3 December 2007

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.


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