Letters to the editor

Most-Responded-To Pieces of 2008:

1. “Shooting Britney” David Samuels, April

2. “In the Basement of the Ivory Tower” Professor X, June

3. “Is Google Making Us Stupid?” Nicolas Carr, July/August

4. “Marry Him!” Lori Gottlieb, March

5. “Unforgiven” Jeffrey Goldberg, May
High Spirits?

Fernet Branca (“The Bitter Beginning,” November Atlantic) has been used in my family as far back as I can remember (I’m 90). There was nothing better to cure a sore tummy, indigestion, or cramps.

For a long time, it was not available. My daughter worked for a liquor distributor and she couldn’t get any. She found out the reason it wasn’t on the market: the original recipe contained opium. No wonder you felt so good after taking it, and no wonder the “new” version doesn’t live up to the old stuff.

Gene Boggiatto
Castroville, Calif.

Wayne Curtis replies:

For reasons too obvious for elaboration, the history of spirits and cocktails generates much intriguing, if unsubstantiated, lore. Representatives of Fratelli Branca “would not deny” the opium claims, but neither would they confirm them. Nor did they have any opinion on Fernet Branca’s contributions to longevity.

Bubble Burst

Henry Blodget blows his analysis of “Why Wall Street Always Blows It” (December Atlantic) by using the word bubble 29 times to explain how my clients, friends, and family have recently lost hard-earned money.

Deflation is an unprecedented, noncyclical problem, which is why interest rates at the Bank of England are at their lowest level not in five or 10 years but in more than 300. Investors in the Japanese market enjoyed a bubble a generation ago, but their “lost decade” stemmed in large part from an unprecedented demographic environment. Investors in emerging markets have not suffered another round of cyclical exuberance about the thieving skills of populist dictatorships; instead, emerging markets finally “emerged” with fiscal conservatism, liberal free trade, competitive production, and vast savings just as the U.S. savings rate approached subzero—which caused unprecedented dislocations for everyone. Even in the United States, hundred-year-old industrial companies are on their deathbeds, not because of a cyclical downturn after an “SUV mania” but as a result of relentless and noncyclical phenomena (e.g., globalization, deunionization, a broken health-care system).

In this meltdown, many efforts at long-term investing have been rudely interrupted by short-term, leveraged noise and stupidity, but we need a broader analysis to understand why leaders of some of the world’s august capitalist institutions are begging for bailouts. This may be the start of a broader realignment of capital that is not cyclical.

Solomon M. Karmel, Ph.D.
Financial Planner and Branch Manager, First Allied Securities
Bellevue, Wash.

Henry Blodget wants us to believe that we’re all equally responsible for the current financial crisis. That’s nonsense. He concludes that if we just “save more, spend less, diversify our investments, and avoid buying things we can’t afford,” we’ll learn from our mistakes. Funny, I, like millions of others, did exactly that. Except for a mortgage with a significant down payment, I never borrowed a dime, always bought cars with cash and drove them into the ground, and followed a conservative diversified investment strategy promoted by Blodget’s former employer, Merrill Lynch. The payoff for this good behavior is a loss in net worth that I’ll probably never recover in my lifetime.

Frank Drobot
Los Altos, Calif.

Henry Blodget replies:

There is no rigorous definition of the term bubble. I have used it loosely to describe situations in which prices soar to previously unfathomable heights and then collapse, revealing even the most sophisticated explanations for the booms to have been comically stupid.

It may be, as Solomon Karmel suggests, that the U.S. is now in a noncyclical decline, and that this is what caused the collapse. I think it’s more likely that history is just repeating itself, and that we’ll now go through a multidecade period of paying for our debt binge, as we did after the 1920s. Given the rise of Asia, I agree that it is indeed unlikely that we’ll ever again have as much power in the world—economically or militarily—as we did in the last decades of the 20th century.

As to the wisdom of diversification: if my former employer, Merrill Lynch, recommended that Frank Drobot limit his borrowing and diversify his portfolio among multiple asset classes, this was a sound strategy. It can’t prevent losses—no investment strategy can—but it’s still the wisest long-term investment plan for most individuals.

