The Plural of Anecdote Is Bullet Point

Giovanni Tiepolo, The Glorification of the Barbaro Family, ca. 1750

Who have you offended, masters, that you are thus
bound to your answer? this learned constable is
too cunning to be understood: what’s your offence?

— William Shakespeare, Much Ado About Nothing

I suppose I should feel bad, Dear Readers, that Famous Economist and Man About Town Tyler Cowen had to interrupt his gustatory survey of Oaxacan tamale stands and their culinary influence on Ethiopian Yirgacheffe coffee growers recently in order to phone in a brief but blistering PowerPoint takedown of my recent critique of two paragraphs of his work. After all, who am I, an obscure, tendentious, financial parasite and peanut gallery denizen, to deprive the grateful masses of even one iota of Professor Cowen’s penetrating insight into all things economic, cultural, and quotidian? He is already famously cutting into his enormous backlog of polymathic munificence in order to mount a sustained, comprehensive attack on creeping inequality-ism being foisted upon an unwitting public by that current media darling and French Communist pest, Thomas Piketty. The last thing he needs is to take even ten minutes of his precious time to dash off crushing telegraphic responses to putzes like me. For shame, ED, for shame. Fie upon me.

But since he did, I suppose it would be the height of irresponsibility and moral turpitude for me not to reply, howsoever briefly I am able, in kind.¹ I wish for your benefit as well as mine, O Long-Suffering Readers, that I knew what the hell he was talking about.

* * *

Since Professor Cowen addresses my cheeky presumption with his famously Delphic and opaque bullet points, let me follow form:

1. He opens his piece with praise for my writing skill. Since this is a compliment, I should thank Professor Cowen, although I suspect it belongs rather more to a species of damning with faint praise—or praising with faint damns—than genuine appreciation, given what follows. Nevertheless, I will plumb the depths of my magnanimous soul and take it at face value. Thank you, Professor.

2. He blasts my piece as blinkered by my “framing of the problem in terms of inequality and inequality alone.” He claims I have, in his own scare quotes, “inequality on the brain.” This I find odd for two reasons:

3. One, given that my original response was to a two paragraph tangent in a lengthy review and critique by Dr. Cowen of Thomas Piketty’s Capital—a work the fundamental premise of which, arguable or not, seems to be universally agreed upon by everyone in Western Civilization and beyond except Tyler Cowen to be the history, causes, and effects of unequal distribution of wealth in capitalist society—I would pose the key question: What the fuck are we supposed to be talking about when we talk about Piketty? Isn’t that the entire point of the culture-wide discussion we seem to be having about this work? It’s like he blasted me for having Plato on the brain while discussing The Republic. I don’t get it.

4. Two, my original reading of the Tyler Cowen passage in question interpreted his remarks to say that certain 19th Century (primarily visual and literary) artists benefited and were able to pursue their work by virtue of inherited wealth or the support of bequests and wealthy family members. His “static blocks of wealth” promoted, in my terms, “cultural dynamism,” which, in the context of his remarks, seems to carry positive connotations, howsoever he fails to explain or describe what he means by it. He seems to chastise Piketty for overlooking that wealth can promote artistic and intellectual activity which enriches society at large. Upon careful rereading, I cannot perceive that my reading of this passage is notably idiosyncratic or egregiously wrong. And yet I challenged it, claiming, inter alia, that

• Cowen never defines what he means by the dynamism he claims for 19th Century European society, and how these artists and their like promoted it. Cultures can be rich, complex, and lasting without exhibiting qualities which the average person would claim to be “dynamic” (viz., Ancient Egypt). Slapping such a label on an entire century without deigning to justify it to the cheap seats is just sloppy argumentation.
  
• Cowen does not justify, by focusing on this particular period of French and European history—presumably to contradict Piketty’s negative characterization of the other socioeconomic effects of increased wealth inequality—why the wealth which purportedly funded these artists’ and writers’ cultural production was particularly notable or different from the sources of wealth and income in different periods of history, when wealth inequality was lower or higher, or why or indeed whether cultural production supported by other peoples’ money in 19th Century France was any more dynamic, complex, interesting, or long lasting than cultural production which has taken place in other, similar or very different (from a wealth inequality point of view) periods of history. (In contrast I claim that, compared to what came before and after, it was nothing unusually dynamic or distinctive from an artistic, literary, or cultural point of view.)
  
• Cowen does not even approach an acknowledgment of the key fact which I assert: that artists, writers, and other laborers in the mines of culture throughout history have almost always been reliant upon monetary patronage of some sort to fund their life and work. This is particularly true of visual artists, with which I am most familiar, and who from time immemorial have mostly carried on their trade in the service of kings, pharaohs, Popes, aristocrats, feudal lords, and other rich and powerful bigwigs who commissioned their work to glorify themselves and the sources of their socioeconomic power. I have no idea whence Professor Cowen derives the assertion my arguments are intemperate, wrong, doubtful, or exaggerated, and he makes no effort in turn to document this, other than to default to an argument from authority (his own, natch) based on five books he claims to have published on the subject. The one book he does cite directly—we may presume to most directly contradict my arguments—does nothing of the kind, arguing principally that market economies and their encouragement of popular culture have salutary effects on high culture. I did not think we were talking about markets, Professor Cowen. I thought we were talking about “static blocks of wealth.” Oops.
  

