.

That is why a more honest reaction, it seems to me, is to declare that there is in fact no value at all in having seen the catastrophe coming. If the honors can’t go to the people who already wear the consensus seal of approval, it is better to declare that there is no prize for rightness in the first place.

This seems to be the reasoning behind one of the strangest comments on the epidemic of folly to appear in recent years, the meditation on pervasive wrongness by Washington Post columnist Ezra Klein that appeared in June of 2011. In it, Klein remembers a boneheaded 2007 Michael Lewis essay in which Lewis mocked people who were worried about risky derivatives; Klein then declares that if a writer as good as Michael Lewis didn’t see the problems mounting, it was either impossible to see the problems mounting or wasn’t worth it to see the problems mounting. “[N]o explanation of the financial crisis that doesn’t have room for Lewis to miss it is sufficient,” Klein writes.

And so those worriers back in 2007—the ones who did get it right—were not only gratuitously insulted by Michael Lewis; they are now insulted all over again by Ezra Klein, who seems to believe that Lewis’s awesomeness is so overwhelming—that our love for him is so great—that he must remain the pole star of intellectual legitimacy no matter how wrong he turns out to be, no matter how grievous the losses the world suffers, and no matter how dreadful the fate of those thrown out of work during the succeeding recession. The celebrity of the celebrated outweighs it all; the situation may change but the personnel must stay the same.[**]

Another way of putting this idea might be to say that the individuals who got things wrong—the ones who saw few problems in financial deregulation, anyone who thought derivatives eliminated risk, anyone who counted on markets to police themselves—were “one of us.” There can be no consequences for them because they merely expressed the consensus views of the time. Like John Maynard Keynes’s “sound banker,” they might have failed, but they failed in the same way that the rest of “us” failed. To hold them accountable for what they said and did would expose the rest of “us” to such judgment as well. And obviously that can’t happen.

A résumé filled with grievous errors in the period 1996–2006 is not only a non-problem for further advances in the world of consensus; it is something of a prerequisite. Our intellectual powers that be not only forgive the mistakes; they require them. You must have been wrong back then in order to have a chance to be taken seriously today; only by having gotten things wrong can you demonstrate that you are trustworthy, a member of the team. (Those who got things right all along, on the other hand, might be dubbed “premature market skeptics”—people who doubted the consensus before the consensus acknowledged it was all right to doubt.)[***]

A résumé filled with grievous errors in the period 1996–2006 is something of a prerequisite.

Christopher Hitchens became the toast of Washington only after he had gone safely wrong on the Iraq War. Or consider the curious saga of New York Times op-ed columnist Joe Nocera, who was elevated to the most exalted post in American journalism in 2011, and who has, since then, done outstanding work exposing financial frauds and assessing the value of the old Glass-Steagall rules regulating banks. But there’s a peculiar twist to this story. Before Nocera became an admirer of bank regulation, he played the opposite role: he was the journalist who told, in the 1994 book A Piece of the Action, the awesome and heroic tale of how the bankers blew Glass-Steagall apart. Nocera has clearly seen the error of his ways and has changed course. (So has Michael Lewis, for that matter.) It would be churlish not to forgive and forget.

But what about the ones who have not changed? Here is the aforementioned economist Dean Baker, one of the few people who has attempted a grand theory of folly, in a 2011 interview published on the valuable blog Naked Capitalism:

We have people who have literally been wrong about everything having to do with the economy over the last 5 years. They totally missed the $8 trillion housing bubble, the largest asset bubble in the history of the world. . . . Then they underestimated the severity of the downturn, telling us the economy was going to bounce right back. And, then they got the interest rate story wrong. They told us that the large budget deficits caused by the downturn would lead the bond vigilantes to send interest rates through the roof. Instead they fell through the floor.

“So who gets listened to in national debates,” Baker continues, “those who have been consistently right on all the key points, or those who have gotten things as wrong as you possibly can?”

Let us take the question a little further: it is not merely a matter of “who gets listened to” but why they get listened to. Recall in this connection the peculiar comment of White House Press Secretary Jay Carney in December of 2011 as he scrambled to get the Obama administration off the hook for its tepid response to the slump: “There was not a single mainstream, Wall Street, academic economist who knew at the time, in January of 2009, just how deep the economic hole was that we were in.”

