The silly season is over, concluded with a big party at the voting polls and then another big party at all the venues. And now we’re wondering what to read.
No worry. We have plenty of decisions ahead, and maybe with the election so fresh, it’s time to review how we make them. We’re talking about longterm decisions, here—things that affect the lives of people for years, or even generations.
If you need convincing that decision-making is a difficult craft, just review a few statements from Alan Greenspan, our major financial decision maker from 1987 to 2006. “I didn’t really get it,” said the former chairman of the Federal Reserve Bank. Repeatedly.
Now that an estimated million families have lost their homes, he sees that you can’t lend big bucks at a low rate to inexperienced borrowers with marginal jobs and then jack up the payment to two or three times the original amount and expect them to make it.
In fact, the lenders that took advantage of these folks are the ones that should pay. Every loan earns a commission, and, if you’re making decisions on the short term, the commission you earn today can distract you from the future pain of your clients.
Still, in the long-term, those loans have an impact on the community that should come into the equation. Abandoned housing, falling home values, bankruptcy. These are personal problems, yes, but they are also problems to the entire village, state, nation.
Any undergraduate in accounting can see that long-term problem if it’s pointed out, but Greenspan and his minions were in a different zone. In fact, they weren’t making decisions at all. It was more like following the crowd. The same process that gets teenagers drunk and pregnant.
Or, maybe we should be generous and say that Greenspan just didn’t understand the current market. That means that he probably “didn’t get” credit default swaps.
Wait! Does anybody “get” C.D.S.s?
Here’s the explanation: A credit default swap is insurance, from an insurer. When a loan goes into default, the insurer will pay for it. And, unlike regular insurance, like on your house or car, where you’re involved if something goes wrong, you don’t need probable liability to buy a C.D.S.
If normal insurance was like a C.D.S., if you know somebody that’s really accident-prone, you might buy a policy on his car. Or maybe you read in the paper that someone has just reached 104 years old, you might buy a policy on her life.
See how cool? You’re guaranteed the insurance payout even though the problem is not really attached to anything that you would be concerned about in real life. Guaranteed profit and no liability. And, to make matters juicier, the company doesn’t have to have actual cash in reserve to pay for the losses. That’s a pretty easy sell, if you’re thinking in the short term. And lots of companies, pension funds, school boards and other nice folks, were sold.
In the long term, however, it’s obvious that if any number of loans go into default, the insurer will be in trouble and need a place to go for cash. A really big place. In fact, enough investors have bought C.D.S.s so that $62 trillion have been sold, according to one analyst. Compare that really humongous number with the Gross World Product of the entire world: $65.95 trillion, more or less.
A.I.G., American International Group, the poster child for bailouts, owns an estimated $440 billion in C.D.S.s. A.I.G. is the world’s biggest insurer, making A.I.G. T.B.T.F., (“too big to fail.”) So, when their C.D.S.s went bad, the US government bailed them out. Who else, we might ask, is T.B.T.F.?
This A.I.G. bailout was not, by the way, part of the $700 billion bailout still being distributed. The A.I.G. bailout was an earlier $85 billion deal, made about the same time as the $29 billion wedding present to Bear Stearns and J.P. Morgan Chase. Oh, and lest we forget, there was the $25 billion toss to Fannie Mae and Freddie Mac. It’s been an expensive line of falling dominoes, and, on the individual level, we haven’t stopped the pain.
But I digress. The subject is decision-making, and how to change our knee-jerk, everyone-in-the-pool mentality into something that takes the community and the long run into account. Something thoughtful. Certainly in the last election, there was information a-plenty, beginning with the races for the primary and continuing to the last minute with blogs, robot calls and mailings.
Yet, listening to our favorite FM radio talk show on the radio as we drove to the polls, we heard callers that complained there wasn’t enough information to make up their minds. Listening to the voices, I had to wonder if the callers had analyzed their own needs before they looked for information. That college kid—did she look for information on the candidates’ college loan programs? That retired fellow—did he Google the candidate names and “social security”?
So, the silly season is over—or maybe it’s just begun. We still have lots of work ahead.
Margot Ford McMillen farms and teaches English at a college in Fulton, Mo. Email: margotmcm@socket.net.
From The Progressive Populist, December 1, 2008
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