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Mirror, Mirror on the Wall ... Are We the 'Villain' After All?

April 30, 2009 By:
Fred D. Snitzer, JE Feature
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The mind-boggling complexity of the current fiscal crisis, coupled with its real and painful effects on the lives of many Americans, has created the fetid conditions for the emergence of poisonous conspiracy theories and rage-filled populism.

Private citizens who had the misfortune to work for AIG have seen their homes turned into a stop on a bus tour of financial villains. Protesters in London threw computers through the windows of the Royal Bank of Scotland. Members of Congress declared taxing 90 percent of the bonuses paid out to employees of AIG, while Andrew Cuomo, New York state attorney general, in his best imitation of Hugo Chavez, threatened to publicly identify recipients of these bonuses.

Populism degrades discourse; encourages self-righteous anger and class envy; allows people to blame others for their problems; panders to the worst instincts in human beings; and -- if excessive, encouraged and left to simmer -- can lead to violence.

It does not discriminate; it is unthinking, unreflective, and -- because it's so pleasurable -- very hard to give up.

You don't have to be an unrepentant anti-government libertarian to feel a chill at the rage being whipped up in some quarters of the country. You can even be a lifelong socialist, and still feel uneasy with the spectacle of private citizens being singled out for causing the financial crisis, or anarchists chucking computers through the windows of the Royal Bank of Scotland in London during the G-20 meeting.

Most of us, if we were truly honest with ourselves, would admit that we don't have a precise idea as to the cause of this crisis -- or the cure. We see the experienced, super-smart but still-limited human beings in the current administration struggling to bring this crisis to an end, and we sense, intuitively, that at some level they are winging it, trying to control a situation that can't really be controlled but perhaps tempered -- like sailors on the sea, up against an awesome storm that can only be weathered and not defeated.

Most of us, if we were honest with ourselves, would admit to not knowing whether the Obama stimulus plan will work, or if the new TARP plan is a give-away to hedge funds and prominent money-managers, or if the mortgage plan should focus on the reduction of interest rates or the reduction of principal.

We also can't quite determine whether there should be more regulation, less regulation or just better regulation.

But -- oh, my -- do we have our opinions!

We're all like 5-year-olds who endorse the presidential candidate that their parents endorse. Is Chris Matthews for the stimulus plan? Then I'm all for it! What does Rush Limbaugh say about TARP? Then that's my opinion, too!

Indeed, check out the comments section of various economic blogs to see a study in certainty and righteous anger.

Lighten Up!
People are angry; they're not sure why, but they sense that they have a right to be angry. Plus, it's much more life-affirming to shake with rage than to wrestle with doubt; we gravitate toward those who narcissistically shout their opinions, even if they have no idea what they're talking about.

How else to explain Keith Olbermann, Lou Dobbs or Michael Savage? They're all so angry; therefore, they are. And look what it does for their ratings!

We should all lighten up a bit. Not that we don't have reasons to be worried, scared or angry, but we need to recognize the limits of our own knowledge as well as others. And we need to stop seeing in every bump this country encounters the sinister plot of a bunch of cackling, devilish bankers, bent on our total destruction.

No doubt there were some greedy individuals who thoughtlessly ratcheted up the risk of the firms they were working for, but many increased the risk because they thought, as did many of us, that we had entered a period known as the Great Moderation, in which risk had been tamed, using clever securities that made everyone better off.

They were wrong, and their errors have had serious consequences. But this doesn't mean that they're necessarily evil.

Many people messed up. But in some cases -- and maybe in most -- people messed up not out of a desire to bring on the worst financial crisis in 70 years, or to wreck the savings and 401(k)s of innocent Americans.

As another example, take the statisticians at our rating agencies, like Moody's or Standard and Poor's, who bestowed the AAA ratings on securities holding subprime mortgages. They used computer models to judge the probability of default on mortgages; the model spit out data that purported to tell them how many homeowners might default in a certain part of the country.

Using these models, the statistician looked at one of these CDOs -- collaterized debt obligation -- and said: There is a 95 percent chance that only 2 percent of the homeowners whose mortgages make up this security will default.

The data they fed into these models was based on the past, when home prices only rose and never fell, when lending standards were more stringent than what happened from 2002 to 2007, when home buyers weren't flippers looking to make a buck -- and before the ravenous and insatiable egos of Wall Street feasted on the mortgage-securitization craze.

Mistakes Made
So, the ratings agencies made some terrible mistakes. But who made that mistake?

Was it some evil, pernicious master of the universe, cackling with glee as he brought down the system?

No, it was probably a nice, pleasant person with a skill in statistics. He or she was probably getting a reasonable but not excessive salary working at a place like Moody's.

But this is letting us off the hook; we feasted on the party, too.

We, the consumers, all across the United States, gorged on low interest rates, no-doc loans, no-income loans, adjustable rate gizmos and the like.

We should check these impulses of revenge, anger and envy. Left unchecked, they will boomerang back to us, and we will be sorry that we indulged the worst -- and not the better -- part of our nature.

Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates. He can be reached at: fred@prudentmanagement.com.

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