The subprime market debacle

"Subprime” refers to an unusual and complex economic situation that has been unfolding in the United States. The term conveys a negative situation, which is the intent.

I’m fascinated with the subprime market debacle and its repercussions. I’m waiting for someone to write a definitive book on the subject. I’m surprised nobody has yet. But that might be due to the fact that it is such a convoluted subject and still unfolding. It’s like a pyramid scheme. The phenomenon is like an octopus, with tentacles reaching out into numerous finance markets and who knows where else. I don’t know all the ins and outs of it but here’s what I understand about it.

What people associate most with subprime is the housing market and the real estate bubble it created. But it is also about its contagions in other areas of finance and commerce. If there were a beginning to the whole thing it might be the recession of 2000-1 and the weak stock market that followed. However, there are also other factors that occurred before which helped enable it. Also, a big part of its happening has to with American culture and its attitude towards capitalism.

There are many reasons why something occurs. It's never just one thing why something happens or becomes possible. It’s a combination of things. I keep saying that about democracy. The subprime debacle is no exception. Nevertheless, everybody likes a starting point. So if there were really a starting point it would have to be human greed, and the personal need for more. It also has to do with the American way of life and its pursuit of happiness. And then there is the bandwagon effect, with people saying “me too, me too".

The greed factor is not just an American trait. However, in many democratic societies we tend to have laws that protect us from ourselves, from the worst aspects of human behavior. Americans tend not to like such restrictions because they are more libertarian and distrustful of government interference, on telling them how to live.

Back in the 1990's banks demanded looser restrictions on their activities. Many of those restrictions were established during the Great Depression in which many bank failures occurred. The pro-business Republican Congress in the 90's obliged the banks and dropped many restrictions. This allowed the banks to be more aggressive and creative, allowing them to design many exotic and complex investment vehicles know as derivatives. In time some of those derivatives would incorporate and hide the subprime loans that would later act like time bombs, affecting other areas of the economy.

What also made subprime loans possible were low interest rates. The Federal Reserve of the US had cut interest rates almost to the bone to get America spending and out of the recession, to keep the economy growing. Money was very cheap to borrow and available to almost anybody who wanted it; to almost anybody who could breath, as the saying goes. It was lent even to those who seemed to have no chance of repaying it. But that didn't stop lenders because in a sense the rules had changed, like the laws of economics and what-goes-up-must-come-down had been repudiated. Logic and reason about lending and borrowing money seemed to have gone out the window. And the government and its financial regulators watched all this as though nothing was wrong, as though a new dawn had graced America.

Another thing that enabled the subprime debacle was the huge drop in the stock market in 2000-1. Investors were unwilling to invest in it because the returns were unfavorable. Instead they turned to real estate and housing which was relatively cheap and cheap money made it even cheaper. People thus started to invest and trade in housing like it was a commodity, "flipping" properties and houses left and right. From my perspective it seemed crazy because the prices where spiraling ever upward and becoming ridiculous, Nevertheless, the practice continue for many years, as long as money remained cheap.

All this frenzy inevitably begot more frenzy with every "Tom, Dick and Harry” getting into the act. It also spawned unscrupulous mortgage lenders, mostly due to the lack of government oversight and the relaxation of mortgage and banking regulations. But all this was also made possible by the philosophy of the Bush administration, which encouraged such practices. It had total confidence in the freedom of market, as though it was some elixir. Its philosophy was to encourage an "ownership society" which dovetailed nicely into the subprime activity. People who normally were unable to buy or own a house, because of a poor credit rate or lack of sufficient capital were now owners. Bush&Co, which seems to have a C- in economics, were ecstatic with the results because the subprime market was expanding the ownership society.

The market and the people involved thought that this 'game' could continue forever. And the surprising thing is that people that we would think of as intelligent and in the know, like two Federal Reserve chairmen, thought everything was just fine, that people could continue to push up prices and spend money like there was not tomorrow. To them it was just a bit of "irrational exuberance". Eventually, though, the cost of borrowing money increased, ending the party and forcing many people to give up their houses because they could not afford their escalating mortgages.

All this frenzy eventually led to overbuilding, which then put downward pressure on the value of properties. In many cases the value of the property became lower than the mortgage. As a result lenders would instigate foreclosure proceedings and called in their loans for fear of losing their money, further exacerbating the situation.

Like all bubbles the housing bubble burst, last year, sending shock waves through the financial markets, which had packaged and buried many of the bad housing loans in the derivatives they had devised and sold to unsuspecting investors. Some of the big institutional investors did know what was taking place but thought that since this was a brave new world, as they imagined, the market was immune to the shocks this activity might cause.