5. Oh, and while we’re at it, cooking is not an art. Period.

* * *

In fact, if I interpret the opacity of Dr. Cowen’s prose and arguments correctly, we do not now and did not then disagree on one fundamental point: historically, accumulated wealth—whether of rulers, family, or solicitous strangers—has been a huge support to the legions of fine artists, musicians, and writers, and intellectuals who have labored to enrich our culture. With extraordinarily few exceptions, artists have not been wealthy themselves, but rather have had to rely on the kindness of strangers and family to support them as they strive to produce meaningful art. (I am not talking about popular artists, who are another species entirely.)

But this, I would posit to you, is neither an indictment nor an endorsement of equal or unequal wealth distribution. It just is. This is the key point of my previous post, that fine art is fundamentally superfluous and irrelevant to the core activities and economic structures which drive a society. It is a parasite, a lichen or Spanish Moss which clings to the tree of society, lives off it and, if we spectators are lucky, makes the tree more attractive or at least picturesque, without killing it or stunting its growth. Artists will find a way to fund themselves in any society. If artists cannot support themselves, they will find someone else to do so, or they will give up their brushes and pens and get a real job. In many respects, it is easier to be an artist when there are lots of silly rich people around to fund your painting, poems, or plays. In many respects, it is better for culture if there are large, static blocks of concentrated wealth which can be tapped via flattery, boredom, vanity, guilt, or a sense of social gratitude or obligation to fund luxury activities like painting, sculpture, fine music, plays, and the like. Andrew Carnegie’s philanthropic legacy is just one example among many.

But I take exception to the argument, which I sense Professor Cowen is making, howsoever he would squirm to deny it,² that art and culture justify the existence of concentrated blocks of wealth; i.e., wealth inequality. I am a huge supporter of the arts, and I would fight hard to preserve their vitality and dynamism, even at the cost of many other valuable things, like improved economic security and opportunity for broader swathes of society than we seem to accommodate at present. But they must be weighed in the balance, and debated, with a clear eye to the facts, and without prejudging the outcome.

Overall, I think Dr. Cowen’s rebuttal is a good example of how easily and quickly one can go awry by an obsession with justifying the status quo by whatever means necessary. It also shows the drawbacks of a relative unfamiliarity with the actual arguments of your opponent, including for that matter the recent post by Yours Truly.

* * *

I trust Professor Cowen can now put the minor inconvenience of my interference behind him, and resume dazzling us with oracular pronouncements of exquisite incomprehensibility. I would not want to deprive my fellow members of society of this boundless font of cultural dynamism.

Related reading:
Tyler Cowen, 19th century inequality and the arts (Marginal Revolution, May 7, 2014)
Ozymandias at the Art Gallery (May 3, 2014)

¹ You know, of course, if you are regular readers of this site, how completely and utterly I will fail to do so. (Be brief, that is.)
² And if I have misread him, and he is not arguing this, I am arguing against those who would read his remarks to do so. It is not that hard to imagine.

© 2014 The Epicurean Dealmaker. All rights reserved.

Ozymandias at the Art Gallery

Henri Matisse, Interior with Goldfish, 1914

Who is the third who walks always beside you?
When I count, there are only you and I together
But when I look ahead up the white road
There is always another one walking beside you
Gliding wrapt in a brown mantle, hooded
I do not know whether a man or a woman
—But who is that on the other side of you?

— T.S. Eliot, “The Waste Land”

Economist-überblogger Tyler Cowen slips a bizarre digression into his recent critique of The Book Which Everybody Intends to Read Once They Stop Reading All the Reviews Everybody Else Is Writing About It,¹ a.k.a. Thomas Piketty’s Capital:

Piketty fears the stasis and sluggishness of the rentier, but what might appear to be static blocks of wealth have done a great deal to boost dynamic productivity. Piketty’s own book was published by the Belknap Press imprint of Harvard University Press, which received its initial funding in the form of a 1949 bequest from Waldron Phoenix Belknap, Jr., an architect and art historian who inherited a good deal of money from his father, a vice president of Bankers Trust. (The imprint’s funds were later supplemented by a grant from Belknap’s mother.) And consider Piketty’s native France, where the scores of artists who relied on bequests or family support to further their careers included painters such as Corot, Delacroix, Courbet, Manet, Degas, Cézanne, Monet, and Toulouse-Lautrec and writers such as Baudelaire, Flaubert, Verlaine, and Proust, among others.

Notice, too, how many of those names hail from the nineteenth century. Piketty is sympathetically attached to a relatively low capital-to-income ratio. But the nineteenth century, with its high capital-to-income ratios, was in fact one of the most dynamic periods of European history. Stocks of wealth stimulated invention by liberating creators from the immediate demands of the marketplace and allowing them to explore their fancies, enriching generations to come.

