Really, those senators should have known better.
We all remember the arguments they made at the time: the government has no role in people’s bedrooms. Family bonds are too important for government meddling. Heads of households everywhere live in constant fear of meddling bureaucracies. As a result, Americans on both the right and the left found their reasons to support the new law; is it any wonder that the bill won 90-8 in the Senate, and with a 300 vote majority in the House?
So the Ramm-Bleech-Lyin bill passed in 1999, effectively decriminalizing incest between consenting adults—and more importantly, “near-adults”. Oh, sure, some sexual practices remained illegal and prosecutable: children under the age of 13 were right out, and most Northern states looked upon the practice unkindly if either party ended up worse than bruised. But by and large, the law seemed to be a boon for all, supported by pro-family groups and civil libertarians alike.
Reports of sex crimes and rape dropped precipitously in all states, which was clear evidence that actual crimes had dropped—what better data could we have had? And when Jamie, the pseudonymous 17-year-old, became a national media sensation with the publication of her memoir in 2005, all of us enjoyed the humorous debate which ensued. Can anyone forget the national argument we had to redefine “jailbait”? Only the most extreme feminists and fundamentalists had trouble with her story of trading oral favors with her stepfather for her shiny new car. She even made a brief career out of her notoriety.
Who could have guessed that, ten years later, a wave of revelations would hit the news, telling us—well, more like alleging, really—that so many of these sex acts with teenagers over the past several years were really not consensual? That, in fact, we had made changes to the law which were damaging to America’s children and families?
Most of us, of course, are quick to refute this allegation—who among us has not benefited, at least indirectly, from the new legal regime? Hence the national outpouring of sympathy for “John”, the unfortunate Connecticut man who has become the poster child for retroactive criminalization:
I know that many people think that I should have stayed away from my daughters. But after my wife left a few years ago, after she found me with Stephanie, what else was I supposed to do? I’m a man, for Christ’s sake. It’s only natural to be attracted to young people. So I can go out looking for it elsewhere, or I can get it at home. What would you do?
And, after all, can we blame John? What he did wasn’t illegal, and had immediate short-term benefits for all concerned… or at least, John can be excused for thinking so.
We all know we are a nation of laws, not men. That’s because, obviously, if the law doesn’t criminalize the behavior, we can expect no better of each other than to act like beasts.
This was inspired by this NPR debate, after which 60% of the audience of New Yorkers voted in favor of the premise that Washington is more to blame than Wall Street for the financial crisis, on the grounds that the regulations had been repealed, and therefore no one should expect anyone to have acted any differently.
No time to review the debate now, so I’ll just offer some offhand comments: the question itself still doggedly suggests that we MUST find someone to blame for this, and that someone MUST fall into a particular group or demographic. After all, if blame is spread around across multiple groups, professions, and income classes, then who in the world can we be furious at? There HAS to be someone to be furious at! What’s a good financial crisis without a clearly defined villian?
Your post is, well, “interesting” to say the least. I’m just going to excuse your random and completely indefensible comparsion of derivatives trading and incest as an over-the-top attempt to make a point, and therefore avoid any kind of revulsion…
You’re missing the point of the satirization. The use of incest to make the point is to ridicule the idea that once something is made legal, it is therefore moral.
The other point you seem to be missing much more consistently: the blame apportions largely to the people who understood CDOs before September, 2008, or who served in a role where they were required to understand them. This isn’t restricted to the private market at all — lump in Congress and Treasury as much as you like. I certainly lumped them in, in my post — those vote totals are the actual results from Gramm-Leach-Bliley.
The logical universe of things:
Set 1: Activities that are both legal and moral
Set 2: Activities that are legal, but not moral
Set 3: Activities that are moral, but not legal
Set 4: Activities that are neither legal nor moral
You seem to be suggesting that since incest is in Set #3, derivatives trading must be in Set #3 as well.
As to your second point, you seem to be suggesting (consistently) that anyone who understood CDO’s before September, 2008 knew what was about to happen. Which is interesting, since that’s almost 100% false.
1. I’m not suggesting anything. I’m deliberately equating incest with risky financial practices. This is the point of satire.
2. Actually, the key to the post is set 2: activities which are legal but not moral. What really pissed me off about the NPR debate was the presumption (and winning argument) that once the law was changed, there was no further onus on any actor to think twice about what they were doing. My thinking, which I mistakenly believe is self-evident, is that there’s a tipping point when the risks get too large, regardless of what the law says.
3. What I’m saying with CDOs, etc., is that insofar as the traders have any social value whatsoever, it’s in their extremely well-compensated expertise.
