Sunday, March 11, 2007

Where Are the Grown-Ups When You Need Them?


AS I write this, I am just back from the lovely town of Clinton, S.C., where I spoke at a school called Presbyterian College. I was speaking on a subject of great interest, at least to me: the image of the adolescent in mass culture. I used to teach about this area — the political and social content of the culture — before many of you readers were born, and I am still compelled by it.

The conclusion I made (suggested to me by my mentor, Al Burton) is that adolescents dominate movies and television because they are the main consumers of mass culture. But far more than that, and partly because of mass culture, adolescents, with their short attention spans, their demand for a painless life, their need to blame everyone else for their problems, and their perpetual sense of victimization despite having just been given new Beemers, are the model for the whole society right now.

This hits hard in the current economic world. For example, the stock market has lately been turbulent in a downward direction. After years of smooth sailing, waves of selling have been happening occasionally, sending prices lower. On the business news channels and in print, investors/speculators are whining like kids who have just been grounded for coming home drunk.

But look at it the way a grown-up would. Broad cross-sections of stocks wildly — wildly — outperform cash, Treasuries and corporate bonds over long periods. Why do stocks offer such “excess returns?” Because their standard deviation of return is much higher than that of cash or bonds. In other words, you get paid a lot to go through the gut-wrenching rides like those we have had lately. If we did not have those times, stocks would be priced so that they would not have excess returns.

The last few weeks are the price of admission to this club. It’s that simple. Get used to it. If you want to be in the market, remember why you get those returns. That would be the grown-up way to handle it — so, naturally, we handle it the adolescent way.

Second, perhaps you have noticed the collapse of the subprime mortgage market — or at least its substantial correction. Well, a long time ago, I was friends with the owner of a subprime mortgage issuer. The whole deal was that the issuer was paid a lot of points and fees and higher interest to take on that risk. When the company saw the difference between subprime and prime diminish, he simply left the business. He would not have been paid for risk, so he left the field a superrich man.

Now, the holders of subprime collateralized debt obligations are whining and complaining about the fall in their bonds. But what did they think they were buying? Why did they think they got those higher interest rates? They were called “subprime” for a reason. It was adolescent behavior to think they could both have higher returns and not have any greater risk than the prime mortgage space. (And it was pure magical thinking to think that risk had disappeared from issuing mortgages to unqualified buyers, or that if you put a lot of unqualified buyers together into a pool, the risk would somehow be eliminated — as if you had put a lot of dogs together and expected some to be cats.)

But wait a minute. What is a junk bond if not a loan to a subprime borrower? Why do lenders think that those bonds are called “below investment grade?” It’s not just a formality or a quaint term. Over long periods, junk bonds really do default at rates far greater than investment-grade bonds. That’s why smart lenders used to demand very substantial premiums for making those loans.

Now, in a mania of adolescent “we know better than our stodgy parents” behavior, lenders lend to junk borrowers for not wildly more than they charge Exxon Mobil.

Where did the grown-ups go? In case one of those super-well-paid lenders has been skiing in Gstaad and is recuperating after hitting a mogul the wrong way, he may want to read W. Braddock Hickman’s encyclopedic work, “Corporate Bond Quality and Investor Experience” (out of print but well worth tracking down). The results are just what adults would expect: there are not excess returns in junk except in very rare periods because of the default risk. Again, where have the people who behave like parents gone? Is the correction in subprime ringing any bells in the junk-bond world? Heck, no. Party on, dude.

And we can look even higher up the tree. It used to be assumed that along with great power in the corporate world came great responsibility. To stockholders above all that duty was owed. That was how grown-ups played the game.

But to the adolescent mind, everything is owed and nothing is owed in return. To the adolescent mind, it’s all about what can you do to feed a bottomless maw of self-regard. How else to explain the collapse of ethical standards in terms of excessive C.E.O. compensation, backdating of options, spring-loading, lavish-beyond-words severance packages for failed C.E.O.’s?

Finally, and most discouragingly, what about the very top of the heap? It used to be assumed that the Chief Magistrate of the Nation owed it to us to tell us bad news, to make the government work responsibly and parsimoniously. It used to be thought that while a politician would promise anything to get a vote, some measure of responsibility was required once he or she was in office.

How quaint. For a good 30 years now, at least since Gerald R. Ford left office, we have had a leadership style that said to the citizens, “You can buy it, go on try it, you can pay me next week” (as the immortal Chuck Berry would say). Or, more precisely, “You can have it all and it doesn’t cost a thing.”

We can lower taxes and get more revenue. We can fight a war with grossly inadequate plans and resources and win anyway. We can trust business to regulate itself because, in our time, businesspeople have become self-regulating unselfish madonnas. We can run deficits of $800 billion a year in foreign trade and there won’t be any adverse consequences.

BUT to the adolescent mind, of course, actions are divorced from consequences because Mom and Dad are always there to make it right.

Guess what: we’re the Moms and Dads now, and if we don’t act like it, there will be consequences aplenty.

Again, are there any grown-ups in the house? Anyone? Anyone?

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