Michael Lewis (of Liar's Poker fame), has an "investigation" in August's Vanity Fair that purports to identify the source of the crash of the global financial system.
I'm sure he knows of what he speaks, but the answer he comes up with, while not untrue, seems to me to be completely irrelevant and ultimately misleading in very important ways.
Lewis tracks down the traders of A.I.G.'s infamous Financial Products unit (including Jake DeSantis) and asks them who they think was at fault. Incredibly, he's the first reporter to have successfully tracked them down and talked to them.
Long story short, they unanimously blame Joe Cassano, who became head of AIG FP at the end of 2001. He wasn't a mathematician like his predecessor but he was a very accomplished bully. He made changes in the type of risks the company ensured without understanding the implications of what he was doing. Insecure among his math whiz traders, he demanded total obedience and total control, squelching not just disagreement and criticism but even discussion. He ran his unit of masters of the universe on brute fear.
Now, as much as the next person I enjoy spectacles like Rep. Alan Grayson cross-examining current AIG CEO Edward Liddy ("Mr. Liddy, you said before that there’s 20 or 25 people who were involved in the credit default business. What are their names, please?"). But it seems to me that an approach like that and like Michael Lewis takes in tracking down a culprit in this article are dangerously limited and misguided.
As I mentioned yesterday, I think Americans are culturally conditioned to look at things in an individual way that blinds them to the larger systematic forces arrayed against them.
The questions Lewis asks are not bad for a start:
So how come most of the senior management at A.I.G. was left in place by the U.S. Treasury after the bailout? Why were officials, both public and private, so intent on leading others to believe all the losses at A.I.G. had been caused by a few dozen traders in this fringe unit in London and Connecticut?...
Nearly a year after perhaps the most sensational corporate collapse in the history of finance, a collapse that, without the intervention of the government, would have led to the bankruptcy of every major American financial institution, plus a lot of foreign ones, too, A.I.G.’s losses and the trades that led to them still haven’t been properly explained. How did they happen? Unlike, say, Bernie Madoff’s pyramid scheme, they don’t seem to have been raw theft. They may have been an outrageous departure from financial norms, but, if so, why hasn’t anyone in the place been charged with a crime? How did an insurance company become so entangled in the sophisticated end of Wall Street and wind up the fool at the poker table? How could the U.S. government simply hand over $54 billion in taxpayer dollars to Goldman Sachs and Merrill Lynch and all the rest to make good on the subprime insurance A.I.G. F.P. had sold to them—especially after Goldman Sachs was coming out and saying that it had hedged itself by betting against A.I.G.?
But should we really be satisfied if the answer he offers us is Because Joe Cassano was a moron and a great big bully, or indeed if the blame is affixed to any other particular individual? Will the problem at the root of what has proved to be a disaster for millions of people really be dealt with if one individual, or 25, or a thousand, are called out publicly for what they've done or even if they go to prison?
How could one person be allowed to amass so much power over the lives of others, and such a dangerously incompetent person at that?
It seems to me that the answers lie more in the systems approach Pope Benedict takes in his new encyclical:
Economy and finance, as instruments, can be used badly when those at the helm are motivated by purely selfish ends...
Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty...
Today, as we take to heart the lessons of the current economic crisis, which sees the State's public authorities directly involved in correcting errors and malfunctions, it seems more realistic to re-evaluate their role and their powers, which need to be prudently reviewed and remodelled so as to enable them, perhaps through new forms of engagement, to address the challenges of today's world. Once the role of public authorities has been more clearly defined, one could foresee an increase in the new forms of political participation, nationally and internationally, that have come about through the activity of organizations operating in civil society; in this way it is to be hoped that the citizens' interest and participation in the res publica will become more deeply rooted...
The global market has stimulated first and foremost, on the part of rich countries, a search for areas in which to outsource production at low cost... Consequently, the market has prompted new forms of competition between States as they seek to attract foreign businesses to set up production centres, by means of a variety of instruments, including favourable fiscal regimes and deregulation of the labour market. These processes have led to a downsizing of social security systems as the price to be paid for seeking greater competitive advantage in the global market, with consequent grave danger for the rights of workers, for fundamental human rights and for the solidarity associated with the traditional forms of the social State. Systems of social security can lose the capacity to carry out their task, both in emerging countries and in those that were among the earliest to develop... [B]udgetary policies, with cuts in social spending often made under pressure from international financial institutions, can leave citizens powerless in the face of old and new risks; such powerlessness is increased by the lack of effective protection on the part of workers' associations...
And so on.
Will we be satisfied with the old, simple, misleading answers (He did it!) or will we press harder to insist on more difficult answers that will involve real change and a real rebalancing of power and knowledge away from corporate interests and into the hands of citizens?