This expertise is supposed to mean that they know better. And since, as you say, almost 100% of them were caught with their pants down, their fault is, at the very least, the massive incompetence, blindness, and perhaps malfeasance that it necessary for an industry, based on risk management, not to know that they were building to this.
Congress and the Treasury are also among the people who are supposed to know better, so say what you will about their actions.
Your arguments against this theory seem to be saying that the culture and training methods of Wall Street make it excusable that no one took heed of these risks — and insofar as that makes my larger point that there’s something seriously wrong with Wall Street, we’re in complete agreement.
We’re going in circles now, which I can only assume is either my inability to explain it clearly or your unwillingness to hear me.
Future risk is not a knowable thing. The expertise about which you speak is in predicting future risk given current data. The best and the brightest in the world (and I mean that literally – remember, this is not just an American problem) grossly underestimated the risk. From this we can conclude one of two things: either all traders are heartless bastards who should have known (or perhaps did know) and inexplicably allowed their entire world to collapse upon themselves in order to make a few bucks in the 00’s, OR that this risk was unknowable at the time, given the data available.
Occam’s razor suggests that latter. You, Congress, and most of the media suggest the former, and tend to characterize anyone who suggetss the latter as “one of THEM.” You throw around words like incompetence, blindness and malfeasance with complete disregard to the facts (“the weeds”) or the circumstances of the time.
The ultimate irony is that now that this is in the past, we can know the risk, and we can know how it was missed. Again, though, no one wants to hear it, as it might provide a small opening through which the guilty may crawl to innocence.
All of which matters not at all, until we start passing laws to punish people who make more than it’s possible to earn, and then eventually when we start talking about regulations that involve executive comp and corporate jets, rather than trading curbs, reserve requirements and industry-wide risk controls.
These are the real dangers of over-simplification.
The best and the brightest in the world (and I mean that literally – remember, this is not just an American problem) grossly underestimated the risk. From this we can conclude one of two things: either all traders are heartless bastards… OR that this risk was unknowable at the time, given the data available.
You left out option 3: that the system we built deliberately misled people into taking bigger risks than they thought they were taking.
Here’s a simplified example: Alice and Bob are going to play a wagering game. Alice bets $100. 92 times out of 100, she wins $10. 8 times out of 100, she loses the $100 to Bob.
The expected value of this bet is (0.92)(110)=101.2, making it a net positive game for Alice to play. I just set up a brute force script to test these variables: the most consecutive losses I’ve gotten is 4, and the maximum lost principal after a few hundred thousand trials is $550. So if Alice starts the game with $1,000, she’s in excellent shape to make a solid return.
Now let’s change the rules. Alice is now the investor, but it’s Carol who is placing the bets. Carol makes 10% whenever her bet wins, so she increases her bet into a winning streak.
Let’s say the bet increases 1% when Alice wins, and goes back to $100 when Alice loses. I just ran that game a million times, in 10,000 sets of 100. Alice did great — made $133 million. Carol did even better: $520 million.
But if I change the bet increase to 10 percent, here’s what happens after a million trials: Alice loses $17 billion. Her biggest win in any 100 trial set is only $4,600. Carol makes $13 billion. Second million trials: Alice down $32 billion, Carol up $28 billion.
The game is still theoretically net positive, but we’ve turned it into a Martingale — Alice’s losses when she loses will almost always swamp her more frequent wins. Carol, meanwhile, makes out like a bandit regardless on her 1% commission every time she wins.
So — the point of this unexpectedly long digression? It’s my theory that what we’ve done is set up exactly this system, with the odds of an Alice crash set to much lower than 8% — low enough, in fact, that the people placing the bets effectively valued to odds of wiping out Alice to zero. In effect, though, this number was something nonzero.
My reason #1 for blaming Carol in this situation: it’s her job to know exactly what the odds are of wiping out Alice, and not to place any bets that are too big for Alice to handle. But perhaps we can forgive Carol thanks to those sweet commissions. So then we turn to Carol’s boss David, who wrote the rules to the game and sold it to Alice. We can call Carol rather shortsighted, but David’s misfeasance is far worse.
The ultimate irony is that now that this is in the past, we can know the risk, and we can know how it was missed.
Personally, it seems to me that the ultimate irony is that we had plenty of other financial disasters in the past, and we did away with the rules that we passed when those happened on the theory that we were somehow immune to them.
rather than trading curbs, reserve requirements and industry-wide risk controls.
I have two contradictory responses to this:
1) assuming that we come out of this with a system substantially similar to what we’ve had in the past, yes, these are very good ideas.
2) the predicate clause in point 1) is, to me, a very big assumption.