Twenty-odd years ago, one of my gentile cousins told me she worked at either Goldman Sachs or Salomon Brothers. At the time, I was a grad student in philosophy, and knew so little of the world of finance that they sounded the same to me. A Jamaican security guard at my school, a man old enough to be my father, once told me, “You’re the only Jew I know who doesn’t have any money!”

In recent years, I began trying to learn about the arcane financial world, though Peter Brimelow’s financial columns proved more difficult to decipher than Hegel in the original German. And yet, by the end of August, my cramming left me feeling ready to get rich playing the market. (Fortunately, by the time the meltdown came, I still hadn’t gotten around to placing those “buy” orders.)

Then, when I finally started to see a glimmer of light regarding the world of finance and was able to understand some of what Peter was talking about, and Craig Roberts was reborn as an economic sage, I got the memo that trying to understand finance was a big waste of time, because:

• The initial rejection of the bailout by House Republicans was a “revolt of the nihilists”; and
• “What we need in this situation is authority.”

The author of the memo was not Hermann Göring, but one of my people, David Brooks. A Jewish neocon heralding the return of the Führer Principle against the “nihilists”? David Brooks, call your therapist.

Meanwhile, I’ve got Goldman Sachs (GSG, for Goldman Sachs Group) on the brain, though not unlike with Brooks, the problem seems to have more to do with power than with finance. Since the calls for a bailout began, it seems like every name involved either in the meltdown or the bailout works or used to work at GSG: Lloyd C. Blankfein (current GSG CEO); current Treasury Secretary and bailout architect Henry Paulson (former GSG CEO); Clinton Treasury Secretary Robert Rubin (ditto); National Review’s Thomas L. (Dusty) Rhodes (former GSG vp, vice chairman, and partner); Gary Gensler (former GSG partner and later, Clinton Assistant Secretary of the Treasury for financial markets); World Bank President Robert Zoellick (former GSG managing director), et al.

Already last December, Ben Stein thought Goldman was playing both sides in selling “toxic debt,” while one of its top economists, Jan Hatzius, predicted the meltdown. Stein assumed that everything Goldman did, including Hatzius’ dire warnings, was part of a malignant grand sales strategy.

On Saturday, blogger Skeptical CPA floated the theory, according to which Warren Buffet has recently been acting as Goldman’s front man, in order to bring about the bailout.
And just now, while searching through books on Barack Obama/Dunham/Soetoro, what should I find at Amazon but the following blurb about the author of Obamanomics: How Bottom-Up Economic Prosperity Will Replace Trickle-Down Economics [?!]:

A former investment banker for Goldman Sachs, John R. Talbott is the author of four books on economics and politics, including “The Coming Crash of the Housing Market,” a bestseller that predicted the current housing and mortgage crisis. He’s appeared on CNN, Fox News, CNBC, CBS Marketwatch and written for the Wall Street Journal and the Financial Times.

The DSM V is going to need a new entry for “Anti-Goldman-Sachsism,” the obsessive belief that Goldman Sachs and its proxies are to be found behind all dramatic fluctuations in the financial markets.

Obviously, there has been a gigantic failure by Wall Street rocket scientists at “risk management.” This isn’t my area of expertise, but I think I can point out a basic mistake. Going back decades to Burton Malkiel’s book  A Random Walk Down Wall Street,  sophisticated financial thinking (e.g., the “efficient markets theory” of the 1970s) has been dominated by the concept of randomness: events are distributed on a bell curve-shaped probability distribution.

For example, to take a simplistic example, people tend to default on mortgages when they have bad luck: dad gets cancer and dies and then mom gets depression and loses her job. The bank forecloses. If you hold 1,000 mortgages, that kind of bad luck happens to, say, 15 each year. Of course, your 1000 people might have worse luck than normal. Say you study millions of mortgage and determine the standard deviation is 5 per 1000. So, for 99.75% of the bundles of 1000 mortgages, the number of defaults in a year will range from 0 to 30.

Here’s the problem: human life really isn’t all that random. That’s because human beings respond to incentives. If you treat human beings as if they are just mindless probabilistic events, whose risks you can diversify away by dealing with large numbers of them at a time, they will outsmart you. They will put down inflated incomes on their mortgage applications. They will claim to be owner-occupiers when they are just speculators who will rent out the property to Section 8 tenants when they get into a cash flow bind. They will bribe appraisers to report a higher than actual value.

(more…)

From “McCain Plans Fiercer Strategy Against Obama” in the Washington Post:

Two other top Republicans said the new ads are likely to hammer the senator from Illinois on his connections to convicted Chicago developer Antoin “Tony” Rezko and former radical William Ayres, whom the McCain campaign regularly calls a domestic terrorist because of his acts of violence against the U.S. government in the 1960s.

But not all that fierce:

The Rev. Jeremiah A. Wright Jr. appears to be off limits after McCain condemned the North Carolina Republican Party in April for an ad that linked Obama to his former pastor, saying, “Unfortunately, all I can do is, in as visible a way as possible, disassociate myself from that kind of campaigning.”

Wright is ten times as important a figure in Obama’s life as Rezko, and 100 times as important as Ayers. But Wright is off limits because he’s black. I figured that’s what would happen back in February.

- Gov. Schwarzenegger is asking the federal government for a $7 billion emergency loan so he can meet payroll.

- Roughly half the dollar value of foreclosed-upon mortgages is in California, which has 12% of the population.

- California Scheming — the leader of a real estate fraud ring in Beverly Hills is sentenced to 14 years in jail for buying the lousiest homes on Beverly Hills blocks, then having them appraised like their neighbors. Lehmann Bros., who lost $42 million in the scam, hired a private detective to check up on these guys and found they were inflating appraisals and spending the loans on private jets. This kind of thing was imitated all over Southern California on half-million dollar homes in dumpy neighborhoods with nobody being caught because the losses from fraud were too spread out for anybody to bother burning any shoe leather to check them out. (It makes you wonder how much money would have been saved if Wall Street firms had employed a few hundred Philip Marlowes to gumshoe around California’s subdivisions checking up on mortgage applicants?)

As a native Californian, something that I’ve noticed is an increasing intellectual disconnection between the power centers of the East and the reality on the ground in California. At bottom, this financial crisis is California’s fault. But Wall Street and Washington seemed to have no clue what California was like in this decade. Observe, for instance, all the incredulity when I’ve pointed out the role of Latinos in the housing fiasco.

In the 1960s, it was a cliche that California was where America’s future was being test-driven. That has certainly panned out, and yet New York and Washington D.C. strike me as having lost interest in California, and thus have become increasingly oblivious to the future of the country.

A generation ago, New York and DC interest in California was motivated by envy, along with fear that California would someday displace them at the top of the totem pole. That fear has faded as California’s future has faded.

Yet, California’s fraction of the nation’s population has grown since the 1960s, making the state even more important than when it was closely observed.