Now, I am no economist, and I have not yet read the book either, but my impression so far is that Piketty, if he is criticizing anything, is criticizing the economic stasis and sluggishness he posits attaches to rentier society, as well as deleterious socioeconomic effects he claims significant economic inequality has on politics and society. For what it is worth, economics certainly seems to be the focus of the rest of Professor Cowen’s essay as well, or I am no reader of English prose.

But in medias res Cowen takes a detour to praise the cultural dynamism and productivity of 19th Century France, which he claims results from the substantial socioeconomic inequality of the period. This is a pivot too far.

* * *

It is a pivot too far for several reasons. First, it completely begs the question posed by Henry Farrell:

If you want to argue that Piketty (and other critics of inequality) fail to appreciate how inequality fosters the “dynamic productivity” of culture, you really need to show how culture is more dynamic under high inequality than it is under conditions of low inequality. Otherwise, your argument is beside the point (if all that you’re saying is that high inequality has some cultural payoffs while admitting that low inequality has greater payoffs, your criticism is probably not worth articulating in the first place).

Second, it completely begs the question of comparative cultural dynamism. How “dynamic” was European (French, whatever) culture in the bad old days of inequality in the 18th Century or indeed the modernist period of cultural upheaval, capital destruction, and wholesale collapse of entrenched socioeconomic inequality during the 20th? Was the 19th Century anything special, or was it in fact just another arbitrary division of the calendar superimposed over a self-referential process of cultural development which had endogenous and exogenous sources of extraordinary complexity and diversity? Do we really want to stack transitionalists like Corot, Courbet, and Monet up against innovators like Braque, Picasso, Matisse, the Abstract Expressionists, or even Andy Warhol and start discussing dynamism? Perhaps Professor Cowen better toddle on down to the GMU Art History Department for a short tutorial on Modern Western Art History before he embarrasses himself further.²

Third, I think a careful survey of fine arts and literature for, oh, say the last thirty gazillion centuries would establish that most artists (or culture workers, as Herr Doktor Cowen might like to deem them), have always lived at the edge of personal insolvency and economic irrelevance for most of their productive lives. Artists who have been rich and economically independent during their lifetimes have generally been as rare as hens’ teeth, and often as aesthetically pleasing. (Peter Paul Rubens, banker manqué and factory artist, Jeff Koons, bond trader manqué and factory artist, and Damien Hirst, artist manqué and factory artist, come easily to mind.) In other words, most artists and writers have been scraping by on whatever they can beg, borrow, or steal for millennia. If family bequests or wealthy relations were not at hand, they relied on rich patrons or, failing everything else, garden variety employment. (T.S. Eliot was a schoolteacher, book reviewer, and publishing executive, for example.) The point is, art of almost any stripe is not a profession at which the average schmo (or even average globe-straddling genius) can earn a decent living: somebody needs to support you. For most of recorded history, it has been rich patrons, like the Egyptian pharaohs, the Borgias, or Stevie Cohen. The fact that for some intermittent periods some artists’ patrons happened to share the same DNA is largely irrelevant.

* * *

Lastly, and most importantly, one needs to acknowledge that cultural achievement, dynamism, or meaningfulness—however you want to label or measure it—takes place in a space largely orthogonal to the socioeconomic arrangements, income and wealth distribution, and justice inherent in any particular society. Great art, literature, music, and intellectual argument has often been produced in what most of us nowadays, from the comfortable vantage point of our liberal capitalist democracies, would consider absolute shitholes of society. Ancient Egypt (slavery), Athenian democracy (slavery), Renaissance Italy (everything but slavery, as far as I know), and 20th Century Western civilization (which killed more people through violence and starvation than ever before in history) are shining examples of cultures which produced rich, enduring, dynamic, and productive cultural, artistic, and intellectual legacies. The artists and thinkers who created those legacies often did so with the support and cash of patrons whom progressive thinkers nowadays would like to throw into prisons and lose the keys, if not execute outright.

This makes complete sense, by the way, if you think about it for even a moment. Art and intellectual argument is almost universally a complete luxury, from a societal point of view. People and societies do not want to spend scarce and valuable resources penning poems, composing concertos, painting frescoes, or developing reasoned arguments when they are struggling to avoid starvation, disease, or the cutting edge of their enemy’s sword. Most people don’t even want to think about consuming such cultural delicacies until they have achieved some sort of socioeconomic security and comfort. No wonder artists and intellectuals have starved through the ages: most people don’t give a shit about what they are trying to produce. The ones who do are the people with the resources, leisure time, and egos to satisfy by employing scribblers and daubers to enliven their idle hours. In other words, the very rich.

Now whether our society (or any society) can reach a point of growth and surplus such that more than a tiny minority of driven, obsessive, narcissistic personalities can and want to make a living contributing to the cultural patrimony of their civilization is a question well beyond this writer’s pay grade. But I think it is absolutely irrefutable that great cultural achievement can go hand in hand with staggering social inequality and injustice. From a historical point of view, that is the normal state of affairs.

