Quiet in the peanut gallery

By Megan McArdle

Matt Taibbi shreds Byron York into little tiny pieces

B.Y.: Did I suggest that headwinds are unfair? But on the financial meltdown in particular, if you're suggesting that that is a Republican creation, or even more specifically a McCain creation, I think you're on pretty shaky ground.

M.T.: You don't think the unregulated CDS market was a major factor in the current crisis? Were you watching when AIG almost went under? Were you watching the Lehman collapse?

B.Y.: I think that Fannie Mae and Freddie Mac were also major factors. And I believe that many of the problems in the mortgage area can be attributed to the confluence of Democratic and Republican priorities: the Democrats' desire to give mortgages to people, particularly minorities, who could not afford them, and the Republicans' desire to achieve an "ownership society," in part by giving mortgages to people who could not afford them. Again, I believe that if you are suggesting that the financial crisis is a Republican creation, or even more specifically a McCain creation, I think you're on pretty shaky ground.

M.T.: Oh, come on. Tell me you're not ashamed to put this gigantic international financial Krakatoa at the feet of a bunch of poor black people who missed their mortgage payments. The CDS market, this market for credit default swaps that was created in 2000 by Phil Gramm's Commodities Future Modernization Act, this is now a $62 trillion market, up from $900 billion in 2000. That's like five times the size of the holdings in the NYSE. And it's all speculation by Wall Street traders. It's a classic bubble/Ponzi scheme. The effort of people like you to pin this whole thing on minorities, when in fact this whole thing has been caused by greedy traders dealing in unregulated markets, is despicable.

B.Y.: I was struck by the recent Senate testimony of James Lockhart, who is head of the Federal Housing Finance Agency, about the sheer recklessness of Fannie in recent years. Despite "repeated warnings about credit risk," Lockhart testified, Fannie became more reckless in 2006 and 2007 than they had been in the scandal-ridden tenure of Franklin Raines (who departed in 2004). In 2005, Lockhart said, 14 percent of Fannie's new business was in risky loans. In the first half of 2007, it was 33 percent. So something terribly wrong was going on there, and it became a significant part of the present problem.

M.T.: What a surprise that you mention Franklin Raines. Do you even know how a CDS works? Can you explain your conception of how these derivatives work? Because I get the feeling you don't understand. Or do you actually think that it was a few tiny homeowner defaults that sank gigantic companies like AIG and Lehman and Bear Stearns? Explain to me how these default swaps work, I'm interested to hear.

Because what we're talking about here is the difference between one homeowner defaulting and forty, four hundred, four thousand traders betting back and forth on the viability of his loan. Which do you think has a bigger effect on the economy?

B.Y.: Are you suggesting that critics of Fannie and Freddie are talking about the default of a single homeowner?

M.T.: No. That is what you call a figure of speech. I'm saying that you're talking about individual homeowners defaulting. But these massive companies aren't going under because of individual homeowner defaults. They're going under because of the myriad derivatives trades that go on in connection with each piece of debt, whether it be a homeowner loan or a corporate bond. I'm still waiting to hear what your idea is of how these trades work. I'm guessing you've never even heard of them.

I mean really. You honestly think a company like AIG tanks because a bunch of minorities couldn't pay off their mortgages?

B.Y.: When you refer to "Phil Gramm's Commodities Future Modernization Act," are you referring to S.3283, co-sponsored by Gramm, along with Senators Tom Harkin and Tim Johnson?

M.T.: In point of fact I'm talking about the 262-page amendment Gramm tacked on to that bill that deregulated the trade of credit default swaps.

Tick tick tick. Hilarious sitting here while you frantically search the Internet to learn about the cause of the financial crisis -- in the middle of a live chat interview.

B.Y.: Look, you can keep trying to make this a specifically partisan and specifically Gramm-McCain thing, but it simply isn't. We've gone on for fifteen minutes longer than scheduled, and that's enough. Thanks.

M.T.:  Thanks. Note, folks, that the esteemed representative of the New Republic has no idea what the hell a credit default swap is. But he sure knows what a minority homeowner looks like.

B.Y.: It's National Review.

I love Matt Taibbi's work.  I just wish that when he has no idea what he is talking about, he would shut the hell up, rather than making an awkward public.  Of course, in this exchange he looks good to people who have no knowledge of matters financial or economic.  But sounding plausible to the ignorant is a rather low hurdle for a journalist to set himself.

In point of fact, Byron York is much more correct than Taibbi.  CDS's (credit default swaps) are not the main cause of the crisis, and it seems more than possible that Taibbi has confused them with CDOs (collateralized debt obligations), the slice-and-dice securities that have done so much to destroy transparency in the mortgage securities market.  Professional traders do not claim to understand all that is going on with securities, which makes me skeptical that Taibbi could provide the clear and concise explanation he is demanding from York.  The only reason to fixate on CDS's in particular is that their deregulation can be attributed to a convenient Republican demon.

This brings me to a pet peeve that has been increasingly irritating me as the crisis wears on: people with little or no understanding of markets confidently opining on the causes of the crisis.  Funnily enough, the cause of the crisis is always exactly what they happened to be against before the crisis happened, and the solution is for the people they disagree with to be banned from polite society and exiled from the political process.

What is most infuriating is that the people who know the least are the most confident about their appraisals.  Anyone with any sort of expertise in the field knows that no one understands this crisis very well.  Economists all over the ideological spectrum are rethinking the lessons we thought we had learned from the Great Depression and the Japanese experience.  As it unfolds, we will no doubt be seriously rethinking our model of the relationship between the financial markets and the real economy.

The problem is, ignorant people who have somehow gotten hold of one or two precious facts, and brandish those facts like a mighty Sword of Truth, are superficially convincing.  They are convincing because they misunderstand the situation in, well, the way that ignorant people misunderstand it.  The stories they concoct are therefore very convincing to the ignorant, except those who have an ideological predisposition to doubt their story.  Those ignorant people are busy listening to some other huckster peddling financial snake oil.

No one who did not know what a CDO was before the crisis should be opining as to the causes or the possible solutions.  And anyone who tells you that they understand exactly why this happened, why we got this crisis instead of the dollar crisis we were expecting, and what kind of regulations will unquestionably fix it, is definitionally too ignorant to be opening their mouth.

This article available online at:

http://www.theatlantic.com/business/archive/2008/10/quiet-in-the-peanut-gallery/4251/