Of course there were plenty of economists who knew how bad things were. That one was easy to call. But if you limited your inquiries—as Carney is confessing the administration did—to the statements of economists who are “mainstream” and “Wall Street” you would not have encountered such economists. You would have been counting on the wisdom of people who had been “wrong about everything,” as Dean Baker puts it.

On the other hand, you would also have been listening to the greatest names of professional economics. And this, we know, is in keeping with President Obama’s deepest instincts: trust the experts.

But what happens when the experts are fools? What happens when their professions are corrupted, their jargon has become a shield against outside scrutiny, their process of peer review has been transformed into a device by which a professional faction can commandeer the discipline, excommunicate rivals, and give members of the “us” group endless pardons for their endless failures?

The economist James K. Galbraith, who was right about many of the disasters of our age but who is neither “mainstream” nor “Wall Street,” once wrote that something very much like this had happened to his discipline:

Leading active members of today’s economics profession . . . have formed themselves into a kind of Politburo for correct economic thinking. As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. . . . No one loses face, in this club, for having been wrong. No one is dis-invited from presenting papers at later annual meetings. And still less is anyone from the outside invited in.

Where does this leave the premature market skeptics, the ones (like Galbraith) who were right all along? The answer is, by and large, nowhere.[****] These people have remained at the out-of-the-way universities, the do-it-yourself blogs, and the impotent think tanks where they began.

They were ignored in 2008 and they are ignored today because an extremely convenient corollary to the reigning dogma of the consensus reminds us that it is impossible to see a disaster of the 2008 variety coming. Of course, there were plenty of people who did see it coming, but this corollary defines their work away as a series of lucky guesses, dismisses their methodology as not worth considering, and blows them off as not worth listening to—all of which “we” can prove using equations. “The main lesson we should take away from the E[fficient] M[arket] H[ypothesis] for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles,” announced Chicago school economist Robert Lucas from amid the ruins in 2009. “If these people exist, we will not be able to afford them.”

And the main lesson we should take away from the Efficient Market Hypothesis for our purposes is the utter futility of economics departments like the one that employs Robert Lucas.

A second lesson: if economists—and journalists, and bankers, and bond analysts, and accountants—don’t pay some price for egregious and repeated misrepresentations of reality, then markets aren’t efficient after all. Either the gentlemen of the consensus must go, or their cherished hypothesis must be abandoned. The world isn’t gullible enough to believe both of them any longer.

Or maybe it is. Maybe this state of affairs can go on for years. As you watch the anointed men of the Washington consensus shuttle through the CNN green room or relax comfortably at the $10,000 Halloween party the neighbors are throwing for their third grader, you begin to wonder what kind of blunder it will take to shatter this city’s epic complacency, its dazzling confidence in its own stupidity.

We will assuredly find out soon. And when we do, we can be just as assured that the fools who let it happen will walk away once again without feeling any consequences.


[*]There were relatively few of these journalists, and their reporting dried up after the Bush administration preempted state-level predatory lending laws in 2003. See the painstaking summary by Dean Starkman in Columbia Journalism Review, May/June 2009.

[**]As far as I know, Michael Lewis himself has never made such a preposterous claim. His own take on the grand folly of recent years, The Big Short, is that epidemic madness of the mid-aughts variety creates opportunities for really smart people to make really big profits. On all of this stuff see Yves Smith, “Ezra Klein Should Stick to Being Wrong About Health Care,” a blog post from June 14, 2011 on Naked Capitalism.

[***]A similar situation arose in the red-hunting years after World War II, when the need arose to separate the righteousness of the just-concluded war against fascism from the ardent anti-fascists on the left, who had opposed fascism since the beginning but who now needed to be ridiculed, blacklisted, and otherwise ostracized. The phrase that was invented to do this job was “premature anti-fascist”–it meant someone who had opposed fascism before the consensus had determined that fascism was a thing Americans ought to oppose.

[****]See page 22 for an excerpt of the memo that Galbraith sent to Obama’s economists in July 2008.