Griftopia, by Matt Taibbi

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Matt Taibbi is angry. He is a Rolling Stone columnist who spent the last several years covering the financial crisis, and as an outside observer, is far more negative about the finance industry than anybody associated with it. Griftopia is a collection of columns and other research put together as a striking condemnation of what has happened to America in the last twenty years.

Taibbi’s main thesis is that the finance industry has, rather than produce real value, chosen to exploit value created by others by creating financial instruments. He digs into the mortgage crisis, the commodities bubble, urban privatization and health care and shows how these are all different facets of the same attitude – make a quick buck for yourself, and damn the long-term consequences. I don’t know if all of Taibbi’s allegations are accurate, but he strings his observations together into a compelling story of a country headed into oblivion, because we are letting these jerks get away with it.

Here’s Taibbi’s description of the bubble economy:

Imagine the whole economy has turned into a casino. Investors are betting on oil futures, subprime mortgages, and Internet stocks, hoping for a quick score. In this scenario the major brokerages and investment banks play the role of the house. Just like real casinos, they always win in the end – regardless of which investments succeed or fail, they always take their cut in the form of fees and interest. Also just like real casinos, they only make more money as the number of gamblers increases: the more you play, the more they make. And even if the speculative bubbles themselves have all the inherent value of a royal flush, the money the house takes out is real. … Bettors chase imaginary riches, while the house turns those dreams into real mansions.

Now imagine that every time the bubble bursts and the gamblers all go belly-up, the house is allowed to borrow giant piles of money from the state for next to nothing. The casino then in turn lends out all that money at the door to its recently busted customers, who flock back to the tables to lose their shirts all over again. The cycle quickly repeats itself, only this time the gambles is in even worse shape than before; now he’s not only lost his own money, he’s lost his money and he owes the house for what he’s borrowed.

Taibbi shows how this played out in the subprime mortgage crisis, but also in several other areas:

  • Commodities trading used to be about hedging risk, where a corn farmer could lock in a guaranteed price at market. The government used to enforce position limits, to ensure that “the trading on the commodities markets would be dominated by the physical hedgers”. However, in the 80s and 90s, the government issued exemptions to those position limits to several banks like Goldman Sachs, leading to 2008, when “80 percent of the activity on the commodity exchanges was speculative”. Instead of creating and maintaining real value from real crops, the commodities market became just another casino. This played into the oil price craziness of 2008, which exacerbated the slide into recession.

  • He also tells the story of how Chicago leased its parking meters for 75 years to an Abu Dhabi coalition for a lump-sum payment to cover a budget deficit – they essentially securitized the parking meter income stream. The downside was that the new lessors immediately raised prices and extended the meter schedule to start making a lot more money than originally projected in the lump sum payment, and left Chicago in worse shape than when it started.

Taibbi uses several more examples to demonstrate that Wall Street is a parasite getting fat by sucking profit out of others. It’s a short-term attitude that destroys value, rather than create value by producing goods and services. He ends the book by describing Goldman Sachs as a “vampire squid”, entwined with every aspect of the American economy and sucking value out of all of it without creating any value itself.

Griftopia is a withering tirade against what Wall Street has done to the American economy, and how the government and we, the people, have allowed it. It’s a quick read, and I recommend it for a different perspective on the recent financial crises than what is reported in more typical news channels.

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