Allan Sloan: Five Myths of the Financial Meltdown

We are about five years and one month past the financial meltdown, when America's largest and most prestigious banks could no longer hide the fact they were in big trouble--and were taking everyone else with them.

Fortune Magazine columnist Allan Sloan recalls:

It's hard to believe, but it's been five years and a day since the U.S. financial system's problems surfaced, and we're still not even remotely close to being able to feel good about the economy. My admittedly arbitrary start date is June 12, 2007, the day the Wall Street Journal reported that two Bear Stearns hedge funds that owned mortgage securities were in big trouble. At the time, things didn't seem all that grim -- in fact, U.S. stocks hit an all-time high four months later. But in retrospect the travails of the funds, which collapsed within weeks, were a tip-off that a crisis was afoot. Problems kept erupting, efforts to restore calm failed, and we trembled on the brink of a financial abyss in 2008-09. Things have gotten better since then, but still aren't close to being right.

There's a long way to go before the economy, and people, recover from wounds inflicted by the financial meltdown. The value of homeowners' equity -- most Americans' biggest single financial asset -- is down $4.7 trillion, about 41%, since June 2007, according to the Federal Reserve. The U.S. stock market has lost $1.9 trillion of value, by Wilshire Associates' count. Even worse, we've got fewer people working now -- 142.3 million -- than then (146.1 million), even though the working-age population has grown. So while plenty of folks are doing well and entire industries have recovered, people on average are worse off than they were. Bad stuff.

Sloan observes that only five years away from these shattering events, myth is already displacing reality (and some people wonder why I distrust the reliability of the gospel accounts of Jesus and such.)

Sloan reminds us of the facts. I'll just list them here. Go read the article.

Myth No. 1: The government should have done nothing.
Myth No. 2: The government bailed out shareholders.
Myth No. 3: The Volcker Rule will save us.
Myth No. 4: Taxpayers are off the hook for future failures.
Myth No. 5: It's the government's fault.

Sloan's article generated reaction. In a follow-up article, he brought out more facts and reasoning to deal with the rabble. First he deals with the cries over Myth #1, the myth that the government shouldn't have done anything:

Dozens of commenters said that cleaning up the mess should have been left to the private markets, which would have done things better than the Federal Reserve, Treasury, and rest of the government did.

What most of those people probably don't realize, though, and what I had no room to discuss in my last column, is that private markets took the first big swing at recapitalizing troubled financial institutions -- and struck out.

Other objectors told Sloan the government should have done something else. He dispenses with this line of thinking, too.

The alternate complaint -- that the government should have nationalized troubled institutions -- sounds plausible too. But that strategy stood no chance of working, regardless of how things played out in other countries. First, seizure would have resulted in endless litigation. Second, there were practical problems. For example, when I looked into the consequences of the government nationalizing Citi, I discovered (from independent third parties) that Citi most likely would have had to surrender lucrative franchises in several foreign countries that don't allow banks there to be owned by foreign governments.

A third complaint made to Sloan dealt with Myth #5, that the government was really to blame for the financial meltdown. Sloan explains why this is bunk:

The other widespread criticism was of my last point: that although the government lowered some mortgage loan standards, the debacle is primarily the private sector's fault. I was attacking the oh-so-convenient myth that private markets are blameless and pure, that the whole problem comes from misguided government efforts to help "those people" get homes they couldn't afford. Many commenters were, shall we say, displeased.

Well, let's see. Most of the bad mortgages were made to supposedly qualified borrowers, without pressure from the government. Lenders required little in the way of down payments or credit checks; they wanted to juice up their loan volume. Credit-rating agencies gave AAA ratings to trash, to keep fee income flowing. Yield-hungry investors snapped up garbage that bore the agencies' imprimatur. Private enterprise all the way.

Sloan closes by reminding all of us just how bad it was five years ago.

Credit default swaps and other esoterica spread the problems worldwide, magnified losses, and put even the soundest institutions at risk. That's because if giant, less sound institutions had failed en masse, they would have defaulted on their obligations to their sounder trading partners.

We also need to remember that for all the criticism (including mine) of particular tactics, Hank Paulson and Tim Geithner and Ben Bernanke bailed out the U.S. financial system at no net expense to America's taxpayers. An impressive achievement.

Instead of a discussion about what happened, we've gotten into a government-vs.-free-market shoutfest. These fragmented days, many people tend to see things in black and white terms, in ways that reinforce what they want to believe. The real world is more complicated than that. Black and white have their places -- but to understand the financial meltdown, you need to see some gray.

To me, the big takeaway is that the financial meltdown was caused and magnified by bad business and poor regulation. And although the crisis was mitigated by cooperation between business and government, we still need lots of partnership, transparent decision making, and cool-headed leadership on both sides.

We need business to step up and we need government to stay involved and proactive.
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Crime Pays: Rapture, Doom, Prophets, and Profits

Doomsday prophet Harold Camping of Family Radio International says the world will really end (seriously this time, no kidding) on 21 October 2011. But here is all you really need to know:

Camping offered no clues about Family Radio's finances Monday, saying he could not estimate how much had been spent advertising his prediction nor how much money the nonprofit had taken in as a result. In 2009, the nonprofit reported in IRS filings that it received $18.3 million in donations, and had assets of more than $104 million, including $34 million in stocks or other publicly traded securities.

