Scaling Risk and Political Decline – Or the Triumph of the Dark Lord Sauron

van-gogh-corridor-in-the-asylum-1889The arc of my two previous posts has been to explain the relevance to our modern condition of the jeremiad, the Puritan sermon form assailing human declension from the high and exacting standards of God and of the original demands placed upon a covenanted people. In my previous post, I introduced the ideas of Nassim Nicholas Taleb as the most powerful and relevant jeremiadic indictment of institutions, behavior, and practices of mind shaped in a post-Christian nation in which technology has displaced Jesus as the vehicle of our salvation or our damnation.

In this essay, I extend the prior threads of my argument from Wall Street and finance into Washington, DC and politics. Taleb does not delve into politics, perhaps because it is too akin to stepping into a sewer, perhaps because he knows that power truly sits in Wall Street, and so Washington is simply a waste of time. However, any narrative of decline cannot evade the instruments of government. Nor can it elide the underlying mechanics of political dysfunction.

Taleb’s central argument is that financial professionals on Wall Street benefit enormously from both a rigged (if explosively rigged) system and luck. However, these professionals are probably the least introspective class of people and so the ones most likely to assume their extraordinary compensation reflect their uniquely vital and irreplaceable brilliance.

Similarly, politicians (and a new phenomenon – the celebrity politician) also assume their fame validates their superiority, conveniently forgetting the massive correlation between luck and success. Donald Trump conveniently exemplifies how celebrities confuse effect (that they rise to national prominence) with cause (that they might not actually have anything meaningful to contribute to national discourse and their pheromones might more plausibly explain they reason they were “chosen”). Of course, politicians, like financial professionals, routinely take credit for events that have nothing to do with anything they have personally done.

Wealth inequalities have appreciably widened in the past 30 years. If democratic politics are designed to protect the weak from the powerful, in last 40 years, changes in politics have led to a social inversion, in which politics now protects the powerful from the weak. Income inequality is only the most prominent result of this inversion. Scaling risk (financial and social and environmental) is a less-noticed consequence of the servitude of the politicians to the powerful. But however we spin out these dark threads of regression, there is no doubt that the United States, with its dreams of freedom and reinvention, has now regressed unapologetically to the social assumptions of an ancien regime.

Politics and Scaling Risk

Finance is about money. Politics is about power. Neither can exist without the other. Together, they undermine democracy, inexorably and sometimes fatally. But democracy also cannot exist without both. For years, some semblance of social progress could occur – fitfully – because a basic legal-regulatory framework held the financial system in check. The term “banker hours” meant something through the 1970s. One reason bankers could tee off at 3:00 PM was that they did not have very much to do at work. Banking and securities laws dating from the 1930s limited the scope of banking activity, and the risks bankers could take.

For Taleb, limitations on things bankers could do – such limitations designed precisely to prevent risk that exceeded the goals of the system (those goals being, say, to promote home ownership or national markets for non-derivative equity and debt securities) – made our financial system robust. In simple short-hand, the Glass-Steagall Act (all 38 pages of it), separating commercial banking and investment banking functions, made our financial system robust. Boring, yes, but functional and stable and not inclined to explode with unforeseen, accelerating, and catastrophic consequences. Put another way, robustness is nothing more than insurance. Robustness is the Federal Deposit Insurance Corporation. With sufficient reserve requirements.

Starting in the 1970s, everything changed. We began to witness a 40-year assault of the wealthy on everyone else. Multiple, intertwined stories thread this narrative. (1) The destruction of labor unions wiped out one important countervailing source of resistance to the rampaging revolution of the rich. (2) The U.S. Chamber of Commerce emerged as a hidden, yet immensely powerful advocate for institutional deconstruction. (3) Unfettered campaign contributions generated 24/7/365 campaign cycles, with politicians entirely pocketed by major industries. (4) Financial and commercial deregulation and technological instrumentation (data-driven fund-raising; implementation of new technologies that supported high-speed trading; creation of synthetic securities; and globalization of capital flows) created risk without transparency or any capacity to manage unforeseen consequences. (5) Accumulation of mountains of wealth alongside massively scaling risk provided conditions for multi-trillion-dollar debt, the idea of the sovereign nation-state backed by the full faith and credit of its financial commitments in tatters, and an empathically chill winter upon us, the nation unable to support the basic survival needs of its poorest and most vulnerable citizens. (6) All enabled by the instrumentation of the God Technology and the meltdown of political institutions as meaningful, credible vehicles for balancing interests, harmonizing differences, and distributing rough justice. (7) Leaving us with blithe disregard, generally, for catastrophic risk in the fundamental choices we make: (a) To go to war to serve the interests of nation-building ideologues; (b) To deconstruct our market institutions so banks can bundle and sell spurious assets without limit; (c) To plunge catastrophically into debt at the expense of our children so we can bail out the wealthy and powerful; (d) To dismantle civil liberties (speech, privacy, and due process) enshrined in the Bill of Rights; (e) In sum, to put the interests of the first before those of the last.