There is an argument to be made—which I would not make, by the way—that great cultural achievement requires great social inequality to thrive and survive. I think we have had enough recent evidence that this is not true to refute it. But I also think the apologists for increased economic inequality, like Professor Cowen, have a very steep hill to climb in arguing that such cultural achievement justifies the social and economic misery and stagnation which are the primary outcomes of massive economic inequality.

And that, I am reliably led to believe, is the ill Thomas Piketty seeks to cure.

Related reading:
Tyler Cowen, Capital Punishment: Why a Global Tax on Wealth Won’t End Inequality (Foreign Affairs, May/June 2014)
Henry Farrell, Inequality and the arts (Crooked Timber, April 30, 2014)
A Painting Is Not a Refrigerator (October 6, 2012)
Luxe, Calme et Volupté (April 16, 2011)


¹ Yes, I am one of them.
² I mean, I know the guy’s supposed to be a brilliant polymath and all, but Jesus, what ill-informed idiocy. Related: how does an economist define (relative) cultural dynamism, anyway? I’m waiting…

© 2014 The Epicurean Dealmaker. All rights reserved.

Assume a Can Opener

Once upon a time, O Dearly Beloved, a cruise ship carrying a convention of scientists and social scientists collided somewhere in the South Pacific with a floating shipping container full of remaindered Greg Mankiw textbooks. The textbooks had been bound for the newly founded Jack Welch School of Neverending Business in Shenzhou before the container fell off a freighter during a storm. Sadly, the cruise ship foundered and sank to the bottom with almost all hands and passengers on board, with the exception of one physicist, one chemist, and four economists.

Being practical, quick-acting folk, the physicist and chemist salvaged a shrink wrapped pallet full of Principles of Economics (4th ed.) from the open container to float upon in the open sea, where they were shortly joined by one of the economists. The other three economists swam to another pallet floating nearby, which happened to contain Denver Broncos Super Bowl XLVIII Champion t-shirts, and were able to climb onto that. Eventually, the drifting current separated our two little bands of survivors, and a few days later they each washed up on small, isolated atolls about five miles apart.

Upon their atoll, as luck would have it, the three economists found a large cache of perfectly preserved canned food, left no doubt by local fishermen for just such an eventuality. Unfortunately, however, the fishermen had forgotten to provide can openers or indeed tools of any kind to open the food, and of course the survivors had carried nothing off the ship with them but their clothes. After considering the situation, the three economists agreed to separate and come up with solutions to their predicament which they could discuss and agree upon. The economists spent some time wandering the beach in thought. Then they reconvened to discuss their ideas.

The first economist stated that, based on his calculations, the joint probability of the three of them surviving the shipwreck, landing on a habitable atoll in the middle of thousands of square miles of empty ocean, and finding a cache of edible foodstuffs was so infinitesimal they might as well curl up and starve to death, content in the knowledge they had beaten the odds spectacularly so far. The second economist countered that, based on his proprietary DSGE model, the normalized incidence of unopened canned foodstuffs in an economy in equilibrium should comprise no more than 17.2% of all available consumables. He therefore proposed a thorough exploration of the 500 square meter atoll to find the remaining edibles—theoretically consisting of canned goods already opened and uncanned foods edible without the aid of openers—which his model predicted were just waiting to be discovered. The third economist demurred, contending that, even if they were able to find some means of opening and cooking the canned food, eventually the stores would run out and they would starve to death. He argued that expending tremendous amounts of effort trying to extend their lives in the face of certain death was foolish. Instead, he proposed the three spend their remaining days in relative ease and comfort, arguing about Paul Krugman’s latest op ed in The New York Times.

Naturally, being economists, the three could not agree on which solution to follow, so they parted company and went their separate ways. The first economist, true to his word, curled up under a palm tree and waited to die, taking comfort in his distress from the even more unlikely fact he could shelter under a blanket made of Denver Broncos Super Bowl shirts. The second economist set off on an expedition around the atoll to look for the missing food his model predicted. Within minutes, he stumbled into a sinkhole and broke his neck. The third decided that, since he was now alone, going for a pleasant swim would be easier than attempting to discuss a Krugman piece with himself, so he waded into the ocean and was promptly eaten by a large shark.

* * *

Meanwhile, five miles away, the physicist and the chemist killed the fourth economist with a rock, roasted and ate his body over a bonfire of economics textbooks, and waited for a ship to respond to their smoke beacon. After they were rescued, they got married, got tenure, and lived happily ever after.

