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Another axiom in the popular American vernacular is, "All is fair in love, war, and politics." It is not just a saying, is has become a profession for those who plan and execute campaigns for political candidates. Practitioners like James Carvel and Carl Rove achieved a perverse sort of stardom, say nothing of wealth and power, as strategists for the left and right of American politics. Each election cycle brings a new flood of negative political ads, the most strident of which are usually timed for the eve of Election Day when an opponent has no possible way to respond to false or misleading allegations. Neither the law nor the voters punish such manipulation.
In business many people see unfettered competition as a fundamental mechanism of free enterprise. They would say that it is natural and proper that the "invisible hand" of free markets should favor those enterprises that best serve our society and dispassionately eliminate the less competitive ones. We assume without much reflection that society is and should be a pool of consumers acting in their own narrow self-interest. Yet in our hearts we know that we have lost something when the little downtown book shop and the neighborhood hardware store are shuttered after the big-box shopping mall opens on the edge of town.
I would hope, having read this far, that you have objections. At the very least, I hope you feel a knot in your stomach and a vague sense that something is wrong. I ask you to stay with me. I will shortly demonstrate that in the context of "gaming the system" many perplexing ills of our society become understandable, and I submit that our awareness positions us to address such ills positively. In the final analysis it is a matter of values and what our 21st century society finds acceptable.
Before about 1980, the study of game theory was an academic statistical pursuit that sought to build mathematical models for social and market processes. The concept was straight forward: if one could correctly describe the rules of the process (game), then one could predict outcomes. One such analysis entered the popular awareness: "Beat the Dealer" by mathematician Edward Thorp who optimized a strategy for playing casino blackjack. It wasn't cheating, because his system did not change the odds of the game as, say, a loaded pair of dice would. However his system did allow him to know when the remaining cards in the deck favored the player over the house. By betting strategically, over time he could win big by betting heavily when the cards favored the player. When the cards favored the house he would bet the minimum. He could and did beat the dealer. Thorp played within the rules of the game, but exploited them to reduce his risk and enhance his rewards.
You can see how one might learn to "play" business risks if one could model the rules that govern and exploit that knowledge. Business schools teach game theory and we now have a generation of executives who understand very well how to game the system their businesses operate in.
In 1977, during the Clinton administration, the Community Reinvestment Act was passed "to help meet the credit needs of the local communities in which [regulated banks] are chartered, consistent with safe and sound operation." The act mandated that banks (not mortgage companies) abandon practices that disqualified borrowers based on the neighborhood they lived in and similar broad categories, and consider their loan applications on individual merit.
Since 1938, when Fannie Mae created a secondary market for them, home mortgages have been a commodity. New mortgages were often not held and administered by the originator bank, but were sold to others who assumed the risk of non-performance and profited from the interest paid. The availability of a secondary market, and the standardization of mortgage instruments, made it possible for non-bank mortgage originators to create commission sales organizations that worked closely with real estate sales organizations. They were not subject to the same regulatory scrutiny as banks, and were not subject to the Community Reinvestment Act. Once a mortgage transaction closed, these sales organizations "sold the paper" on the mortgage market.
This created a new "game" in which the risk of performance was not on those who granted the mortgage, but on a third party who bought it from the originator. Therein began the mischief. With reward separated from risk, there is little incentive to carefully scrutinize the ability of the buyer to pay. Neither is their concern for the ups and downs of the real estate market. A non-performing underwater mortgage becomes the problem of the entity holding the paper. In the regulation-averse environment of the Bush Administration, this created the ticking bomb.
Easy mortgage money spiked demand and fueled a boom in real estate that escalated prices. Across the housing industry everyone was making money and the dream of home ownership became possible for many new buyers, some of them poorly qualified. Bankers, recognizing that these mortgages were not prime risks, invented a kind of insurance called a Credit Default Swap. This further removed the risk of default from the profit on the loans. When the real estate bubble burst, it triggered the cascading national economic disaster we have been living with for six years.
It wasn't that nobody saw it coming. Researchers at MIT and elsewhere predicted the crash. The upward ride was too sweet, and those who knew it would end thought they had hedged their bets by risk gamesmanship. But few appreciated the far-reaching consequences for people and institutions that were not directly involved in gaming the system. A huge amount of monetary wealth was wiped out.An Enlightened Concept of Wealth
Monetary wealth is only part of the wealth of a nation. The contemporary public debate about income inequality reveals confusion about what constitutes personal and national wealth -- more about that shortly.
Half a century ago, when I was a boy, a millionaire was a person who had a net worth of over a million dollars. The average person expected to earn, not save, about $500,000 over a lifetime, and a really nice car cost around $2,000. Today the term millionaire usually means someone who has income of a million dollars a year. Yet the real income in inflation adjusted dollars has not increased much for the lowest 20% of our population. The real income of the working poor has increased 13% in buying power since 1967 but the richest 5% have gained 67% (source: US Census data).
If we are financially successful we give credit to luck, our diligence in educating ourselves, and our personal qualities of "drive" and "gumption." We proudly say, that "I did it my way." Seldom do we recognize the importance of our circumstances. Not so with the recent immigrants that I know. They recognize that education, drive, and gumption avail little unless society fosters success. It takes a community to thrive. Our more or less blind trust that our personal effort will be rewarded comes from experience with life in a nation that rewards individual initiative. We live in an economy that over a century ago raised most of our families above spending full time eking out a survival. Spare time is a given except for the working poor. Such prosperous economies have been the norm in the western world for centuries, but they are far from universal on the planet.
In the early '80s I was privileged to visit China with an American who had lived and worked there since the end of World War II. In addition to tourist activities, we visited private homes, schools, and other places both public and private. Our guide had known Chiang Kai-shek, witnessed and endured the cultural revolution, and enjoyed the friendship of many prominent people.
Both through his eyes and with my own I saw how different my circumstances, and my children's opportunities, were from those of the Chinese people we met. While most of them were seeing great gains in personal prosperity and opportunity, my situation at home in the US was incomparably better. The environment that fosters opportunity here does not register on a balance sheet, it shows up only in contrast to its absence elsewhere.
Then and now most Americans enjoy greater autonomy, easier access to goods and services of all sorts, and work that affords abundant leisure for recreation and self-education. These intangible resources are a kind of national wealth that we swim in like a fish in water. The fish doesn't see the water, but can't swim or even live without it. We swim in our national wealth.
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Richmond Shreve is a retired business executive whose careers began in electronics (USN) and broadcasting in the 1960s. Over the years he has maintained a hobby interest in amateur radio, and the audio-visual arts while working in sales and (more...)
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