Class warfare? Fuck yeah.

The End of the Utility Model of Financial Services

Let’s start with financial deregulation, which business elites systematically orchestrated beginning in the 1970s and which legitimized future deregulatory initiatives. And let’s make a point now that bears repeating without limit – there is absolutely no correlation between support for deregulation and political party affiliation. Lobbying, which is mostly about promoting deregulation (or tax dodging), is entirely equal opportunity when it comes to Congress. When it comes to campaign finance, Democrats belly up to the trough with gusto equal to that of any Republican.

So when regulation of basic industries fell, it fell hard because the voices defending regulation were alone in the forest. The deregulation of the thrift industry in the late 1970s and early 1980s created the precedent for the general collapse of regulatory oversight over the next 30 years. What is significant about the deregulation of the savings and loan industry was that an industry that had essentially functioned as a regulated utility with the goal of promoting housing and home ownership now became an industry about making money for the thrifts themselves.

Between 1980 and 1982, a menu of legislation transformed the thrift, creating the pyre that ultimately consumed them (the Depository Institutions Deregulation and Monetary Control Act of 1980, the Economic Recovery Tax Act of 1981, and the Garn-St. Germain Depositary Institutions Act of 1982). The ultimate impact of this legislation was that by 1982, thrifts desperate to generate new revenues had the freedom to make consumer and commercial loans (not just mortgages), apply more lenient accounting rules, eliminate restrictions on the number of stockholders, issue credit cards, and invest up to 20 percent of their assets in commercial real estate. Most important, the legislation allowed thrifts to sell off their mortgage loans to investment banks.

We all know where that led. For the next chapter in this sordid tale, please read Liar’s Poker by Michael Lewis, (in which we meet mortgage finance godfather, Lewis Ranieri and the fallen angel of Greenwich, Long-Term Capital Management’s own John Meriwether). Glass-Steagall had essentially encoded into our collective consciousness a utility model of financial services since 1933. Gramm-Leach-Bliley officially repealed the Act in 1999, but in truth it was essentially dead by 1980. In the absence of this utility model of regulation, with inmates such as Ranieri and Meriwether now guarding the asylum of financial services, risk spiraled out of control. Michael Lewis of course also chronicled the devastating outcomes of this financing risk spiral in The Big Short.

Enter the Dark Chamber

The repeal of Glass-Steagall in 1999 was a political act, orchestrated by many business actors, and emblematic of the transformation of politics from 1971 through 2016 (other evidence of this transformation – compare Glass-Steagall at 38 pages to the Dodd-Frank legislation, designed to stabilize the financial regime after 2008, at 2,300 pages). In an essay published several years ago in The Nation, Bill Moyers isolated and cast a spotlight on key elements of this political transformation by focusing on a hidden yet rapacious power grab by the U.S. Chamber of Commerce. I will only summarize the key points of the narrative. You can read the entire essay for the gory details. But here’s the gist, staring with some lobbying numbers, and while the numbers date only from 1998, they distill the view at the end of the triumphant march, when, by 2008, the Chamber of Commerce had become entirely the master of its universe, the unchallenged hinge of power in Washington, DC.

In 1998, the U.S. Chamber of Commerce reported lobbying expenditures of $17 million, well behind the leading corporate lobbyist, tobacco company Brown & Williamson (at $24.9 million). These numbers remained essentially constant until 2002, when the USCC suddenly doubled its spending to more than $41 million, now exceeding by more than 100 percent the next most prolific lobbyist (the American Medical Association, at $15 million). In 2006, the USCC took another quantum leap, with lobbying expenditures of nearly $73 million (by contrast, number two lobbyist AT&T spent only $27 million in 2006).

Since 2008, with the election of Barack Obama to the presidency, the USCC has simply gone dope, with lobbying expenditures totaling more than $854 million, averaging $106 million annually (versus annual average spending of $37 million in the previous ten years). We can particularly witness the impact of recent USCC lobbying patterns during election years – where in each of the four election years since 2008, the USCC has spent more than the next four largest spenders combined (notably, even at peak annual spending levels in 2012, all of organized labor spent only about one-third of the money on lobbying as the USCC).

These lobbying numbers are like the credits rolling at the end of a scary movie. Since the early 1970s, the U.S. Chamber of Commerce has systematically organized and executed long-range plans to seize control of U.S. political institutions. The USCC has waged a war of ideas via think tanks and legal foundations. They have saturated interest groups and elected officials with money. They have forged a visionary plan based on the promotion of an integrated, singular ideological agenda and propaganda machine, alongside the cultivation of massive networks of ties to leading figures in major political institutions – all with the aim of stripping government of its regulatory mandates and reconstructing unfettered corporate power as it existed prior to the New Deal. Don’t take my word for it. Go to their website. It will scare the shit out of you.

