“I Guess You Could Call it Greed”: Graduating in the Doom Cycle
Thursday, 03/11/2010 - 10:41 am by Justin Lutz | 4 Comments
Junior Fellow Justin Lutz on graduating college in the midst of an economic “Doom Cycle.”
“Debt is a flower that blooms in the Spring and fades to mulch in the Fall.”
-Hiroshi Kobayashi
“The Art of High Finance” promised to be “an interactive discussion about the cause of the financial meltdown of 2008, the implications of the government ‘bailout’ and other programs created in response to the meltdown, and what it all means for a Sarah Lawrence student facing an uncertain future.
The discussion — complete with free lunch — was put together by the school to calm the nerves of seniors like myself who are preparing to graduate and enter the unemployment force (the “workforce” seems all too elusive these days). Augustus K. Oliver gave the talk — a Yale graduate and investment manager with years of experience and an impressive CV (not someone you really want talking to you about the hardships of coming of age in a depleted economy).
But Augustus’ knowledge of the market got me past the intimidating qualities of his big-shot title. Through his explanation of the financial crisis, I have been able to better understand the connections between the small business of Main Street and its reliance on the mammoth financiers of Wall Street.
What Augustus began to describe was the very same thing that Simon Johnson has been discussing recently — the “Doom Cycle“, which is the vicious boom-and-bust economic model epitomized by the financial crisis and the federal government’s response with TARP (see Johnson’s chapter in the Roosevelt Institute’s freshly-released Make Markets Be Markets report).
Augustus outlined this cycle in four phases:
1)The set-up
2)The spiral upward
3)The inevitable consequence
4)The ‘cure’
The cycle begins with banks and lenders taking dangerous risks that lead to temporarily cosmic profits. But these profits are followed by the inevitable crash and consequence of the risks taken. These consequences lead to a financial catastrophe exactly like the one we find ourselves with today. Finally comes the “cure”, in this case, the bailout.
The problem with this cycle is that it replaces any space for meaningful financial reform with panic and misinformation from the big banks so that they might position themselves in the same place again to take the same risks, reap the same profits, and look to the same government coffers for a rescue plan.
When asked what would lead bankers or any financial actor to take such mammoth risks and endanger so many, Augustus simply answered “I guess you could call it greed.”
Augustus actually did not have much to say in terms of advice for us graduating seniors. Most of the talk was devoted to explaining market jargon, dissecting balance sheets, and wading through legislative rumors regarding financial regulation. I came to realize that all the time that was supposed to be devoted to cultivating a financial identity after college was spent explaining the mess that we are in right now, how we got here, and what we can do about it.
Any hope of becoming giddy from discussing our entrance into the working world was replaced by a lesson on equity, risk management, and regulation. What I have come to realize is that even students fresh out of college have to know how to recognize a bank balance sheet and be able to calculate equity. We have to know the legislative tools in congress that impede or foster financial regulation. We have to know the history America’s largest financiers, just to be able to get by.
Why? Because in this economy, we are tools of the “free” market and its capitalistic exploitation of the American consumer. Knowing how to play the game of the big banks has replaced knowing how to manage money wisely and all other common sense, because no one else is playing by the rules. We have to equip ourselves with an understanding of how these institutions work if we want to be financially sound.
Class warfare has replaced common sense, and unless there is a paradigmatic shift in the way the government and the financial sector interact in this country, we will continue to play a game of financial retribution The only reward will be the contrived populist outrage that has already muddled the message of raw financial responsibility.
Justin Lutz is a Junior Fellow at the Roosevelt Institute.
I graduated from University in 1976. Talk about a period of economic turmoil.
Keep you chin up. Do what you have to do in the short term, but keep your eye on some greater goal, and continue to move towards it, little by little if necessary, but you will get their if you have the heart for it, and are willing to prepare for the occasional breaks.
I would rather be graduating from college at this time, than to be a person in their late 50’s or 60’s who is too young to properly retire, and still has a mortage and family to care for, having lost their job.
Posted by Jesse | March 11th, 2010 at 11:04 am
And I should add, my father graduated high school in 1942, after having spent most of his childhood enduring the Great Depression.
He and I both had to make it ‘on our own’ more or less.
The point being - it’s usually never easy. We just came off a bubble period, when it was easier than normal. We squandered a legacy, and now we are back to more normal times.
Throw yourself into reform, and doing good, and the career will be something you will look back after 30 years or so and say, “This is what I did.”
Posted by Jesse | March 11th, 2010 at 11:08 am
Ah, I don’t know… I’m 30 years old with a BA under my belt and very lucky to have a job, but also completely terrified of losing said job, and without a dime of savings of any sort, nor without the ability to generate any. I don’t assume my story is the whole world’s story, of course, and perhaps my age bracket and those younger than myself will make it out fine. But it is beginning to look increasingly with each passing year that the “American dream” of homeownership and having children (that you can afford to feed, house, and send to college someday) is not within my grasp, nor the grasp of many of my similarly educated peers. I sure hope I’m wrong.
There is a term in Russian for all this: “smuta”… It connotes a time of troubles replacing bad times with something even worse. I think it’s time we appropriated that term for American English.
Posted by James Call | March 11th, 2010 at 12:03 pm
The bailout is not a cure, it’s a sedative. These banks were detrimental in the economy, and need to fail as they were mis-allocating scarce resources in a unproductive direction. That’s what happens when you remove risk from the financial markets. Regulation prevented risk, and the regulators at the Fed did a horrible job controlling the money supply, and provided the punch bowl that allowed the bubble to get bigger for a few years. Banks met demand for mortgages by repackaging them, making them even bigger. Greed is regulated by the fear of loss. Government spending isn’t going to help the economy either, or more tax cuts. Tax cuts are meaningless when there is a large deficit. The problem is the credit markets, and foreign creditors can replace all the insolvent banks in the country, instead you have the federal government doing large deficit spending, and stimulus packages that don’t produce any genuine productivity. Further more, minimum wage doesn’t help employment either. Congress increasing the minimum wage doesn’t solve anything. It destroys jobs if anything. Another is regulations, US has a lot of regulations on business, thus that is why jobs are leaving the country. The fundamentals of economy have to improve, subsidies doesn’t do that, it’s illusionary. Wages have to increase, and prices have to go down just like in the 1950’s. Housing stimulus is futile, because again, these home buyers simply can afford them, and nonsense to try to inflate the bubble again when it’s clear the underlying micro activity can’t sustain it. Also the problem is too much spending, not a savings glut like Keynesians like to generalize all depressions. The economy simply can’t sustain 2006 consumption, and needs to save money to diversify into goods production.
Posted by Samuel Morales Jr. | March 12th, 2010 at 12:50 am