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

September 17, 2013


The 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 adumbrated 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. As I mentioned previously, 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. Wall Street has its Circle of Fools. So does Washington.

As winter descended on New York in 2011, I stood in the rain and talked to people from Occupy Wall Street, only a day after the police had removed any remnant of their encampment. The following day, I returned to Zuccotti Park when OWS attempted to “Rebuild the Block Party on Wall Street”. Not more than 200 of the Occupiers marched up Fulton Street to the beat of a bass drum, surrounded by a phalanx of 500 or 600 police. Occupiers and police alike appeared bedraggled, bored, exhausted. The movement hadn’t so much been crushed or dismantled, as it had run out of steam.

My fondness for Occupy Wall Street balanced my scorn for the Tea Party. The two are spawn of similar experiences of alienation from corrupt political and financial institutions. They could be brothers of a different mother. But while the Tea Party reveled in anti-intellectual, fact-shredding ignorance, the Occupiers embraced a gentle, playful, funky innocence. Newt Gingrich tells Occupiers to take a bath and get a job, but between ignorance and innocence, which would you choose?

OWS connected Wall Street to Washington, Michael Bloomberg to Barack Obama, and finance to politics. This is not a story about partisanship. It is a story about how financial corruption taints both political parties and all national political institutions.

OWS also differed from the Tea Party by introducing the concept of the 1 percent. And through this concept that we can extend Taleb’s ideas from Wall Street to Washington.

Here is the connection. If we focus on who are the 1 percent, and what is it they do, we learn quickly that they contribute nothing of value that justifies their elite financial position. This position is not only unearned, but harmful. While – in the traditional Protestant theodicy – the works are supposed to validate the wealth, in the case of the 1 percent, the equation is reversed and the wealth validates the works. The position, the influence, and the ideas of the 1 percent are all superior because they are in the 1 percent, and by extension, the influence and ideas of the 99 percent are ipso factoinferior.

Perhaps 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 reflects 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. Using Sarah Palin as a convenient example, celebrities confuse effect (that they rise to national prominence) with cause (that they have anything particularly meaningful to contribute to national discourse).

Of course, politicians, like financial professionals, routinely take credit for events that have nothing to do with anything they have personally done. Silicon Valley technologists turned politicians provide recent illustration of political arrogance borne of financial success.

The political consequences of the rise of the 1 percent in the United States are dire and perverse. If democratic politics are designed to protect weak from powerful, in last 40 years, changes in politics have led to a social inversion, in which politics exists to protect 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 this great nation, with its dreams of freedom and reinvention, has now regressed unapologetically to the social assumptions of the ancien regime.

Politics and Scaling Risk

While for a moment in time, the Tea Party and Occupy Wall Street captured the imagination of the national press, those in positions of influence could step back and let these movements run their course, secure in the knowledge that neither political party will cease heeding their masters. For this reason, the issues of risk that afflict decision-making on Wall Street transfer seamlessly to Washington.

Finance is about money. Politics is about power. Neither can exist without the other. Together, they shred democracy. But democracy 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 liked to 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. The destruction of labor unions wiped out one important countervailing source of resistance to the rampaging revolution of the rich. The Chamber of Commerce emerged as a hidden, yet immensely powerful advocate for institutional deconstruction. Unfettered campaign contributions generated 24/7/365 campaign cycles, with politicians entirely pocketed by major industries. Financial and commercial deregulation and technological instrumentation (the impact of computers and data-driven fund-raising; the implementation of new technologies that supported high-speed trading; the creation of synthetic securities; and the globalization of capital flows) created risk without transparency or any capacity to manage unforeseen consequences. And, of course, the accumulation of mountains of wealth (and arrogance) alongside this massively scaling risk provided the 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, with our nation unable to support the basic survival needs of its poorest citizens. 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. Leaving us with blithe disregard, generally, for catastrophic risk in the fundamental choices we make – to go to war to serve the interests of nation-building ideologues, oil companies, and Halliburton; to deconstruct our market institutions so banks can bundle and sell spurious assets without limit; to plunge catastrophically into debt at the expense of our children so we can bail out the wealthy and powerful; to casually dismantle civil liberties (speech, privacy, and due process) enshrined in the Bill of Rights; in sum, to put the interests of the first before those of the last. Class warfare? Hell 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, which is of course why President Obama and key New York legislators such as Charles Schumer and Kirsten Gillibrand have been the leading recipients of largesse from Wall Street.

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.

Consider the menu of legislation that transformed the thrifts prior to the conflagration that consumed them –the Depository Institutions Deregulation and Monetary Control Act of 1980s, 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 the mortgage finance godfather from central casting, 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.

Enter the Dark Lord Sauron

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 2011. In an essay published in The Nation, Bill Moyers isolates and spotlights key elements of this political transformation by focusing on a hidden yet rapacious power grab by the organization known to most as the U.S. Chamber of Commerce, but to the initiated as the Dark Lord Sauron.

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 1999, they distill the view at the end of the triumphant march, when, by 2012, the Chamber of Commerce had become entirely the master of its universe, the unchallenged hinge of power in Washington, DC.

Let's review the history.

  • In 2000, a presidential election year, the U.S. Chamber of Commerce reported lobbying expenditures of $17.6 million, behind the Business Roundtable and General Electric, and representing 8.4 percent of the total spent on lobbying of the other 20 most politically active organizations.

  • USCC spending began to skyrocket in 2004, particularly with the addition to the mix of the US Chamber Institute for Legal Reform (established to limit tort liability of businesses). In the 2004 presidential election year, the USCC spent a total of $54.8 million, 3 times more than in 2000 and 20.1 percent of the total spent by the other 20 most prolific lobbying organizations.