Banking on China

Banker Gao Xiqing’s candor (“‘Be Nice to the Countries That Lend You Money,’” December Atlantic) is refreshing, but his model of treating financial derivatives as mirrors seems precisely wrong. Mirrors transmit information about objects without transmitting their substance. Derivatives do the opposite, delivering the substance—risks and all—of their underlying assets without information that might inspire caution or provoke regulation. Real-estate agents to mortgage brokers, brokers to banks, banks to Wall Street, and on to insurers—every derivative step obscures risk; none reflects it.

Instead of mirrors, I see derivatives as shipping containers crammed with poorly labeled goods from loosely regulated factories and forwarded by dubious intermediaries. Trade remains brisk as long as the risks inside—lead paint, melamine additives, or time-bomb mortgages—go unacknowledged. But it takes only a glimpse of scandal or whisper of doubt to bring the edifice down.

Patrick Mulvanny
Pacifica, Calif.

James Fallows replies:

Patrick Mulvanny’s point is a good one. While I obviously cannot speak for Gao Xiqing, I imagine that if he were sitting down with Mulvanny he would instantly recognize the technical superiority of the shipping-container analogy, which vividly conveys the danger that excessive use of derivatives can pose to the financial system. (“There could be a powerful bomb inside one box—but you would have no idea from the outside!”)

But when Gao used the mirror analogy, he was trying to convey the most basic idea of how derivatives worked to a council of senior Chinese Communist Party leaders with virtually no financial experience, at a time when China’s financial markets had been operating for barely 10 years. Under the circumstances, it seems a forgivable simplification. And if he sees this exchange, I bet he will adopt the container analogy as his own.

Debt Nation

Virginia Postrel (“The Case for Debt,” November Atlantic) selectively ignores the economic reality facing American families today. The personal-savings rate has been steadily decreasing for more than 20 years, becoming negative in 2005 for the first time since the Great Depression and hovering close to zero since then. At the same time, the debt-service ratio (the ratio of debt payments to personal disposable income) has increased to 15 percent. Real wages have been relatively flat since 2001, growing by only 4 percent since 1999, while outstanding credit-card debt has grown by more than 75 percent. And a recent survey conducted by the public-policy organization Demos of low- and middle-income Americans found that the main reason for carrying a revolving credit balance was the loss of a job, or a medical expense, car repair, or other basic necessity.

Furthermore, Postrel’s assertion that credit is cheaper now fails to recognize that for low- and middle-income credit-card holders, the high cost of late fees and penalties can trap families in debt. All the major issuers now raise a cardholder’s interest rate to a “default rate” when their payment arrives late, often to 30 or even 34 percent. Issuers also charge the consumer a late fee.

Credit cards may be a cheaper option than payday loans and pawnshops, as Postrel states, but credit-card companies should not profit from families just trying to make ends meet.

José A. García
Associate Director of Policy and Research, Economic Opportunity Program
New York, N.Y.

Virginia Postrel replies:

By suggesting that financially strapped consumers would be better off without access to credit, José García repeats a common fallacy in the century-old litany of complaints about consumer debt. The problem is not credit. It is poverty. If you don’t have money to get your car fixed or pay your doctor, even high-priced credit is a godsend. (It’s worth noting that the forms of credit traditionally used by lower-income people—pawnshops, rent-to-own stores, and loans from friends and family—do not show up in aggregate statistics on consumers’ savings or debt.)

As I said in the column, credit-card prices used to be “high and simple,” with everyone paying the same, regardless of credit risk. Now people who reliably pay their bills no longer cross-subsidize higher-risk customers—which arguably makes pricing fairer—and people who used to be too risky for standard pricing can get credit cards. But the fees and interest rates that García complains about are one result. They represent the real cost of making those loans. As we’ve recently learned from the mortgage market, underpriced credit can prove terribly expensive in the long run.

The best argument against consumer credit is that its easy availability tempts people into buying things they later regret, not that credit-card companies make profits by lending to risky borrowers who need their services. The latter complaint is just a 21st-century form of the ancient attack on money lending.


“Race Over?” (January/February Atlantic) incorrectly stated that Pastor Anthony Evans of the Oak Cliff Bible Fellowship in Dallas, Texas, attempted to secure money to help turn out the vote for Barack Obama. He did not do so. Dr. Evans did not campaign or canvass on behalf of Barack Obama, and had no contact with the Obama campaign on such matters before the election. We regret the error.