Some types of crime pay very well.

P.Z. Myers points out the real punchline, however:

Sure, everyone is laughing at Harold Camping now, except his followers, who are undeterred. But you're missing the real joke. Look at every Abrahamic religion, with their myths of prophets and favored peoples and fate. Look at the crazy conservative church in your town, that preaches homophobia and anti-science and supports Israel because of the Armageddon prophecy. Look at the liberal Christian church down the street from you that has the nice Vacation Bible School and puts on happy plays for the older kids, and also teaches that one day you will stand before a great god and be judged. Look at your family members who blithely believe in death as a mini-apocalypse, in which they will be magically translated into another realm, again to be judged.

It's the very same rot, the poison of religion that twists minds away from reality and fastens them on hellish bogeymen. They're demented fuckwits, every one, and the big lie rests right on the fundamental beliefs of supernaturalism and deities, not on the ephemera of one crank's bizarre interpretations.

The punchline is not the crankpot huckster like Camping, it's the "normal" huckster at your local house of worship.

Teachers Deserve Competitive Salaries and Benefits

From 1995 through 2002, I taught over two dozen college classes in English. Most of my experience was in introductory composition, but I also taught short-fiction, business writing, and linguistics (my favorite).

I left teaching in 2002 for a non-academic position after a year of adjuncting at a local college and supporting one of the school's programs. In that year, I also worked at another place teaching English as a Second Language to Korean children. Although I taught only a couple of hours per night, the pay rate was significantly higher than the college gig. Neither situation offered benefits. My total annual income was about $28-$32K.

It was a joke, that salary.

After teaching, my first full-time job was $38K per year, plus benefits. I thought at the time that the money was great. What's more, I enjoyed being able to drive from the workplace at the end of the day and not have to continue working into the night. When I taught, I felt mentally and emotionally indentured around the clock with grading, class preparation, conferences, student issues, and school issues.

As I got smarter about the non-academic job market and my own marketability, I moved ahead quickly enough. My salary increases went something like this: 38 -> 41 -> 74 -> 88 -> 95. I pull in low six figures now. I have decent benefits. I work at the office and at home, too, yet I have a semblance of work-life balance.

I recently returned from a trip to my old university, where I had just passed my doctoral candidacy exams. My dissertation director was telling me about how the university was committed to offering at least $50K to new hires in the department. Imagine that, only $50K for a person with a doctorate and a full teaching load.

I left teaching for many reasons. I left academia generally because I didn't see a fast enough path to fair compensation. I wanted to earn what my students would earn. I wanted to have money to buy a home and raise a family. I wanted all of this sooner rather than later.

This is the context from which I read Eggers and Calegari in their NYT piece, "The High Cost of Low Teacher Salaries." Here's the money part (pun intended):

At the moment, the average teacher’s pay is on par with that of a toll taker or bartender. Teachers make 14 percent less than professionals in other occupations that require similar levels of education. In real terms, teachers’ salaries have declined for 30 years. The average starting salary is $39,000; the average ending salary — after 25 years in the profession — is $67,000. This prices teachers out of home ownership in 32 metropolitan areas, and makes raising a family on one salary near impossible.

So how do teachers cope? Sixty-two percent work outside the classroom to make ends meet. For Erik Benner, an award-winning history teacher in Keller, Tex., money has been a constant struggle. He has two children, and for 15 years has been unable to support them on his salary. Every weekday, he goes directly from Trinity Springs Middle School to drive a forklift at Floor and Décor. He works until 11 every night, then gets up and starts all over again. Does this look like “A Plan,” either on the state or federal level?

We’ve been working with public school teachers for 10 years; every spring, we see many of the best teachers leave the profession. They’re mowed down by the long hours, low pay, the lack of support and respect.

I have relatives and friends in the military or on a police force. I respect these professions, but the people in them can be over-the-top with the "respect our sacrifice" lines. Teachers sacrifice every bit as much as soldiers and cops, yet they get no social respect whatsoever.

There's no heroism in a sacrifice you don't make willingly, and so I left teaching as a full-time vocation. Why should I have left money on the table? Why should I have denied myself to a lifestyle similar to that of my peers? Why should I have condemned myself to decades of financial strain? I still teach a literature class at the local college on some mornings, but basically I am out of the profession. Too bad. It's good and important work. I bet lots of our best and brightest would love to teach if the opportunity were made competitive with non-academic positions.

Yes, Virginia, America Is a Banana Republic

Below is a remarkable and unfortunately true speech made recently by Senator Bernie Sanders of Vermont. I wish we had more in government like him.

Time, Money, Money, and Money

I'm spending less time on this blog, mainly because my other one has been consuming my time. Well, that and work.

Work's been major league busy, but add to that my scholarship duties and my ghostwriting and you get one stretched out dude. Speaking of my ghostwriter employer, he finally paid me. I got $500 for a quick-turnaround assignment. I ended up buying about $220 in books for school. And now I am trying to negotiate about $1200 for a new project, half paid up front. I would take $750, but we'll see where he comes in. My bet is that we end up with $650, but we'll see. If I get close to $1000, I'm buying some stuff.