Karl Marx is dead. Long live Karl Marx.
As the stock market slides and home values collapse, it’s difficult for most to decipher how “credit default swaps” and “collateralized debt obligations” contributed to the mess. A new book, Reckless Endangerment, deciphers the debacle. It also reminds us of why Karl Marx still lives.
Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon is the searing new book by Gretchen Morgenson, a New York Times columnist, and Joshua Rosner, a housing finance expert. It is “a story of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.” It’s also a story of how overlapping networks corrupted consciences, created an entitlement culture, and ignored crap detectors.
The story starts with the 1977 Community Reinvestment Act that Congress passed and then used to pressure banks to relax lending standards. The pressure was ratcheted up in 1992 when the Federal Reserve Bank of Boston purported to identify racial discrimination in the application of traditional lending standards to those “whose incomes, assets, or abilities to pay fell far below the traditional homeowner spectrum,” write Morgenson and Rosner. The report was later repudiated but not before President Clinton proposed increasing homeownership through a “partnership” between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise.” He should have said “taxpayer-sponsored.”
“Guaranteed” loans promoted reckless borrowing. Lenders knew they could offload risk to purchasers of bundled loans, especially Fannie Mae. In 1994, subprime lending was $40 billion. In 2000, it totaled $160 billion. As housing prices soared, many homeowners greedily tried to turn their homes into personal ATMs. “In 2005 alone, homeowners extracted three quarters of a trillion dollars from their homes, spending two thirds of it on personal consumption, home improvements, and credit-card debt.”1
Greed was the name of the game inside Fannie Mae as well. Under James A. Johnson, it became “the largest and most powerful financial institution in the world,” Morgenson and Rosner write. Johnson made Fannie a part of a network of politicians as it dispensed campaign contributions and gave jobs to friends and relatives of legislators. Fannie spent millions on lobbyists who cajoled Congressmen. Lobbyists also paid academics to play the part of prostitutes by publishing biased research that validated Fannie’s fraud.
By 2003, the government was involved in financing almost half—$3.4 trillion—of the home-loan market. By summer 2005 almost 40 percent of new subprime loans were for amounts larger than the value of the properties. The bill was about to come due—but not before Johnson left the scene. Morgenson and Rosner report that in 1998, when Fannie Mae’s lending hit $1 trillion, its top officials began manipulating the company’s results to generate bonuses for themselves. That year Johnson’s $1.9 million bonus brought his compensation to $21 million. In nine years, Johnson received $100 million.
Not everyone was drinking the Kool-Aid, however. Ross Gruberman was a crap detector who, in 2002, wrote an article in the Washington Post titled “Balancing Act.” He explained the history and the benefits Fannie received, as well as its arrogant culture. Marvin Phaup and June O’Neill of the Congressional Budget Office offered the same assessment at the same time. They issued a report critical of Fannie Mae and suggested killing the institution. Fannie Mae resisted, arrogantly characterizing Phaup and O’Neill as “digit-heads” and “pencil brains.”
The outcome of Fannie Mae’s arrogant culture is a dogged recession and declining housing prices. If you suffer from high blood pressure, it might not be wise to read Reckless Endangerment. It will make your blood boil. If however you wonder about the origins of the housing debacle, consider reading one of Karl Marx’s books.
In 1867, Karl Marx published Das Kapital: A Critique of Political Economy. Marx gave capitalism—the system he hated fiercely—its now-classic definition: a system of market exchange, private property, and private accumulation of profit. Notice there is no mention of a moral system or purpose. Michael Novak, an American Catholic philosopher and journalist, says the biblical view of capitalism is different. He defines it as “an economic system, dependent on an appropriate political system and a supportive moral-cultural system, that unites a large variety of social institutions in the support of human economic creativity.”2 Notice that it requires “a moral-cultural system.”
Marx had the cultural system—without the moral compass. In his 1845 work “Theses on Feuerbach,” Marx wrote, “The philosophers have only interpreted the world, in various ways; the point, however, is to change it.” Marx changed the world because, like Fannie Mae, he linked his ideas to a culture of academics, politicians, and businesspeople who created institutions championing Marxist capitalism. The outcome is Harvard Business School professor Michael Porter’s opening line in a recent article: “The capitalist system is under siege.”3 Of course it is. Reckless Endangerment provides a detailed account. Das Kapital provides the origins. Together, they remind us why Karl Marx lives.
1 Gretchen Morgenson and Joshua Rosner, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (New York, NY: Times Books/Henry Holt & Company, 2011), p. 224.
2 Michael Novak, Business as a Calling: Work and the Examined Life (New York, NY: Free Press, 1996), pp. 80-84.