So who said economists are useless?¹

Related reading:
Bryan Caplan, Try Harder or Do Something Easier? (EconLog, April 16, 2014)


¹ As someone who has made giving advice his living, this kind of nonsense irritates me no end. Advising people to take or forgo risks based on averages isn’t good advice. It’s lazy advice. Good advice includes a clear discussion of the odds of success—or what you think might be the odds (which are normally not quite so clear cut in most instances)—but it doesn’t stop there. You discuss the risks, the odds, and the special talents and resources your advisee intends to bring to the situation to come to a specific, tailored recommendation. “Don’t start a restaurant, because 60% of them fail” is lousy advice. “You realize on average 60% of new restaurants fail, right? What makes you think you can succeed?” is a better start to advice that might actually do the advisee some good. Notwithstanding many economists’ predilection to think in aggregates and averages, virtually nobody lives an average life. And a hell of a lot of outliers contribute to socioeconomic averages.

Consider the quincunx.

© 2014 The Epicurean Dealmaker. All rights reserved.

We Have Met the Enemy, and He Is Us

Creditocracy and the Case for Debt Refusal by Andrew Ross¹
OR Books, 280 pp, $17, February 2014, ISBN 978-1-939293-38-1

“Creditocracy (n.)
1. governance or the holding of power in the interests of a creditor class
2. a society where access to vital needs is financed through debt”

— Andrew Ross

If the book currently under review is any indication, Andrew Ross, a professor of social and cultural analysis at New York University, has never (or very, very rarely) met a creditor he really liked. This reader, no stranger to debt or creditors himself, is quite certain that similar attitudes are held by approximately 99.27% of all human beings extant who have undergone the experience of borrowing money. Accordingly, Professor Ross, a social activist who was instrumental to the creation of Occupy Student Debt and the Strike Debt forgiveness program, should have a very receptive audience for his message, which basically boils down to the assertion that debt is very, very bad.

What makes Ross’s tome different from advice dispensed by Suze Orman and dozens of other personal-finance mavens of greater or lesser credibility is his characterization of the socioeconomic institution of credit and his prescription for it. With respect to the former, he spends a great deal of time and effort outlining how debt and credit are inextricably intertwined with our lives and society, including personal consumption, housing, labor, climate, and long-term growth. As for his prescription for it, his message is bracingly simple: repudiate it.

Did I mention that Professor Ross thinks debt is very, very bad?

For if I did not, or if you forget between reading this article and picking up the book, you will recall it very quickly once you do. Ross is no fan of debt. He sees the current pervasiveness and economic and political power of what he has termed the creditocracy to be corrosive of our social fabric, destructive of participatory democracy, and particularly oppressive of the working poor. For the latter, he contends the current system of consumer and personal debt is but the newest incarnation of compulsory social and economic indebtedness for the poor that extends from and encompasses feudalism, indentured servitude, slavery, sharecropping, company scrip, and loan sharking. He has bad things to say about Wall Street, banks, hedge funds, payday lenders, the IMF, the World Bank, the Troika, the Club of Paris, advocates of austerity, politicians, lobbyists, Sallie Mae, Fannie Mae, college administrators, unpaid internships, student debt, revolving credit, compound interest, economic growth, Kenneth Orr, for-profit higher education, securitization, and colonialism. Did I mention debt?

Now lest you think I sport with Professor Ross or your intelligence, let me reassure you I found his book an interesting and, in places, a compelling read. He takes pains to declare that he is neither an economist nor an expert in all things credit or financial, and he makes no effort to offer up specific policy prescriptions or economic analysis to back up his arguments. He does cite reasonably extensive secondary sources throughout, which should enable diligent readers to check his facts and draw their own conclusions about his evidence. He leavens his narrative with the occasional fact or figure, some of which are well chosen to drive home his point. He employs a serviceable and not unpleasant writing style, which makes his book more readable than a run-of-the-mill polemic. He does shoehorn the intermittent left-wing shibboleth like “monopoly capitalism,” “high interest loans,” “high carbon industrialists” (the Koch brothers), and “Wall Street” into the flow of his text, but, as one would expect, these throwaway non sequiturs seem mostly placed to remind his readers of his (and their) political bona fides rather than carry any argumentative weight.

Ross also offers up interesting historical background on the use of debt as an instrument of political control by the IMF and the World Bank in developing economies, the development of the housing mortgage market in the United States after World War II, and the source and growth of the student loan market for higher education. He avoids many basic mistakes of fact or emphasis, and the occasional slip—like the comparison of stocks (bank assets) to economic flows (GDP)—is usually not so serious as to derail his arguments. He flubs the central premise of his chapter contra economic growth, contending that lending requires growth to function. (That this is not so can be illustrated with a simple auto loan.)² He offers an entire chapter on what he titles climate debt to those of you who find such topics interesting. Sadly, this reviewer is not one of them.

However, he does make a compelling argument that the struggle between debtors and creditors has, for most people, replaced or superseded the struggle between labor and capital:

in societies that are heavily financialized, the struggle over debt is increasingly the frontline conflict. Not because wage conflict is over (it never will be), but because debts, for most people, are the wages of the future, to which creditors lay claim far in advance. Each new surrender of a part of our lives to debt- financing further consumes the fruit of labor we have not yet performed in the form of compensation we have not yet earned. Now that this condition has become inescapable, it is easier to imagine that the struggle between creditor and debtor is much older than the face-off between capital and labor that Marx proposed as a common sense explanation for economic life. After all, exploitation through debt long predates the era of wage tyranny, and its recent restoration as the most efficient means of wealth accumulation suggests that credit is a more enduring, all-weather organ of economic power.

