George Soros called 2008 the end of an era - the bursting of a “super-bubble”. It also the beginning of an era: The era in which an unlikely cast of characters assembled themselves to “crowdsource” answers to the global financial crisis.
In late 2006 a former academic in English with decades of experience in America’s mortgage industry, off work ill, began posting at finance industry blog, Calculated Risk, anatomising her industry and prophesying doom with encyclopedic knowledge and wry hilarity.
Why were things going off the rails? “Because God hates us” she suggested beginning a paragraph that explained yet another attenuation of the relationship between borrower and ultimate lender in the by then stupefyingly complex chain of mortgage securitisation.
To retain her good name in the industry she wrote pseudonymously - using only her family nickname “Tanta”. But in the intellectual hothouse of the blogosphere she rapidly gained the authority she deserved even being cited in Federal Reserve research.
Welcome to the turbocharged ecology of cyber-opinion where intellectual esteem matters rather than notoriety or media budgets: where towering figures - usually, but not exclusively, top academics - direct the traffic, and literally hundreds of high quality contributors weigh in with posts and comments like a set of strategically placed cameras around a sports ground. Blogs like Naked Capitalism, Angry Bear, Follow the Money and Grasping Reality bring you the action from every angle.
One of my favourites is Steve Randy Waldman whose searching posts on Interfluidity rethink issues from first principles with bracing originality and perspicacity.
A doctoral student in Kentucky he admits “I’m not the brightest bulb on the tree”. But don’t be fooled. In an introductory post in March 2006 he’s willing himself to articulate his thoughts. “I am not a humble person. There are things I have to contribute that could really matter, that could be revolutionary even.” I won’t be surprised if he pulls it off.
As the crisis unfolded, from one bailout to the next, we’d see the wisdom of this crowd at work within hours, pouring over the detail and the theory, sharing inside stories, and proposing or refining alternative policies, orthodox and otherwise.
The crowd’s influence had been kept at bay while bailouts were agreed behind closed doors and presented as a fait accompli, but those doors got prized open when the scale of the next bailout - US$700 billion - required Congressional approval. Treasury Secretary Hank Paulson put his case in a skimpy (three-page) proposal.
Within hours the blogosphere was crawling over the plan like a swarm of angry ants. Tanta hated it. Waldman pronounced it “breathtakingly awful”. If troubled assets were purchased at market prices as Paulson was publicly suggesting - this could help liquidity concerns which arise when creditors seek payment before banks’ loans fall due. But the real problem had become banks’ solvency - their liabilities swamping their assets. And to tackle solvency, the troubled assets would have to be purchased at inflated prices.
If so, then the plan simply slipped money to the banks (like Goldman Sachs whose immediate previous CEO had been Hank Paulson) with no quid pro quo such as requirements to maintain lending, constraints on executive salaries or some share in the upside of the government’s investment (for instance by way of equity in the banks).
Yves Smith of Naked Capitalism duly turned up evidence that, behind those closed doors, Paulson had conceded his intention to pay inflated prices, something US Fed Governor Ben Bernanke publicly conceded soon afterwards.
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