This Eric Martin post reminds me that a number of you have asked me what I thought of Matt Taibbi's Rolling Stone piece on Goldman Sachs. What I think, sadly, is that Matt Taibbi is becoming the Sarah Palin of journalism. He seems to deliberately eschew understanding his subjects, because only corrupt, pointy-headed financial journalists who have been co-opted by the system do that. And Matt Taibbi is here to save you from those pointy headed elites.
Taibbi is a gifted narrative journalist, whose verbal talents I greatly admire. But financial meltdowns don't offer villains, for the simple reason that no one person or even one group is powerful enough to take down a whole system. Confronted with this, Taibbi doesn't back away from the narrative form, or apply it to smaller questions where it is more appropriate, as William Cohan did in House of Cards. Instead, he grabs whoever's nearest to hand and builds them up into a gigantic straw villian, which he proceeds to bash with a handful of recently acquired technical terms that he clearly doesn't quite understand. It's not that everything he says is wrong, but the bits that are true aren't interesting, and the bits that are interesting aren't true. The whole thing dissolves into the kind of conspiracy theory he so ably lampooned in The Great Derangement. The result is something that's not even wrong. It's just incoherent.
To give you a flavor of what I mean, Taibbi rants about how we knew derivatives were bad bad BAD! because they'd gone so badly wrong before:
There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated - and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses.
But it's not clear how much derivatives regulation would have helped any of these three companies. Gibson was defrauded by its bankers. P&G wasn't; they spent a great deal of money unwinding their positions when the Treasurer realized they had a lot of exposure on a bad bet on falling interest rates. Orange County, too, was making a massive, levered bet on a steep yield curve (roughly, a large difference between short and long term interest rates) that came undone when the yield curve flattened and interest rates rose. Moderately complex derivatives allowed its idiot financial manager to take somewhat larger bets, but you can take massive, money losing bets without them. At any rate, none of these derivatives have much to do with CDOs or CDSs; you might as well conflate stocks and bonds because they're both "securities". No one, as far as I know, is now proposing that we need to curtail the use of interest rate swaps.