Ayn Rand Was Very Silly, But Conservatives Are Just Evil

"There are two novels that can change a bookish fourteen-year old's life:
The Lord of the Rings and Atlas Shrugged. One is a childish
fantasy that often engenders a lifelong obsession with its unbelievable
heroes, leading to an emotionally stunted, socially crippled adulthood,
unable to deal with the real world. The other, of course, involves orcs."

--John Rogers
Kung Fu Monkey


Johann Hari has a new column up over at the UK's The Independent that simply is a must-read. He excoriates today's Republican party for its crass insistence on promoting only the interests of the country's uberwealthy at the direct expense of the less fortunate 99% of Americans. For example, of the Ryan Budget plan he points out that "it halves taxes on the richest 1% and ends all taxes on corporate income, dividends and inheritance. It pays for it by slashing spending on food stamps, health care for the poor and elderly, and basic services. . . . Ryan says 'the reason I got involved in public service' was because he read the writings of Ayn Rand, who described the poor as 'parasites' who must 'perish', and are best summarized by the title of one of her books: The Virtue of Selfishness."

However, the vast majority of Hari's column devotes itself to Donald Trump and what it says about the modern Republican party that he is now the party's frontrunner in Presidential nominee polls. Describing Trump as "the Republican Id, finally entirely unleashed from all restraint and all reality," Hari offers up a few choice quotes from the Donald about how America should deal with the rest of the world. On Libya: "I would go in and I would take the oil . . . I would take the oil and stop this baby stuff." On Iraq: "We stay there and we take the oil. . . In the old days, when you have a war and you win, that nation's yours."

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In the liberal blogosphere, which I frequent, there has been for a number of years now a good deal of focus on the new, ersatz Republican followers of Ayn Rand's writings. Alan Greenspan himself, the maestro of our current financial debacle, was one of Rand's most devoted followers -- he actually sat at her feet as a college student and was editor of one of her Objectivist publications. As a result, to this day he so objects to any government regulation of any business or financial activity that he once told Brooksley Born that he was not even in favor of prosecuting financial firms that committed fraud because that would only interfere in the market's ability to punish such firms itself. (He, Larry Summers and Bob Rubin were also instrumental in crushing Born's attempt to impose derivative regulations while she was with the CFTC; of course, given that unregulated derivatives trading is a large part - if not the largest part - of how the financial industry got into the mess it did, that decision seems in retrospect very, very stupid).

In Congress, of course, we have Rep. Paul Ryan and his plan to wage war against almost everyone in America for the benefit of his small number of rich paymasters, and we have newly elected Senator Rand Paul who makes no bones about the fact that he is an Ayn Rand devotee (although it is not true that he was named after Rand; my understanding is that his name is short for 'Randal').

And this constant reference to Ayn Rand's writings by our new Republican Overlords -- who, despite controlling only one chamber of Congress, somehow manage to decide what issues must be taken up by the government (abortion and the deficit, but not jobs or the economy) and how those issues must be framed -- and by bloviating Conservative pundits and TeeVee talking heads, has had an affect on the people who listen to such folk.

For example, about two years ago, shortly after Obama had been sworn into office and the first glimpses of Tea Party Madness were beginning to emerge among the nation's more conservative elderly, I was checking out a few books at my local library. A sizable percentage of the immediate population where I live consists of retirees. Whilst checking out my books I got into a brief conversation with the librarian, who told me that she had just started reading Atlas Shrugged as part of a local book club. She told me she thought it was important that as many people as possible read Ayn Rand's opus because the book is "so relevant, given what's happening in the world today."

Now, a couple of things about this statement struck me immediately. First, I could think of nothing that was "happening in the world" right then that would make Rand's so-called philosophy more relevant than before -- that is, unless you count the fact we now have a black man sitting in the White House. Second, the library doesn't sponsor book clubs; this apparently was something she had gotten into with some unspecified number of friends, and they all had suddenly decided they needed to read Ayn Rand. Third, I couldn't just let this statement go unchallenged, because the last thing we need is people interested in reading Ayn Rand for the lessons they think they can learn from her.

So I explained to the librarian, as gently as I could, that I had read Atlas Shrugged and nearly all of Rand's writings years and years ago, back when I was in High School, and that - like a lot of people who stumble across Rand - I had enjoyed them immensely. However, after I grew up some and gained a greater appreciation of how people work in the real world, I came to see Rand's writings as fairly juvenile. I told her (as nicely as I could) that I thought they were not writings anyone should ever make the mistake of taking seriously.