  • In 2008, with the presidential election pitting Barack Obama against John McCain, the USCC increased its spending to $94 million, or 23.6 percent of the total spent by the next 20 most politically active organizations.

  • Finally, in 2012, the Chamber of Commerce simply went dope, with lobbying expenditures of $138 million. This spending occurred in an otherwise down year for large lobbyists compared to 2008, with Chamber hence spending 36.6 percent of the total spent by the next 20 most prolific lobbying organizations.

Put another way, in 2000, the Dark Lord Sauron spent only 1.6 times the average of the 20 next most politically active organizations on lobbying. By 2012, the DLS was spending 8 times as much on lobbying as it did in 2000, which also amounted to a spending rate more than 7 times the average of its largest lobbying peers.

These lobbying numbers are like the credits rolling at the end of a scary movie. The Chamber has systematically dispersed their 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.

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, the Koch Brothers have epitomized this private, secretive insinuation of individual power into public political institutions and processes, but 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 baseball players juiced up on steroids. Should it now surprise us when the politics we witness in Congress resembles nothing so much as roid rage?

The Political Circle of Fools

For Taleb, the Circle of Fools on Wall Street accelerate and feed our addled propensity to indulge in enormously risky behavior with cataclysmic impacts (risky and cataclysmic for everyone except those among the 1 percent who create and promote these risks). We can apply exactly the same structural model in Washington, DC, with an analogous circle of fools comprised of experts (lobbyists and funders), practitioners (elected officials), and pundits (the story tellers). Perhaps the most important consequence of the insular power wielded by this D.C. Circle of Fools is the debasement of language, which is the common currency of our democracy. More on this shortly.

Experts. On Wall Street, the experts are the social scientists, economists and statisticians who evince the purblind characteristics of “epistemic assholes”. In DC, the asshole mantle falls upon the lobbyists and campaign finance cash bundlers. Is the US Chamber of Commerce too vague and generic to incite your wrath? Trust me, that is just fine with them. However, if you need a more porcine representation of corruption gnawing its way through our political system, you can always consider Karl Rove.

The point is, whichever way you spin it, the influence of lobbyists and campaign contributors have become so pervasive that they have literally sucked the air out of the corridors of power. Truly, this is the impact of the 40-year assault of the lobbyists and the donors. They have destroyed the cornerstone of representative democracy, which is deliberation.

As Al Gore has described the situation, “The influence of special interests is … to the point where it’s virtually impossible for participants in the current political system to enact any significant change without first seeking and gaining permission from the largest commercial interests who are most affected by the proposed change.” The “interests” are so fully in the room, there is no way to breathe, to establish relationships organized around conversation and deliberation, not tied directly and solely to expedience and cash. With the loss of deliberation, and the capacity for enduring coalition-building, we are left only with partisan walls, which partisanship, as we shall shortly see, has nothing to do with ideas and is simply about a cash grab.

Scaling risk in politics exists precisely because no major differences exist between Democrats and Republicans. The revolving door between public officials and lobbyists draws equally from both parties. No meaningful framework for deliberation exists that can delineate responsible governance itself as a risk management practice. David L. Cohen is the former political strategist for former Philadelphia mayor and Pennsylvania governor Ed Rendell. He is presently Executive Vice-President of cable titan Comcast. He is a lifelong Democrat and his primary job is to raise money for Democrat politicians who will serve the interests of his employer. Comcast appreciates Cohen. In 2012, he received compensation approaching $16 million. At a recent fundraiser at Cohen’s house, President Obama thanked “Rhonda and David for not only hosting this incredible event but also just being great friends for so many years.” Oh, and by the way, the attendance at the dinner only required contributions of between $10,000 and $100,000.

Practitioners. 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 an entirely twisted process, because the only people who would want, under these circumstances, to run for elected office and then serve in elected office, are craven, self-serving, celebrity whores. It is too easy to dismiss Tea Party minions 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 power ties. That is where we are.

Story Tellers. 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 our political language. 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 characters collapses into incoherence. And it is a problem intentionally perpetuated and sustained by the Circle of Fools, because their interests lie, not with legislation, but with the debauchery of the modern 365/24/7 election campaign cycle, a cycle fueled not just by cash, but by tsunamis of mind-numbing rhetoric (if one can call it that), the entire purpose of which is to short-circuit the brains of candidates and voters alike.

How does the misuse of language and of speech contribute to the problem of scaling risk? It is not merely that Twitter (the most moronic invention of the 21st century) has become, of all things, the communications vehicle of choice for nationally elected politicians, mostly mummified men in their 60s and 70s who are texting like fiends into their phones while sumultaneously and secretly permitting the NSA, FBI, and DHS to mine everything we publish via our cell phones, email, and other social media applications.

The problem of debased speech is much greater than 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. Even Nate Silver, who is in many respects Taleb’s peer in his knowledge of and respect for rigorous, data-driven modeling, would still be crafting baseball performance metrics if not for the vastly more massive size of the audience for daily data updates about the Iowa Caucus. Quite simply, Silver lends credence to the horse race because it is the most convenient vehicle for the application of his methods and it earns him a lot of money – he, too, cashes in on the campaign carousel. 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. Campaigns are ultimately about words, and not just any words, but words crafted to seduce and deceive. 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 pundits and cash bundlers and lobbyists are all lying up a storm about matters of the utmost import, risk scales likes 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 writes 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. I propose that the fundamental problem with both 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.