In this same period, wealthy individuals, led by former Nixon treasury secretary William Simon, began to funnel their wealth back into the political system, supporting right-wing institutions such as The Heritage Foundation and the Cato Institute, funding lobbying initiatives, and pouring money into campaign coffers. Most recently, as fulsomely described by Jane Mayer in the recently published Dark Money, the Koch Brothers have epitomized this private, secretive insinuation of individual power into public political institutions and processes.

The impact of oil fortunes, insurance fortunes, banking fortunes, manufacturing fortunes, agribusiness fortunes, defense technology fortunes, media fortunes, legal fortunes, and physician and hospital fortunes has generally and vigorously) permeated national political life throughout the past 40 years. With the Citizens United decision, the Supreme Court fully blessed these efforts to plump up politicians with cash like athletes juiced on steroids. Should it now surprise us when the politics we witness in Congress resembles nothing so much as roid rage?

As a result of this third party in the room – the lobbyist, the bundler, the guy you can’t escape from, who is constantly whispering in your ear, let us call him Grima Wormtongue – elected officials face profound structural impediments to governing – the need for money and the impact of lobbying. What this means is that the self-selection of candidates becomes a twisted, dysfunctional process, because the only people who would want, under these circumstances, to run for elected office and then serve in elected office, are all too often craven, self-serving, and delusional.

But it is too easy to dismiss Tea Party minions and Trump supporters – and those whom they elect – as village idiots and leave it at that. Too much remains unexplained regarding the pervasiveness of the corruption across party lines. The individuals themselves may not be personally corrupt – but they inhabit a system that requires them to accept corruption as the first principle of governance. So what was once – barely – an honorable profession, or one that at least allowed for the opportunity to aspire to honor and nobility – now leaves elected officials writhing on the floor like molten half-humanoids whose faces have been ripped off but who somehow have preserved the crease in their trousers and the knots in their ties.

Debased Speech and Scaling Risk

So that is where we are. The emergence of the Internet, social media, cable television, right-wing talk radio, and the collapse of print journalism in the last 25 years have catastrophically debased political language in the United States. Non-risk scaling politics depends on thoughtful, deliberative, coherent, meaningful speech. But none of our story-telling institutions promote this kind of measured, idea-driven discourse. Instead, we hurtle through a maelstrom of disjointed words and images, and speech as the currency of our conduct and our character collapses into incoherence.

How does the misuse of language and of speech contribute to the problem of scaling risk? Micro-blogging platform Twitter has become the communications vehicle of choice for nationally elected politicians, which alone is pretty embarrassing. The problem of debased speech extends well beyond Twitter, however. The election horse race is now the center of attention in politics, for the politicians as well as the voters. Legislation, itself, has been outsourced to the lobbyists (largely so the legislators can attend to their election campaigns)! We care about these endless campaigns. Far more than we care about the legislation churning through Congress that affects our lives in enormously more profound ways. We care because the campaigns have become the ultimate reality show.

But here’s the problem. Modern political campaigns are ultimately about words, and not just any words, but words that are lies. Almost by definition, campaigns are one of the most artfully constructed, filigreed latticework of falsehoods you can imagine. And when politicians and talk show hosts and Sunday morning television pundits and cash bundlers and lobbyists are all lying up a storm about matters of actual importance, risk scales like nobody’s business.

In the end, managing risk is about being honest and practicing skepticism and telling the truth to the best of one’s ability. If one wants to measure the health of our political and financial systems at any given time, all one has to do is ask this question. Are the institutions that are managing vast quantities of risk fundamentally committed to telling the truth?

Epilogue: Umberto Eco’s Antilibrary

Taleb famously wrote about Umberto Eco’s library of 30,000 books (he has a second with 20,000 books) and somewhat brutally herds those foolish enough to examine the library, or even the concept of a library of this enormity, into two groups – those who would ask Eco, somewhat dismissively, how many of these books he has read, and those who instinctively understand that the majesty of the library derives from the quantity of books Eco has purchased but not read. The difference, of course, is whether one adopts a functional and utilitarian approach to books or an ontological and spiritual approach.

Taleb doesn’t say this, but I will. The fundamental problem with both contemporary finance and politics is that no one reads. And to put a finer point on the proposition, risk would not scale inappropriately if people did read. And to extend this argument even further, technology does a lot to explain this absence of reading. Not just technology viewed as the impact of computers and cell phones and now tablets in our work lives (and personal lives). But technology as a kind of ray gun that annihilates ideas and thought. So we should read and cherish books as physical objects, not as lifeless digital decompressors of meaning.

Here is the political perspective on the problem of robust institutions. We need regulation to have robust institutions, and regulation requires thought, judicious review, a process of deliberation that benefits from shorter work days, less time campaigning and fund-raising, and more time given to active thought based on active reading. If I were to create more robust political institutions, the first rule I would make is to require each congressional office to reserve a room for a library. The second rule I would make would be to require each member of Congress, and their staff members, to reserve one day a week to read.