His description of the endless treadmill of high interest, predatory lending suffered by the poor and less fortunate is believable and harrowing, and his description of the student loan market and its parasitic for-profit segment is eye-opening, and not in a good way. There is much to praise here.

* * *

And yet, given all these positives, this reviewer cannot help but feel that Ross has missed the mark. His foreground focus on the instruments and practices of debt has blinded him to an essential, incontrovertible fact: Debt is merely an instrument of economic interrelationships. A careful reader can see that Ross dances around this revelation every now and then, and even nods in its direction and alludes to its implications, but he retreats too soon to tackle the thorny fact directly. Missing this fact puts too much emphasis on the mechanism and history of the use of debt to sustain consumption in the face of stagnant or declining real wages for the majority of Americans, rather than the reason for it. Which, this reviewer believes, is ineluctably tied up with the issues and mechanisms of income distribution in the past several decades. (But that is another essay for another time.)

Ross is also not the first to confuse banks, which have increasingly taken on the role of intermediaries and originators of loans, with the holders of wealth who actually lend it out. But this is not true. Look at any bank’s balance sheet, and you will observe—as Ross correctly does at other places in his text—that banks borrow the lion’s share of what they lend out from other people: depositors, bondholders, other banks, the Federal Reserve. It’s not their money. Banks are conduits for transforming certain kinds of assets (money, investable funds) into others (loans, securities). More often than not, they transform short-term loans they borrow from their creditors into long-term loans to their debtors. This key bank function is called maturity transformation, and it is a critical, highly valuable socioeconomic service lending banks perform.

The real holders of wealth in the economy are not banks, which are only servants. The real holders of wealth are rich individuals, corporations, and institutional investors which manage trillions of dollars of their own and others’ wealth. The lion’s share of such wealth is and has always been invested in the fixed-income markets: sovereign debt, corporate loans, high-yield debt, municipal debt, and, yes, individual consumer debt in the form of securitized credit-card, auto, and student loans and mortgages. The complication, which Ross ignores, is that much of the institutional investment in fixed income is done by and on behalf of pension funds, retirement accounts, and mutual funds managed for individuals. Individuals—people, us—are the creditors we fear and loathe. Even someone with a simple passbook savings account is a lender: first directly to the bank she deposits at, and second indirectly to the debtors who borrow from her bank.

This is a critical point to understand. For it means that it’s not always so clear just whose ox is going to get gored if we go about repudiating debt wholesale. Ross makes a big deal about the retired city workers of Detroit being asked to reduce their pension benefits in the restructuring of the city’s debt. But Detroit’s municipal debt has been bought for years by, among others, professional fund managers on behalf of firefighters, policemen, nurses, and other public and private workers to support their pensions. By the same token, non-wealthy individuals have directly and indirectly purchased the loans and securitized debt of other individuals—i.e., made loans—to provide sources of income for their own futures. Who gets screwed if we start repudiating our credit card debt, student loans, home mortgages, and auto loans? Firefighters? Teachers? Our parents? Ourselves?

And waving one’s hands and saying the government should pick up the tab—as Ross suggests in the case of debt incurred for public higher education—just begs the question in another way. For who both lends money to government and pays taxes to pay its bills? We do, of course, directly and indirectly, in a thousand ways. Of course, we all have different exposures, both as creditors and debtors, to our governments. That, plus the fact we have different economic and political interests and preferences means we will have different opinions as to what debt, if any, should be repudiated and for whom. In other words, by focusing on the allegedly inherent evil of debt instruments, Ross elides the critical point that what needs to happen in our society is a political debate about power and inequality, not a technical debate about the mechanics of a debt jubilee.

This is the Gordian Knot we face when it comes to the problem of debt. I am sympathetic to the plight of the poor, I am outraged at the behavior of predatory lenders, and I am a firm believer in heavy regulation of consumer finance and a much heavier hand in prosecution of financial chicanery than we have yet seen. But the threads of debt shoot through our society and economy in such myriad patterns and interlinkages that it would be practically impossible for anyone to trace them all. Ross wants citizens to audit lenders for “bad” or “illegitimate” debt. But is he truly sure he or we can tell the difference? Is he truly certain repudiating “bad” debt will be good for everyone except lenders? Does he truly know who the lenders are? Who is going to pick up the tab?

Ross states he wants a “moral economy of debt.” He wants the privatization and financialization of basic human wants and needs—shelter, education, health care—reversed and taken out of the hands of private lenders, presumably to be put in the hands of government or, what is another word for the same thing, our common hands. But this is not a moral decision. This is a political decision.

And the last time I checked, we made those decisions through the ballot box. If Ross intends his book to be a call to action and a spur to political discussion of the transformation of our economy, all the better. We need more individual citizens involved. But he and they might find the answers they seek are not quite as obvious or acceptable to the rest of us as he contends they are.


