How Things Get Worse

Photo courtesy of Gareth Ellis

Leading up to the Global Financial Crisis in 2008, people did some really stupid things. Things that were comically irresponsible.

Investment bankers were playing around with dangerous instruments — explosives, basically. Instruments like collateralized debt obligations and turbo-levered credit default swaps and three-tranched mortgage-backed securities filled with the financial equivalent of dog shit.

Mortgage lenders were giving loans to people who had no verifiable income, and letting people with middle-class wages have 3 mortgages at a time. We all know how hard it is to pay just one mortgage on a middle-class wage.

And when the mortgage lenders gave out these bad loans, these bad loans were then repackaged and sold inside tranches-upon-tranches of those mortgage-backed securities the investment bankers were trading. It actually got to the point where the tranches of some mortgage-backed securities were made up not of mortgages, but of other mortgage-backed securities.

That’s like buying 100 shares of stock, but inside each of those shares is 100 more shares of the stock. Which means that if the stock price goes down 1 dollar, you don’t lose 100 dollars. You lose 10,000 dollars. (Which, as we recall, is what happened. Because the value of dog shit does not go up forever.)

How did things get so bad? Many of these bankers and lenders didn’t have to wait until 2009 to feel ashamed of what they’d done. They knew it was wrong; they felt ashamed of what they did as they were doing it. Anybody with any sense knows you can’t give a $240,000 loan to someone who makes 8 dollars an hour. Because that’s stupid. Not only are you condemning that person to bankruptcy, you’re condemning your own bank to a bad loan.

But they did it, these bankers and lenders and executives. They did it because everyone else was doing it. That’s what you always hear — if you watch movies like The Big Short or Margin Call (which are both great movies about the Crisis), or read interviews with people from that time… the excuse they all give is that “everybody was doing it” — everybody was trading these explosively dangerous instruments and putting their banks at risk. You have to make hay while the sun is shining, because what am I gonna do, let everyone else make hay while I sit around and go broke?

There will always be truth in the excuse “I did it because everyone else was doing it.” Sociologically, that is a sufficient condition to make people do dumb things most of the time. But I think there are times in life when that doesn’t quite explain the problem. Doesn’t quite explain the evolution of the problem — how things got worse, or how things got so bad in the first place.

Here is another well-known financial trick: billionaires live off of loans. Musk and Bezos can, for instance, refuse to live off of actual income, by refusing to get actual income.

When they sell shares of stock, they have to report it as capital gains and then pay capital gains tax on those shares. They can simply refuse to do this. They can, instead, take out massive loans against the stock they own (use the stock as collateral to secure a loan) and then live off of loans. This is common practice among billionaires. Because it means that, essentially, they will never have to pay taxes. Because loans are not “income” and therefore can't be taxed. Pay off the loan, start over.

And one place your mind might go, when hearing this, is “well why don’t the banks just refuse to fund this nonsense, and refuse to give them loans?”

Which is a great question. By all means, nobody should be giving those loans to billionaires. Literally everybody knows better than to do that.

The problem is, someone is going to. And everyone knows that someone is going to. Therefore a perverse incentive is created and the situation reverses: instead of everyone trying to stay away from the billionaire, to hang onto their morals, everyone lines up to be the one to give him the loan.

Why?

Because, at the end of the day, it’s income. The interest from the loan is income for the lender. If someone is going to get that income, it might as well be me. After all, my wife and kids deserve a good life. And I am their provider. This might help me make a nice fat bonus come January, so I can take them on a nice vacation in May.

Institutional suicide often comes in the form of personal advancement. We saw that in the Global Financial Crisis, and you see it in any institution that ethically decays by letting its employees play around in bad incentive structures.

This is how many things in life get worse: nobody actively wants to make them worse, and yet everybody implicitly sees that they are in fact going to get worse, and so they voluntarily participate.

Self-fulfilling prophecies drive a lot of human behavior. Especially at the level of society. The level where millions of people are involved, with millions of weaknesses and millions of families to look out for.

At the level of the individual, most people actually make the best moral decisions with the information available to them. Both out of goodness — trying to do the right thing — and out of a fear of being spotted doing the wrong thing. At the level of the individual, people can and will quite easily stand up for something and be good. But it’s different when you put those people in competition with millions of other people, with things at stake like security and family. At that level, it becomes hard to cooperate; or rather, it becomes extremely easy to justify not cooperating.

