Democracy and the Financial Crisis

Three unrelated observations about Democracy and the Financial Crisis:

1. Bond funds should create a consumer cooperative that runs credit rating agencies. They have the right incentive to police overgenerous credit ratings, and unlike individual bond issuers or investors, they have diversified portfolios of bonds, so they care about percentage accuracy of ratings, not a particular bond issue's default or lack thereof.

2. The financial crisis has resulted in massive layoffs of highly skilled and specialized Wall Street financial professionals and the lawyers who serve them, in more or less inverse proportion to their seniority -- many associate lawyers and junior level professionals, quite a few mid-level lawyers (of counsel and non-equity partners) and mid-level financial professionals, and a small number of full partner level professionals. Media layoffs are doing much the same thing to reporters who cover business issues, and vast number of experience mortgage finance and real estate professionals are also on the outs. (There is also a huge surplus of professionals with backgrounds in construction and manufacturing.)

My question is this: What happens to this group of people?

When World War I ended, enlisted men and junior offices appalled at the idiocies of their aristocratic senior officers were a major force for social change in Europe. Emigration of Jews from Europe in the face of pre-WWII persecution transformed both America and Israel. Taiwan was remade by Nationalists leaving China. Florida was transformed by Cuban emigration. The wave of foreign doctors allowed to immigrate to the U.S. in the 1960s dramatically increased the ethic diversity and changed the perspectives of the medical profession. Jewish lawyers who couldn't get jobs in white shoe firms in New York City transformed big firm legal practice a couple of decades later.

One way to explain the social history of the union movement is that the limited availability of college educations, and the limitation of management jobs to the socially connected and the educated, prevented a lot of smart people who would of made good managers but came from poverty, working class backgrounds or even the middle, middle class from being coopted into management; instead they were forced into blue collar jobs where their highest change to advance was as a foreman supervising a small group of blue collar levels at the most direct and basic level. Union activists were would have been managers who secured power in huge organizations by other means. Greater meritocracy, in addition to political gains for even non-union employees won by the union movement, help explain the dramatic long term decline of the private sector union movement. When you exclude competent and effective smart people from power they trickle up anyway.

Do mass financial sector layoffs create a class of laid off, highly skilled, best and brightest professionals who will have a collective impact and identity that will sew the seeds of "insurgency" in the financial sector? Does it breed distrust of institutions? Does it breed commitment to new business models (see, e.g., the dot.com generation of venture capitalists, and the non-bank finance/private equity/hedge fund generation that followed). Do they go and reinvigorate some other part of the economy, and if so, which part? Do they simply slump and end up as massive human capital waste and turned useless? Because they are younger and less entrenched than their superiors who were not laid off, they have time to retool and build careers on adjusted trajectories. But how?

Do they create a political class of former big business professionals who understand big business but don't trust big institutions? Do they form a new generation of financial industry regulators, a booming field as government tries to right the ship?

Meanwhile, one impact of the construction crisis seems to be that many immigrant construction workers are returning to the places from which they emigrated. How does this change the construction market in the U.S.? Do those who stick it out have a big edge when and if this market comes back? Does reduced labor supply from reverse immigration and from people who leave the industry for something else in the downturn improve wages when demand picks back up? Do those who stay organize to keep out new entrants into the industry with tighter licensing and regulation? Does a smaller class of skilled tradespeople in construction discourage young people from entering the industry at all?

More interestingly, how does this transform the economies to which they are returning? While they may not be the "best and brightest" of their societies in the same way Wall Street professionals have been in the U.S. for the last decade, they are people who are ambitious, willing to take risks, willing to work around the regulatory state, and people who have significant exposure to U.S. ways of doing business, both at a skilled trade technical level and more remotely at a business model level, and who have much better than average command of the English language compared to those who spent no time in the U.S. Many are also overqualified for their U.S. jobs but sought employment here because it was lucrative compared to work they are qualified to do at home. The return of millions of people with those kinds of experiences has to provide a major boost to the domestic economies of much of Latin America and particularly Mexico, while reducing the availability of foreign injections of money via remittances. Do they lead an entrepreneurial neo-conservative class in Latin America?