¹ This review first appeared in The New Inquiry “Money” issue, published April 2014. It differs in minor cosmetic details from the published article, the online version of which can be found here. Any unexpected clarity and concision which has crept into my writing in this piece can be attributed to the excellent work of TNI’s editors. By the by, I recommend those among you who enjoy challenging your assumptions about the proper role of finance in society go check out the other thought-provoking articles therein by Steve Randy Waldman, Izabella Kaminska, Mike Konczal, and others. As is usual and proper among such econoblogospherical heavyweights, my piece was included for comic relief.
² Should, for example, Ross decide to purchase a new Honda Accord for $22,000, he could finance it for 48 months at 4% interest for 48 level monthly payments of $495 each. Self-amortizing debt at fixed interest rates—which comprises a very large percentage of consumer and housing debt—does not require or depend on incomes or anything else growing. In fact, in general creditors tend to prefer a static or even deflationary economic environment, since inflation, which is usually associated with growth, erodes the real value of their fixed claims.

© 2014 The Epicurean Dealmaker. All rights reserved.

In Loco Parentis

“You know, Mrs. Buckman, you need a license to buy a dog, or… drive a car. Hell, you need a license to catch a fish. But they’ll let any butt-reaming asshole be a father.”

— Parenthood

One of the advantages of being a sole pseudonymous proprietor of an obscure online opinion emporium—insulated from the interference of officious editors, hypersensitive advertisers, and unhinged commenters still seething over the unflattering piece I posted about their dipsomaniac uncle six years ago—is the freedom to write whatever I will. Periodically then, this freedom licenses me to post explanatory articles which illuminate often obscure features or issues about my chosen profession which, to be perfectly honest, will be of little interest to most of you Charming Visitors.¹ So unless you would like to learn a little bit more about the current regulatory environment surrounding mergers & acquisitions, I suggest you skip over this entry and revisit the latest internet outrage du jour on Gawker or Slate, instead. Or better yet, read a book.²

The impetus for this post is the release, this January, of what is known in the trade as a “No-Action” letter by the SEC in response to a formal inquiry by a gaggle of M&A lawyers. Now in layman’s terms, a no-action letter is simply a formal statement by the SEC that, under a certain limited set of circumstances as laid out in exhaustive detail by the petitioners, it will choose not to enforce existing securities laws. In the particular instance under consideration, the no-action letter effectively eliminates the existing requirement for advisors who participate in mergers and acquisitions involving private companies to be registered as broker dealers with the SEC.

Now Charming Visitors like you, I am sure, can just imagine how this news was received among certain shouty quarters of the internet and associated environs:“Wall Street Banksters Celebrate
SEC Trashcanning of Investor Protections
Over Lavish Meal of Roast Baby Seal,
Fricasséed Retirees’ Dreams”

Fortunately—or unfortunately, perhaps, if you are one who prefers to keep her mental map of the financial system conveniently colored in morally unambiguous shades of black and white—I am here to reassure you that baby seals and investor dreams face no greater threat than they did before, and this particular instance of deregulation running, as it were, against the tide of increasing regulation in the brave new world of Dodd Frank makes eminent and prudent regulatory sense.

* * *

It will help me make my case if you understand the historical background of the existing regulation which the SEC has decided to waive enforcement of. Historically, as you might expect from an organization entitled the “Securities and Exchange Commission,” the SEC has been particularly concerned with the regulation of anything and everything to do with securities. Simplifying greatly for the non-lawyers in my audience, the SEC has traditionally said that any financial intermediary who participates in the origination, solicitation, negotiation, marketing, or general fricaséeing of a security and gets paid a fee for doing so (i.e., all of us) is required by law to register as a broker-dealer. In other words, if you make money assisting the transfer of securities from one party to another–whether by making a market in secondary shares, underwriting a new bond issue, or selling companies—you need a license. What may not have occurred to you is that the securities of private, non-publicly-traded companies count as securities under the SEC’s purview, too. And M&A transactions, which usually involve the purchase, transfer, or exchange of securities for cash and/or other securities, definitely count.

Given the SEC’s mandate to protect investors, this makes eminent sense when M&A involves companies with publicly-traded securities. After all, if there are public securities involved, somewhere or other a widow or an orphan is likely to get caught up in the deal, and nobody—least of all the SEC—wants nefarious unregulated doings clouding the pale and fevered brows of said Ws and Os. At least not publicly. Of course pure M&A advisors almost never handle customer funds or securities—a big hot button for the widow and orphan protection unit—and they rarely provide financing for the transaction, unless they are one of the monster integrated investment banks intent on sucking more fees out of their clients’ wallets by lending their own balance sheet to the equation. But the overarching presence of public securities is as probably as good a reason as one can muster for the licensing of M&A advisors who participate in transactions involving public companies, even if it might be considered, for various reasons, a bit of overkill.

