[xmca] US discovers capitalism doesn't work

It seems to me that we ought to mark here the events of the past week in the
US, as they throw light on the kind of social reality in which many of us
live. I'm certainly no economist, but this is what I think I've figured out
so far.

A bunch of smart bankers figured out how to turn debt, especially mortgage
debt, into a commodity. They arranged to package it and label it as high
quality, with some dubious auditing. They arranged to market it to
individual and corporate investors. And then they set about mass producing
this new commodity, by exploiting the people whose debt they could purchase.
They advertized easy credit to naïve would-be home owners. This pushed up
house prices, but this was fine because it created more demand for mortgages
and these loans were for higher amounts, so the size of the debts was doubly
increased. They sold credit with one hand while with the other hand they
sold the debt this created. A win-win situation, seemingly.

Several things went wrong at the same time. The price of housing got so high
that the demand to buy it dried up. The mortgage contracts turned out to be
so grossly exploitative that the people bound by them were simply squeezed
dry. So the value of the new commodities fell into doubt, and the banks
found they could no longer sell them. They were over-stocked with goods that
were no longer wanted, and overnight a vast amount of value simply
disappeared. The banks woke up to discover that they could no longer pay
their own debts, to one another, to industry, or to investors. The country
woke up to find their savings disappearing, their currency falling, their
homes not worth what they paid for them, their credit revoked, and their
jobs on the line.

So now the federal government has stepped in, and will buy these unwanted
commodities from the banks for a total of perhaps $500 billion. The banks
will get real cash in its place and will be able to do business again. The
government will hope to squeeze some value from the mortgage holders,
presumably on less onerous terms, in order to get something back for its
purchase. The wheels of capitalism will turn again, and the crisis may be
over.

This at least is the picture that is now visible, on the basis of data
collected by government agencies and reporting by the media. But the
participants in all this were able to see only a small part of what they
were doing, and understood what they saw only poorly. Part of this was
wishful thinking and deception, but it was also a result of the positioning
of the various actors and the ways capitalist economies take on a life of
their own, escaping both the needs and the intentions of we who inhabit
them.

It's a fascinating situation, enough for a dozen good dissertations.
Alexandra Michel and Stanton Wortham, who were at ISCAR, are publishing a
book based on their study of the contrasting cultures of two investment
banks. I hope they will extend their work to include what is going on today.
To me it would be especially interesting to explore the psychological
dimension – how desires are created and manipulated, how perceptions of risk
and probability are changed, how people act in a time of such instability.
But it also shows how modern society, civilized and modern and advanced, is
a house of cards.

Martin
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Received on Sat Sep 20 11:25 PDT 2008