The Shift

It's one of those anthropological peculiarities among the Great Spotted Republicans that there is no action that a Republican commits that another Republican will not defend, excuse and/or cover for. Phil Gramm dealt John McCain's chances a mortal blow when he called the middle class a bunch of whiners and termed present conditions a 'mental recession.' It's the sort of comment that ends campaigns, but George Will immediately rushed to Gramm's defense, saying that we're 'the crybabies of the Western World."

Now, of course that we've has the second biggest bank failure in American history and the gummint is getting ready to bail out the gargantuan Fannie Mae  and Freddie Mac, the republic clutch-reflex defense has gone from defending "things are fine and all the hubbub is the average joe's fault" to defending "Everything's falling apart, and it's all the average joe's fault."

And so we have David Brooks. A column which, in doleful sincerity, laments the dreadful moral erosion that has destroyed our culture of thrift? That has so many people living beyond their means? Isn't it horrible that these profligate grasshoppers have caused such a terrible financial collapse as we're going through now? What, oh what, has become of our wonderful country?

It's nauseating, and it's tremendously tempting to point out the evil predatory lenders and their shark-like tactics, or to make the point that the switch over to the credit-card economy enabled corporations to grow without actually, you know, paying people more--or to mention that people adopt a culture of thrift when they flat broke and have nothing--and except for those multitudes the American culture has been a combination of stealing from the Indians, buying slaves, and speculation since the opening gun--

--but all of those accept the moral-decay premise and attempt to shift it. It's a loser's game. So let me go at it differently.

A loan is a bargain founded on trust. . In order to go through with a loan, the lender must have trust in the ability to repay. A failed banker is a banker who trusts badly--no other reason. And in consequence the banking profession has made a detailed and finely gradated art of degrees of trust--and it is based not only on evaluations of character, but awareness of the wealth of the nation, the cultural currents, and even the air, sea and sky. (farm loans, anyone?)

And the recipient of the loan does not make a holy oath to repay the loan--he or she promises adhere to a contract--but anyone who assures someone else is either lying or insane or both. Instead, consequences for default  are spelled out.

If there is a shame attached to defaulting on a contract, it's a sentimental one--optional and completely absent in the world of business today. (reading Theodore Dreiser's The Financier is kind of quaint today, what with the idea that a man who has a business collapse is a 'failed man', and is to be cast out from society as well as business).  Trust is inverted to be named risk, and effectively sanitized morally.

And that's because it has always been the case that the trust and the risk are also dependent on all sorts of other factors--lumped together under the phrase 'financial climate.' And monitoring that is the job of the banker.

(if you're pinning the Captain Obvious badge on me, I've got to warn you that it doesn't get too much more exotic. But I am gong somewhere with this.)

A large bank will have a number of loans that default, arising in the main from three sources: 1) imperfections in the ability to determine trust-level on the part of the banker; 2) unforeseen changes in the financial climate, and 3) the institutionally determined rate of risk-acceptance.

What, then does it mean when the default rate skyrockets--when millions of lendees start to default? There seem to be fiver options:

1) Millions of people have suddenly changed their character--become lazy, alcoholic, or snapped;

2) The financial climate has changed abruptly and in an unanticipated way for millions of people;

3) Thousands of bankers have become stupid and bad at there jobs;

4) The financial climate has changed far too abruptly to be taken into account, or

5) The institutional risk acceptance level is a couple of notches too high.

David Brooks would have you believe 1), invoking a mysterious 'moral erosion' which probably fits in with progressive politics, rock and roll, and sneakers with lights in them.  There are most assuredly large numbers of people who are materialist, irresponsible, and--that all important factor!--not rich, who are prime default fodder. They may even be morally eroded. But the important word here is 'suddenly'. For this to be the fault of the borrowers, their character has to have changed between the issuance of the loan and the present. And Brooks invokes things that have been happening since at least the 80's--many the 60's. Sure, ordinary folks may handle credit worse than their forebears--but how does that excuse a banker making a bad loan? That's the banker's only job--the determination of trust and risk.

But one of the the assumptions built into the evaluation of risk is a deeply held belief in America--that things are getting better. Honest, hard working Americans will make more money as time goes by. It's a deep belief in American Progress--deep enough to be called the American Dream. A banker factors that in at a basic level: that trustworthy client of good character, and education and skills will, if not grow richer, then at least maintain his or her level into the future. And why? Because the Financial Climate--aka America--will provide.

But the ugly fact is that the Climate has changed--over the time-frame Brooks is banging around in. Middle class income has been flat--and middle class uncertainty has gotten worse and worse. Career paths are more and more jagged, even as the perils of income interruption get greater. A whole generation is poorer than their parents. This has been obscured by a number of factors--technology, women in the work force, and the very explosion of credit in a rather insane feedback loop--but the biggest factor is that people don't want to believe it. Neither the borrowers nor the lenders.

So there's a little bit of each of the five: people make irresponsible credit decisions--but based on an optimistic financial climate no longer warranted. Bankers make the same stupid mistakes--based on the same la-la-la-I-can't-hear-you optimism. And banks, for a variety of reason, ratchet up the risk acceptance to ever higher levels. 

My main quasi-philosophical point is that an economy, a culture, and a nation built on credit is not morally reprehensible--or morally anything. The coherence and workability of an economy, society, and nation built on credit is dependent, however, on a strong backbone of the Principles of Banking: risk, trust, character and climate. It's a backbone with an intelligent spinal cord, adaptable and sensitive .It works, and there's no reason why it should be immoral. It is, moreover, the world we live in.

But the basis of the current crisis is this: the financial climate has changed  in a disturbing way: people who, under the rules of the American Dream, should be able to pay their bills, now cannot. The promised deal has had the terms change radically for the worse. And we didn't want to see it. Now we have no choice.

Brooks, in order to excuse the disastrous shifting of the climate, decides to use criteria that have nothing to do with the world we live in. But a mortgage borrower makes one bad decision that Brooks can tsk over--while a mortgage lender makes thousands of bad decisions. The borrower gets punished devastatingly, moreover--but instead of alignment with the backbone of the contract, Brooks wants to make these morally eroded fools the source of the other side's woes, too.

It's odious--but Brooks is counting on the universal folkloric condemnation of borrowing that everybody shares for it to work. Because the shift that makes the better-educated children of middle-class parents less able to own a home or lead a stable life must be covered up at all costs. They'll defend this shit even at the cost of insulting the electorate and displaying themselves as rich, uncaring assholes.

This tendency will be the death of them yet.