But the inclusion of M&A deals involving purely private companies under this licensing requirement has never made much sense. I will allow the helpful lawyers at Morrison & Foerster to explain:

The application of the broker-dealer regulatory framework to private company M&A advisers has always been somewhat awkward. Much of that framework is designed to protect customers against abusive sales or trading practices and to ensure that customer funds and securities are safeguarded. However, in the typical private company M&A transaction, the terms of the deal are negotiated directly by the principals with assistance from their financial and legal advisers. Unlike the customer who buys or sells stock based on a brief conversation with his broker, the owners of a private business are generally very involved in the negotiation process, which may take place over a period of weeks or months. Moreover, the financial intermediary never touches the customer’s funds or securities. The “broker” in private company M&A transactions functions essentially as an adviser to its client and its role bears little resemblance to more traditional broker-dealers.

This, I can tell you from long and painful experience, is absolutely true. The principals in a private company transaction are either other companies or financial sponsors, all of whom tend to be very experienced in doing M&A themselves and/or are protected by the advice and counsel of armies of very experienced lawyers, accountants, and professional M&A advisors like me. We take oceans of time for due diligence and negotiate the everloving crap out of every possible term of these deals six ways from Sunday. The notion that an average billion dollar corporation or financial sponsor with a three billion dollar fund needs the indirect, implicit investor protection that a broker-dealer license from the SEC purportedly conveys to its M&A advisor when it purchases a $25 million dollar business is patently ludicrous.

But historically the SEC has been a big fan of one-size-fits-all legislation: what’s good for Aunt Millie is good for Steve Schwarzman. I have complained in the past that the conflation of retail and wholesale finance under one legislative rubric structurally designed to protect the widows and orphans of 1933 and 1934 from boiler room operations is just silly. Financial transactions among professionally advised, intimately involved, professional principals like corporations and financial sponsors just should not be treated in the same way as Aunt Millie’s purchase of a mutual fund from her stockbroker Chuck. And M&A deals, both public and private, definitely count as the former.

* * *

The prior restrictions were not without negative effects, by the way. In order to satisfy the rules, M&A brokers who wanted to actively advise their clients often had to twist the transaction structure into an asset sale, thereby avoiding the requirements triggered by the involvement of securities, whether that was the most financially efficient structure or not. Or they simply ignored the law, in the hopes that the SEC would look the other way. In the latter case, their clients usually shrugged indifferently, since they knew they were fully protected by intensively negotiated legal engagement contracts and fully applicable anti-fraud provisions under the law anyway. Most aficionados of jurisprudence will tell you a law which only encourages scofflaws or evasion is bad legislation.

Lastly, the prior regime enforced a very inefficient structure in the market for private company M&A. In order to comply with the law, many individual advisors or small boutiques which could do M&A either had to associate with an existing licensed broker-dealer or apply for a license and maintain ongoing registration themselves. This, for smaller outfits, was not trivial, costing potentially hundreds of thousands of dollars up front and entailing substantial ongoing reporting obligations, dedicated compliance and administrative personnel, and non-trivial financial expense. It likely substantially curtailed the establishment of small independent advisors who otherwise wanted to and could provide professional advisory services to privately held companies. The outcome of this regulatory barrier to entry, of course, has probably been higher prices for customers who want to do M&A.

So I congratulate the SEC for finally seeing the light of intelligent market regulation in the M&A world. No true investor protections have been lost, and barriers to entry in a high cost service industry have been lowered at a stroke. Who knows, maybe this is the start of a new era of intelligent regulation of financial markets, not more regulation.

Naahh…³

Related reading:
United States Securities and Exchange Commission, No-Action Letter Dated January 31, 2014
Morrison & Foerster LLP, Private Company M&A Brokers Don’t Need to Register With the SEC as Broker-Dealers (February 6, 2014)
You’re Doing It Wrong (October 22, 2011)


¹ This, of course, incorporates the perhaps heroic assumption on my part that anything I write here is of interest to more than zero of you. But, since this is my website, I can damn well assume as much such nonsense as I choose. So take it as given.
² I hear some mid-range Princeton author has an inflammatory new book out about Wall Street traders who like to expose themselves in public that’s getting a lot of press. Flasher Boys, or something like that.
³ In the isn’t-it-interesting-what-a-coincidence department, the SEC no-action letter comes at a time when legislation is currently wending its way through Congress that would enshrine the exemption of M&A advisors from broker-dealer registration requirements in actual law. The original bill, H.R. 2274/S. 1923, and the omnibus bill which incorporates it, H.R. 4304, incorporate virtually the same exemptions from registration as are included in the no-action letter, with the slight addition of size limits for transactions. Note that neither the no-action letter nor the proposed legislation lets M&A brokers off the hook from registration if they do public company M&A or normal securities financing work, like private placements. Any investment bank which aspires to the full range of agency services, even if they do not have capital markets trading activities, will still have to register. Relax, Aunt Millie: the dogs of war are not completely off the chain.

© 2014 The Epicurean Dealmaker. All rights reserved.