Manufacturing is a different story perhaps. This industry has seen continuous relentless declines in employment for four decades, pretty much in good times and bad, which are particularly tough now. It may not come back at all. New hires have slowed to a trickle, particularly in the Rust Belt, and retirees are not being replaced. Those losing jobs now are not new comers (who have the lowest pay, so management wants to keep them), often in Southern non-rust belt states, but older workers who have spent careers in the industry surviving while others were laid off in round after round after round. The UAW sought layoff protections and retiree benefits from the Big Three for a reason. They saw which way the wind was blowing. They are going to get burned on many of the long term promises received in those contracts, but they are getting substantial ownership stakes in two of the Big Three automakers in exchange for the debts created by those promises (something their counterparts in Germany have had for many decades on a de facto basis).

I am concerned that there isn't enough of a critical mass of knowledgeable people starting their careers who really know how to make stuff and how manufacturing works. We have lots of engineers, but not so many really talented and encouraged machinists and foremen and tool and die makers. Professor Florida's observations about the rise of a "creative class" with people wanting to be hair dressers rather than machinists, is partially a product of a decline of this sector and of this knowledge base that goes with it. Ditto, declines in areas like textiles. If the critical mass were there, I'm not sure that the industry would be declining so deeply, although I am not sure how the U.S. would re-industrialize, or whether it makes economic sense in a big picture to do so.

3. At a human level, the Financial Crisis has been a war between a smaller and only intermittently effective "insurgent group," and a large "establishment group," both within a diversified class of financial and economic technocrats (as an aside, I'll bet birth order predicts quite powerfully which sides people took in that war). The good guys and bad guys alike were highly educated, wonkish technocrats. It has not been a particular partisan conflict by traditional measures until very late in the game, and even then the general public has had a hard time getting control of the debate and policy decisions.

This war of ideas was one that lay people without expertise were not qualified to judge. And, many of the issues that turned out to be important in hindsight, were issues that looked like obscure side shows when they were being fought in board rooms and administrative offices of corporations and big businesses and non-trial litigation in courts in opinions that most people, even lawyers, never read. The wars were umpired by financial regulators and judges and expert legislative staffers, who were in turn selected by politicians with more expertise than the average person but more ideology and judgment than expertise, who were in turn selected by the public on even more vague criteria.

While many of the umpires were chosen by politicians, the vast majority of politicians were in offices that simply had no power to influence the outcome no matter how savvy and prescient they were about what was going on (not that many of them had a clue in any case). No amount of policy work or business climate in Tennessee could have prevents the mistakes made in California and New York that killed the economy that killed manufacturing demand and in turn hurt Tennessee businesses. Likewise, even rank and file offices in Congress may not have been enough to make much of an impact -- the key issues in the Financial Crisis were dealt with at the committee level and in key parts of the federal regulatory state (which makes up only a small part of federal employment which is largely comprised of military, postal and public land oriented officials).

Both the top official in the Bush Administration's TARP program, and the top official in the Obama administration's automobile bailout program are young men in their thirties who are long on enthusiasm, political connections and general smarts, and short on relevant industry or large scale management experience. They are typical of junior to mid-level players in the legislative branch (political aides), executive branch (political appointees), and judiciary (law clerks). These are the people who bridge the gap between non-expert principals (judges and senior politicians) and technocratic experts within industries who are actually waging the political wars and wars of ideas.

This isn't unusual. Foreign policy has a very similar character. Subject matter experts and select political appointees chosen for disparate reasons make many key decisions that politicians only dimly understand and the general public has no clue about until it goes horribly wrong.

More so than in past wars, U.S. military involvement in Iraq and Afghanistan has cast junior officers, NCOs and mid-level military contractors in the key decision making roles, rather than the colonels, generals and senior civil agency officials.

It isn't clear whether we are moving towards technocratic consensus, policy confusion as politics only dimly interfaces with the actual decisions that need to be made, or new fault lines forming as we speak in these intramural wars of ideas. To win the war of ideas, one has to get ones ideas credibly into the mix with these people first, at any rate. Otherwise, issues won't get identified as politically important in the first place (one of the key roles of actual politicians) and won't ever have the debate and deliberation needed for ideas that the public understands and supports with the wisdom of the masses being held.