Left and Wrong author: Paul Krugman
Left and Wrong article: Bankers Without a Clue

Last night I watched a movie titled “The International". It was a typical Hollywood corporations-are-evil protagonist-is-disillusioned-idealist type of thing about a bank that funnels arms to third world conflicts and hires assassins to kill squeeky-wheel executives who try to get the word out to Interpol about what is happening. I knew this going in (you can’t avoid knowing it after watching the trailer) but figured I could sift some merit from the film through either its good acting (Clive Owen, Namoi Watts) or exciting scenes or foreign scenery or whatever. Discounting the silly Hollywood message is pretty common practice for the conservative or libertarian trying to get colorful entertainment on planet earth.

Anyhow, the movie drips with much left-wing moralizing of how the innocent subjects of the world are manipulated and exploited by the elite financiers. One of these preachy bits was particularly noteworthy. The character Umberto Calvini, an Italian politician and arms dealer, starts talking about why he intended to sell arms to the big bad bank:

The IBBC is a bank. Their objective isn’t to control the conflict, it’s to control the debt that the conflict produces. You see, the real value of a conflict, the true value, is in the debt that it creates. You control the debt, you control everything. You find this upsetting, yes? But this is the very essence of the banking industry, to make us all, whether we be nations or individuals, slaves to debt.

And the big oil companies make us slaves to cheap gas and the big agricultural conglomerates make us slaves to food and big Pharma have us all hooked on pills and the big movie studios have me by their puppet strings watching their stupid blockbuster flick. You see, the aim of the filmmaker (or screenwriter) is to convince each member of the audience that they are exempted from the condescention if they buy into it, i.e. even when people act on their own free will they are so prone to manipulation that this free will means nothing, except if you act by free will to condemn it, as this film is manipulating you to do. Of course, I think people make their choices and should be responsible for them, and not even the cynical man-behind-the-curtain tendencies of clever filmmakers are an excuse for doing the wrong thing.

Okay, okay. I know this is just a movie. But this same kind of reverse victimization inhabits the minds of some very influential people who actually believe this drivel. Specifically, it reminded me of an article that Paul Krugman wrote last week about the role banks played in the financial crisis. In this article, he says the following:

But there was nothing accidental about the crisis. From the late 1970s on, the American financial system, freed by deregulation and a political climate in which greed was presumed to be good, spun ever further out of control. There were ever-greater rewards — bonuses beyond the dreams of avarice — for bankers who could generate big short-term profits. And the way to raise those profits was to pile up ever more debt, both by pushing loans on the public and by taking on ever-higher leverage within the financial industry.

Though this kind of mischaracterization ("pushing loans on the public", “taking on ever-higher leverage") has become common in today’s blame-Wall-Street journalism, it is still a mischaracterization.

Banks did not and can not force people to borrow from them. People contact mortgage brokers when they need to finance the purchase of a home; banks do not find unwary citizens on the street and convince them to buy a mortgage, then go and look for a house to back it with. And the big market-failure bugaboo for economists of Krugman’s ilk, asymmetrical information, works against the lender in this situation: if one party was caught unsuspecting with his pants down because someone was dishonest, it was the banker not the homebuyer.

People who borrow money choose to do so. They are not slaves to the financial system any more than employers are slaves to the huge wage bills they pay week in and week out. The revolutionary extension of microcredit in the Third World is not making slaves of these people; it is liberating them.

The other charge Krugman makes, that banks were making short-term profits by “taking on ever-higher leverage” is the source of an even greater misconception peddled about the crisis: banks can create financial exposure for everyone, even those who are responsible and aware. Banks can not “take on leverage” at will; to take on leverage is to finance your operations with debt, and someone must be convinced enough of your solvency and good business practices to buy it from you. That is, unless you are a government agency (such as FNMA or FHLMC) which has an implicit backing of the federal government, in which case they will buy your mortgage-backed securities no matter how shaky they are.

The point is that it is a myth that we are all involuntarily connected with all of these banks, thus making them “too big to fail” because by our connections with them they will make us fail too. Mortgage banks have to be careful who they lend to, investment banks have to be careful what mortgage banks they buy from, and investors have to be careful what investment banks they invest in. All of the connections are voluntary, and the exposure of any citizen to the failure of someone to pay their mortgage or of some bank to lend to solvent borrowers or of some mutual fund to buy shares in solvent banks is all earned. Once we start absolving people of the need to verify the trust they put in the people and companies they have financial connections with, the whole financial system will collapse.