One thing that has suffered through all this is, trust. Banking and financial markets operate on trust. Members trust each other to tell the others about the possible risks involved. They generally support each other in times of financial upheavals. But this time it's different. It's as though a line was crossed and a bond was broken. In the old days derivatives involving things like subprime loans were consider "junk". This time they were peddled as if they were prime and classified as AAA. Those who held large positions on those derivatives had the rug pulled out from under them. That trust will take time to rebuild. One other major fallout from all this is that many credit markets and sources of venture capital have dried up, vehicles that are essential for keeping the economy going.

There's lots more to be said about the subprime market.

Global warming

Philosopher Nicholas Maxwell asks the question "Are Philosophers Responsible for Global Warming? It’s an odd question and he admits it.

At first I thought the question was absurd but then I saw the merit in it.

What Maxwell is trying to say is that if philosophers had spoken up earlier about the perils of carbon dioxide, that it is a greenhouse gas, the world would not be going through the climate change that is occurring now. He pointed out that as early as 1859 a John Tyndall discovered that carbon dioxide was a greenhouse gas and that a Svante Arrhenus in 1896 speculated that it would cause global warming. According to Maxwell we should have acted on this information sooner.

Now, philosophers have done some great things throughout history. What philosophers do best is discuss ideas and speculate about how humankind can improve itself. They throw out ideas about how we ought to behave and how we might best govern ourselves. They ponder why things are and attempt to explain what they discover to the rest of us. The first such pondering by philosophers led to the natural and social sciences. There would be no science if philosophers hadn't first asked questions about the nature of things and the world around us. Before philosophy, and the sciences that arouse from it, the world was governed by mythology and superstition. Today, one of philosophy's jobs is to challenge its creation and ask ethical questions of science, so as to make sure that it works in the world's best interest.

One thing Maxwell is saying it that philosophers in the past have not challenging science enough on subject of greenhouse gas and the technologies that spews them out. However, philosophy may have been blind-sided by science and that’s why it didn't speak up early. Science has had this alluring, magic appeal and for years has told us that it could fix and cure what ails humankind. For example, one major aspect of human governance, communism, was founded strictly on science, believing that the world could be organized just on scientific principles, without having to be questioned by philosophers. It took years to discover that fallacy. Within democracy we hardly did much better but at least we let the philosophers who criticized live.

Maxwell thinks that if the idea of global warming had been introduced into the curriculum and in the press years ago we would have done something about it sooner. But I don't think it is philosophers fault that they hadn't managed to reach a consensus on global warming earlier. I think that back then, as far back as Maxwell goes in his admonishment, people were not ready to hear or deal with this stuff. People were to busy dealing with other things in history and first getting them out of the way. Now that the world is more settled and basically thinking as one, we can truly start thinking about and dealing with global warming.

I think many other things had to transpire before we could begin to think about global warming, like, for instance, seeing the world from outer space. For another, we first had to develop a political will to do something about it. And seeing the world from outer space as we did for the first time, in its solitude, gave many of us a sense of how fragile the world can be. From that episode Earth Day was born and thus our more unanimous concern for the planet we live on. And until recently we never had a person like Al Gore, who has been the pied piper of global warming's consequences.

There is one thing that Maxwell neglected to address in his argument, the hurdles philosophers may have faced in trying to impress upon the rest of us about the need to do something about global warming. He wishes that philosophers had been able to warn the rest of us about climate change earlier. However, he didn't consider the fact that there have been skeptics and obstructionists in great numbers that have made it difficult to convince a large enough number of us that global warming is a threat, and due to human activity, so that we could start doing something about it. Skeptics and obstructionists probably have been drowning out the voices of reason on this issue for decades.

Today, though, those obstacle are not as prevalent as they used to be because reason has succeeded in convincing most of us that human activity does cause climate change. The skepticism is being swept away by hard evidence. And now what Al Gore has been saying makes perfect sense to the majority of us, the people who count, who care and are rational; the people who want to make a difference and improve the world.

And that is one thing philosophers also do, they bear reason on the world. On this score Maxwell only wishes it could have happen sooner.

Common Sense

The idea for this post came from a review I read about a book that talks about common sense. This book was written by a French sociologist, Raymond Boudon, and is entitle "Renouveler la democratie", which I think means 'renewing democracy'. As I understand it, the theme of this book is that common sense is needed for reviving the democratic process. The author thinks democracy has been flagging recently due to the lack of common sense.

The reviewer of the book, Stein Ringen, is also a sociologist. He tells us about a powerful idea in today’s world, "relativism", or postmodernism. He says that at its extreme relativism means "there are no truths or objective facts, and all opinions are equally valid”. (I think that is an exaggeration.) However, he says, there is a counter-idea to relativism, common sense. Like Boudon he believes common sense is a rational thing whereas relativism is not. Both Boudon and Ringen believe that relativism poses a threat to democracy because it doesn't foster the common interests that democracy depends on. They also believe that relativism doesn't foster the social cohesive on which democracy is very dependent on to survive. Well, I think both men are really talking about multiculturalism, which is a relativism. They think that multiculturalism doesn't make common sense and like relativism it is divisive and destabilizing to democracy.

