The villains of the financial meltdown aren't criminals. They're morons.

Commentary about business and finance.
Feb. 23 2009 1:21 PM

Dumb Money

The villains of the financial catastrophe aren't criminals. They're morons.

Cover of Dumb Money by Daniel 
Gross.

In the past few months, we've been riveted and disgusted by the exploits of scamsters like Bernard Madoff and Allen Stanford (characters who, if they didn't exist, would have to be invented by Tom Wolfe). It's both easy and convenient to hold them up as the ultimate symbols of the just-ended boom. But we shouldn't. While there was some crime in the mortgage industry, law-abiding, respectable, upstanding citizens caused the overwhelming majority of financial losses suffered thus far. Skeezy money managers and mobbed-up boiler rooms didn't create the economic catastrophe. It was visited on us by firms in the Dow Jones Industrial Average and S&P 500—companies that trace their origins back to the 1800s, run by graduates of Yale and Harvard. The people who blew up the system weren't anarchists. They were members of the club: central bankers and private-equity honchos, hedge-fund geniuses and Ph.D. economists, CEOs and investment bankers. And the (overwhelmingly legal) con they perpetuated on themselves, their colleagues, their shareholders and creditors, and, ultimately, on us taxpayers makes Madoff's sins look like child's play.

That's one of the central arguments of my book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, which has just been published as an e-book. (You can buy a digital version, for the Kindle or Sony Reader, or an audio version. Readers interested in seeing a PDF of the first chapter or even a paper version should send an e-mail to: dumbmoneybook@gmail.com)

Advertisement

My book explains how during the late, great credit bubble, an Era of Cheap Money devolved into an Era of Dumb Money, and then into an Era of Dumber Money. The culture of Wall Street and the rise of the shadow banking system spawned reckless, largely unregulated lending, borrowing, and trading, a financial culture that preferred short-term fees to long-term gains, and that confused liquidity (access to other people's money) with cash on hand. Looking back, the investors who believed the stories told by Madoff and Stanford—that they could deliver steady, positive, market-beating returns in any type of climate, despite the manifest failure of virtually every other money manager to do so—were obviously foolish. But our best financial minds also spun tales and theories with great assurance, making seemingly irrational and unprecedented activity seem completely sensible. And we bought them.

The Dumb Money creed rested on four pillars: perpetually low interest rates, perpetually rising asset prices (especially for housing), borrowers of all types remaining perpetually current, and perpetually strong markets for debt. The high priests of this cult were the nation's central bankers. In the Era of Cheap Money (the fall of 2001 through June 2004), Fed Chairman Alan Greenspan convinced us that we could have low interest rates despite inflationary pressures and global growth. His successor, Ben Bernanke, in 2002 began trying to convince us that we might have as much to fear from deflation as from inflation.

Bernanke also provided intellectual fortification for the argument that one of our greatest vices—a tendency to debt-financed consumption—was actually something of a virtue. He helped popularize the concept of a savings glut, arguing that America's twin budget and trade deficits could be traced not to a dearth of American savings but to a glut of foreign savings. Because foreigners weren't consuming enough, we had to do it for them. Other worthies chimed in that saving money the old-fashioned way was a waste of time because the market was doing the heavy lifting for us. Economists claimed that the government measures of income used to calculate savings—which includes wages and salaries, interest on bonds, and stock dividends but which excluded capital gains on stocks, profits from selling a house, or withdrawals from 401(k) plans—were hopelessly behind the times. "The structure of the household portfolio has changed over time," said David Malpass, chief economist at Bear Stearns, one of the leading exponents of what might be dubbed the theory of Magical Market Savings. In 2004, Malpass found that, thanks to the booming stock and housing markets, the net worth of U.S. households—their assets minus their liabilities—stood at a record $48.54 trillion, up 9.6 percent from 2003 despite sluggish income growth. Why put money aside for a rainy day when your house and the market were doing it for you?

TODAY IN SLATE

Foreigners

More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

What Charles Barkley Gets Wrong About Corporal Punishment and Black Culture

Why Greenland’s “Dark Snow” Should Worry You

Three Talented Actresses in Three Terrible New Shows

Why Do Some People See the Virgin Mary in Grilled Cheese?

The science that explains the human need to find meaning in coincidences.

Jurisprudence

Happy Constitution Day!

Too bad it’s almost certainly unconstitutional.

Is It Worth Paying Full Price for the iPhone 6 to Keep Your Unlimited Data Plan? We Crunch the Numbers.

What to Do if You Literally Get a Bug in Your Ear

  News & Politics
Weigel
Sept. 16 2014 7:03 PM Kansas Secretary of State Loses Battle to Protect Senator From Tough Race
  Business
Moneybox
Sept. 16 2014 2:35 PM Germany’s Nationwide Ban on Uber Lasted All of Two Weeks
  Life
The Vault
Sept. 16 2014 12:15 PM “Human Life Is Frightfully Cheap”: A 1900 Petition to Make Lynching a Federal Offense
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Slate Plus Video
Sept. 16 2014 2:06 PM A Farewell From Emily Bazelon The former senior editor talks about her very first Slate pitch and says goodbye to the magazine.
  Arts
Brow Beat
Sept. 16 2014 8:43 PM This 17-Minute Tribute to David Fincher Is the Perfect Preparation for Gone Girl
  Technology
Future Tense
Sept. 16 2014 6:40 PM This iPhone 6 Feature Will Change Weather Forecasting
  Health & Science
Science
Sept. 16 2014 1:39 PM The Case of the Missing Cerebellum How did a Chinese woman live 24 years missing part of her brain?
  Sports
Sports Nut
Sept. 15 2014 8:41 PM You’re Cut, Adrian Peterson Why fantasy football owners should release the Minnesota Vikings star.