A Modest (Financial) Proposal

I heard on the news that President Obama has instructed the Justice Department to conduct an investigation into the oil commodities market to determine whether the recent run-up in oil prices is the result (or partly the result) of market manipulation and/or speculating. I don't really have an opinion about this one way or the other -- at least for right now, I don't have sufficient information to form an opinion -- but it did remind me of something I've been thinking about for a while now.

Might there not be a recognizable benefit to eliminating (declaring illegal) all "naked derivatives trading?"

A large part of why the financial crisis became so bad, so big, was "naked" trading in Credit Derivative Swaps. Now, a "CDS" may sound complicated, but it essentially is just a type of insurance.

For example, suppose you own a bond (or a "market-backed security") or any other type of financial instrument that guaranteed a future payment in, say, 5 years and that had a face value of $100 million. Just as with regular Americans and their homes, this would be a pretty significant asset to have in your portfolio, and so you might want to take out insurance on it -- just the way regular middle-class Americans do on their homes. So, you could go to AIG, just for example, and purchase a CDS. And in exchange for a annual premium payment of, say, $2 million, AIG would insure that if the bond subsequently proved to be worthless AIG would pay you the full face value of the bond.

Five years of $2 million premium payments would knock your net payout on the bond from $100 million to $90 million, but you would have the security of having eliminated the risk that you might lose the entire $100 million. Not bad.

But "naked" derivative trading allowed Walls Street firms who did not own underlying bonds/mortgage-backed securities to purchase insurance on those same bonds anyway. AIG, which apparently believed the ratings agencies' AAA status on these things, figured the bonds could never fail and so thought the premium payments it was racking up constituted "free money." (It apparently never occurred to AIG -- or, more accurately, to AIG's subsidiary, AIG Financial Products, which was really issuing the insurance policies -- to wonder why all of these Wall Street banks, supposedly the brightest of the brightest, were willing to give it all of this "free money.") Accordingly, AIG issued insurance policy on insurance policy covering the same financial assets, happily taking home millions and millions each year in premium payments.

But think about what this means. Suppose AIG issued 20 different policies on the same $100 million bond. Now, instead of being on the hook for a potential $100 million loss if the bond defaulted, AIG would be on the hook for $2 BILLION. This is a substantial increase in liability, all of which turns on whether one single event occurs -- the same bond turns out to be worthless. No matter how unlikely you may think a future event is, the more money you gamble against that event occurring the more disastrous it will be for you if that event does, in fact, come to pass. This is exactly what happened when the music abruptly stopped in the game of financial musical chairs the big investment firms were playing a few years ago.

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But really, what social purpose did it serve to allow investment banks to purchase insurance policies on financial instruments that they were not themselves invested in? How is this not just sheer gambling?  Place a $2 million bet - once a year - with the chance of winning $100 million. If the banks actually owned the bond in question, then purchasing insurance on the bond makes sense, because they would just be limiting their risk.  But if you don't own the bond, then you are just making a gamble.

Generally speaking, I am not allowed to purchase fire insurance on my neighbor's home. For one thing, there is no social value to my doing so. For another, it does tend to give me a motive to engage in a little bit of arson.

And doesn't it seem to you that something similar may have happened with the financial markets? After all Bank of America was one of the banks most heavily invested in CDS's, which insured mortgage-backed securities that consisted of a whole lot of subprime mortgages all bundled together. Is it a coincidence that Bank of America had a substantial interest in Countrywide Mortgage, the single greatest issuer of subprime mortgages in America?

Similarly, we know that Goldman Sachs got together with one of its richest individual investors and created a mortgage-backed security that consisted of only the worst of the worst mortgages they could cherry-pick. These mortgages were expected to fail. And then the investor and Goldman Sachs sold the security they had created to other investors, purchased CDS's on that security, waited for it to fail, and then demanded full payment on their insurance policies.

In fact, the more you look at things like this, the less it looks like gambling. A closer analogy would be paying an electrician to install wiring in your new home, trusting he has done a competent job because you certainly are not competent to judge the wiring job yourself, and then -- when your house burns down due to substandard wiring -- watching as the electrician cashes in on the insurance policy he took out on your home.