I never though of common sense as a counter-idea to relativism or postmodernism, so I was drawn to the idea. However, I do think there is a common sense in relativism. Relativism, as multiculturalism, allows for many cultures to coexist and thrive together. In many mature democratic countries that recognition is prudent to keep harmony. But this does not mean a different set of laws and rules for different cultures as some argue. It does, though, make sense because relativism/multiculturalism in many ways adds to the polyphony democracy thrives on, to keep it vital, legitimate and relevant. In Canada multiculturalism makes sense. Canadians have learned to view multiculturalism as making perfect sense, embracing and cultivating it. If Canadians didn't, there certainly would be some serious social unrest, considering Canada's bicultural British and French background and the multiculturalism it has spawned.

I think it’s worth repeating that I think Boudon’s common sense views sounds anti-multiculturalism, since multiculturalism is a relativism. Some people think that multiculturalism, like relativism, is a threat to social cohesion. However, the reverse behavior can also threaten social cohesion, by denying diversity and multiculturalism, forcing people to assimilate culturally. Such a denial can produce clashes that can destroy any possibility at social cohesion. However, multiculturalism does not mean the flaunting of the basic, common laws of the land as some have argued. And there can be comfort in that fact because the common laws of a country like Canada are what unity people and in a way nullify the aspects of relativism that many find harmful to democracy.

The review by Ringen appeared in TLS. It is written under the caption "Trust the people" as though to say that the people are the source of common sense. And this is what Boudon is saying in his book, that the source of democracy comes from the common sense of the people. That common sense is a wellspring for democracy. He also equates common sense with ordinary thinking. Ordinary thinking comes from ordinary people. And ordinary people are what makes democracy possible, government of the people, for the people and by the people.

However, the common sense or ordinary thinking that is behind democracy has not always been there. It has taken time for much of the common sense that is behind democracy to surface. For instance, it wasn't always common sense that blacks and women should have the vote or that people should be treated equally under the law. No, there are very few things on their own that make common sense. Common sense is something that has usually evolved into common sense. Oh, there are some common sense ideas that come naturally, like don’t lend money to people who can’t pay it back. But even that common sense comes from experience.

Culture can determine common sense. The recent brouhaha in Britain about the using of sharia law attests to that. The Archbishop of Canterbury, Dr. Rowan Williams, suggested that the incorporation of parts of sharia law into British civil law would make perfect sense. In his view aspects of sharia law could be utilized to help cultivate social unity, to help integrate the Islamic population in Britain into the rest of society. Sharia law, he argued, would help the Muslim population traverse and navigate many of the difficulties it has had in simulating into British society.

Well, the majority in Britain thinks that Dr. Williams’ proposal makes no sense at all. Sharia, many argue, would have a negative impact on social cohesion because there would be two sets of laws that would further divide society. As the ex-Archbishop of Canterbury pointed out, sharia law goes against the grain of the land and its democratic institutions. Lord Carey said, “There can be no exception to the laws of our land, which have been so painfully honed by the struggle for democracy and human rights”. In that light sheria law doesn’t make common sense for a secular culture like that of Britain's.

Sharia law makes perfect sense to some. But it doesn’t make secular sense, the sense Democracy depends on.

Progress and innovation

I was wondering what to write about next and then came upon this question: "Is progress and invention natural or cultural phenomena?"

Well, in many ways it is a cultural phenomenon. Most of the progress and innovation in the last 500 years has occurred in Western culture. Jarad Diamond speculated in his book "Guns, Germs and Steel" why this is so, because of the openness and flexibility of the West, especially during pre-Columbus Europe. Europe, the cradle of Western civilization, has been the fermentation of this cultural phenomenon. The culture of democracy and capitalism, which the West instigated, has also been a hot bed for progress and innovation, which is today's chief hot bed for progress and innovation.

In comparison, other cultures have been 'closed' and not receptive to the new ideas that have sparked progress and innovation. Take a look at the Islamic world in recent years where not even a handful of new books have been published. Furthermore, what sustains the Arab and Islamic world economically is the progress and innovation that was mostly formulated in the West. Now, Communism as a culture was innovative but it didn't progress because it lacked the open society that is essential to achieve progress and sustain technological innovations.

What make progress and innovation 'natural' is that sooner or later it is going to happen. And generally it has been the West that has been receptive to this natural process. The West has embraced this natural process more readily and enthusiastically than any other culture. This is why the rest of the world is more and more resembling Western culture, because it has the progress and innovations to best sustain and maintain all civilization.