The other day Pennywise happened upon the jottings of a writer who referred to “crises of speculation (shares and so forth)” in which “actual material production” becomes irrelevant as “the capitalist nations are seized by a universal mania.”
Was that writer referring to the mania that preceded the collapse of Lehman Brothers two years ago this month? Not precisely, for the statement was written in a notebook in the very same year that the Civil War began: 1861. That simply goes to show that bubbles—speculative orgies that push the price of stock shares, real estate, or some other asset class beyond their value—have long excited attempts to explain them.
In the ancient and medieval worlds, economic crises were largely a function of plague, pestilence, and calamitous harvests. The arrival of modernity is perhaps best demarcated by the increased frequency of economic crises that originate within commercial society itself. Such crises, with their devastating train of bankruptcies, foreclosures, and unemployment, require more ratiocination to explain than do locusts or hailstorms.
As you may have guessed, the words with which this column begins were penned by none other than the author of Capital. Karl Marx’s book sales have been rather more brisk of late than a decade or two ago, when he was presumed to be a disproven prophet. In Pennywise’s universe, Marx’s name last came up in the comments section of a column on how to minimize taxes. I had made a few jests at the expense of a contemporary movement that, shall we say, rhymes with Pea Tarty. Promptly, an angry swarm of Pea Tartiers descended upon The Chronicle’s Web site. My column was refudiated. Never again will I misunderestimate them.
I will admit that the previous paragraph runs the risk of confirming the opinion of a critic of Pennywise who complained in reference to last month’s column on our bubblicious economy that Pennywise’s writings are 80 percent political and 20 percent "(sometimes) insightful advice.”
That gets it backwards. In actuality, Pennywise adheres rigidly to an exact mathematical formula of 80 percent advice, 10 percent folly, and 10 percent (rarely) insightful political perspective. The vast majority of my columns have stuck to such straight-and-narrow topics as home and student loans, credit cards, rollovers, flexible spending accounts, debt reduction, and pension plan choices.
This month, however, I venture into the macro again. Why? Because Pennywise does not believe personal finance to be separable from political economy. As this second anniversary reminds us, we live in the shadow of the Fall of the House of Lehman, the most severe financial crisis and economic contraction in more than half a century.
So what follows is a Greatest Hits of the Great Recession—Pennywise’s pick of some of the best journalism and reflections on the financial crisis and its aftermath of the past two years. (I’m focusing on essays here, not books.) Perhaps the readings will be useful for your teaching—or just for orienting yourself in our brave new economic uncertainty.
Let’s start with the subprime crisis, which some, predictably enough, rushed to blame on food-stamp recipients in barrios and ghettos, and on Washington bureaucrats. As Fox News’s Neil Cavuto put it, “Loaning to minorities and risky folks is a disaster.” (Did he really say that? Yes, he did.)
But working-class and low-income borrowers were victims, ripped off by predatory lenders. That is made vivid in Peter J. Boyer’s haunting tale of the Akron resident Addie Polk: “Ohio Postcard: Eviction,” in The New Yorker (November 24, 2008). Pair that story with Daniel Gross’s brilliant demolition of the myth that Fannie Mae, Freddie Mac, and affordable-housing legislation caused the housing bubble: “Subprime Suspects,” in Slate (October 7, 2008).
Who was behind the crisis, then, if not the black, brown, and poor? Surprise, surprise—we must turn from streets to suites.
The “Giant Pool of Money,” an installment of the radio show This American Life (May 9, 2008) produced by Alex Blumberg and the NPR reporter Adam Davidson, is a highly accessible introductory-level program about mortgage-backed securities, collateralized debt obligations, and those who pedaled them.
Among financial reporters, none have been better than Gretchen Morgenson of The New York Times, whose “The Reckoning: Behind Insurer’s Crisis, Blind Eye to a Web of Risk” still holds up as an account of how credit-default swaps created an interdependence between AIG and Goldman Sachs, exemplifying what became known as “too big to fail” (September 27, 2008).
Responsibility for the crisis lies on Wall Street, where an “American financial oligarchy” of “elite business interests” made “ever-larger gambles.” No kid with chartreuse hair and a nose ring in a Sex Pistols T-shirt wrote that—rather, those are the words of Simon Johnson, former chief economist of the International Monetary Fund, in “The Quiet Coup,” published by The Atlantic (May 2009).
Those willing to indulge in theory might consider Peter Gowan’s analysis of “the New Wall Street System,” a set of global institutions and practices that generate, rather than merely exploit, bubbles in asset prices. He is also good on why “neoliberal” is not the right term to describe a capitalism heavily interventionist in rescuing its financial sector. See his article, “Crisis in the Heartland” in the New Left Review (January-February 2009).
A very few people boldly perceived the bubble and made a great deal of money from popping it. Those short sellers are the subject of Michael Lewis’s riotous new book The Big Short, but you can read the original installment of that work for free in “The End” at Portfolio.com (November 11, 2008).
By far the most entertaining outpouring of the crisis is Matt Taibbi’s description of Wall Street’s leading firm, Goldman Sachs, as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” He wrote that in “The Great American Bubble Machine” in Rolling Stone (April 5, 2010).
Academic economists were so busy cranking out textbooks about market efficiency that they failed to foresee the potentiality for a system-shaking (never mind system-caused) crisis. That has led to several piercing reflections from within, including Paul Krugman’s “How Did Economists Get It So Wrong?” in The New York Times (September 2, 2009) and Philip Mirowski’s “The Great Mortification” in The Hedgehog Review (summer 2010).
After the rescue packages, troubled-asset purchases, and bailouts, Wall Street was saved from itself. We are all left holding the bag: a mounting federal debt whose astronomical levels may be worrying even to those to whom it would never occur to stand on the National Mall with a sign equating the president of the United States with Adolf Hitler. It bears remembering that “this debt explosion has resulted not from big spending by the Democrats, but instead by the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.” That statement is found in “Four Deformations of the Apocalypse” published in the Times (July 31, 2010).
The New York Times? That liberal rag, you sneer? I hasten to mention the article’s author: David Stockman, former budget director for President Ronald Reagan.