Most people hate the fact that Amazon owns so much of our economy now — we complain how totally foul they are as an enterprise, and refuse to morally condone them, and then we get on our iPads and buy a brand new shower head from their website.

Because we know that we can’t do anything to stop them. I mean, everyone else in our neighborhood is going to shop there this week too, right? We know that “voting with your wallet” simply does not work when a company is worth a trillion dollars. So we just opt for the convenient thing and buy from Amazon.

And inside, we die a little. And we deserve to.

I just finished The Count of Monte Cristo, which is hands-down my favourite book I’ve ever read.¹ At the beginning of the book, three young men are sitting around discussing someone they hate: the main character, Edmond Dantès. They are half-heartedly conspiring against him, entertaining a lustful fantasy of knocking his perfect life down a peg.

None of the three of them on his own would ever have the balls to do this. Or, at least, not the brains plus the balls. Having big brains and big balls is actually quite rare.

But together, the three of them start a conversation that takes on a mind of its own. Even though none of the three of them is willing to say out loud that they truly do want to frame Dantès for a crime, each of the three of them sees in the others’ eyes that they do in fact believe it’s possible. And not only that it’s possible, but that Dantès deserves it.

Each of the three young men, encouraged by lustful looks in the others’ eyes, is willing to commit the worst atrocity of his life. This isn’t even peer pressure, per se. It’s more like some vague sense of inevitability. Some sense that, whether or not I participate, this thing is going to happen.

Furthermore, two of the young men are deliberately taking advantage of the other. They know that he’s going to smell this inevitability in the air, this idea that Dantès deserves it — and ultimately they use his own sensibilities to set him up as the perpetrator. And he falls for it, and he commits the inevitable atrocity.

In our own lives, it’s easy to say that we would not fall prey to this kind of thing. But if you still buy iPhones, shop on Amazon, search on Google, or vote for bad candidates, you are already guilty.

I’m guilty. I’m the one writing this, and I am absolutely guilty. Because when it really comes down to it, I think certain things are inevitable. I believe the human species goes in cycles of learning the same elementary lessons over and over, and there’s nothing that poor little I can do to stop that. No matter how many blog posts I write, the economy is still going to crash eventually. Because people are going to invent new over-leveraged financial products and gamble the economy straight into the toilet again.

Because we always do. We can’t help ourselves.

But it still makes me feel weak. Because I shouldn’t believe that atrocities are inevitable. That's a bad thing to believe.

I’m not a religious person, but a lot of my favourite parables come from the Bible. Because they’re great stories.

In one of these stories, John 8:7-11, a mob is about to stone a woman for adultery. Each member of the crowd is just waiting for the spark, the first sign of violence, so that they can join in the violence unmolested by moral hang-ups. After all, if this is what everyone’s doing, right?

And Jesus, in all his wisdom, tells them “okay then, let he who is without sin cast the first stone.” And just like that, the crowd is defeated. Because each and every person there has also sinned. Their revenge fantasy, in all fairness, also applies to themselves.

But the mob isn’t just defeated in its violence or its lust. The mob is defeated in its very state as a mob, in its very sociological essence. What Jesus does is take away the mob’s most valuable asset: the sense of inevitability. The strongest thing a mob can have is some nebulous sense that what they are doing was somehow destined — that it simply must be this way, and we are simply here to participate.

That’s how things get worse. And that’s why Jesus is such a mythical figure (as is the Count of Monte Cristo, in the second half of the book). Because he doesn’t just correct people — he absolutely disarms them. Bereft of all their worst biases, they are left with no excuse to continue being fools.

If there’s one thing in life you should stay away from, it’s a mob with a sense of entitled inevitability. Because if there’s one thing we’ve learned from history, it’s that groups of people are capable of atrocities that no individual would ever commit.

And unless you’re Christ, or the Count of Monte Cristo, you’re probably not going to talk them out of it.

Although, if you have to have one goal in life, maybe it could be to become that kind of person. The kind of person who can talk them out of it. Because that kind of person can prevent us from having to learn terrible lessons again. And again, and again.

Drink some water and don’t frame people.

JR

“History is an alternating series of frying pans and fires.” - Péter Esterházy

1. If you’re going to read The Count of Monte Cristo, you must read the Robin Buss translation. It’s the best translation of anything I’ve ever read. Beautiful, simple, and modernized to the perfect degree.