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February 29, 2008

Our Postmodern Economy

Friedrich von Blowhard writes:

Dear Blowhards,

It has occurred to me from time to time that shifts in a civilization probably show up more clearly in the arts than elsewhere. As one example, let’s look at the transition in painting from representation to more conceptual modes such as cubism and abstraction; this occurred in the first couple decades of the 20th century.

This shift occurred at virtually the same time that the professions -- our technocratic elite -- emerged in their modern, self-regulated form. As Robert H. Wiebe points out in his book, "The Search for Order 1877-1920," practitioners of law, medicine, teaching, architecture, social work and other forms of administration seized the reins of their own professional status around the year 1900. During this era, members of various intellectual "guilds" got legal control over the education of their prospective members, over certification (who got a license and who was kept out), and over disciplinary proceedings governing their members. While Wiebe claims the critical decade for the development of the self-consciousness of the professions as social leaders was between 1895 and 1905, the complete consolidation of professional self-governance took a couple decades to complete.

Let me be clear what it means when professions are able to control themselves, with full cooperation by the government. It means the recognition in law that these groups constitute a leadership class that can not be meaningfully directed by outsiders. Sounds like a pretty thorough endorsement of elite status to me.

While these specific dates and examples come from the United States, the rise of a new class of experts (distinguished by their technical education, claiming to embody the power of advanced science and working in close communion with both industry and government while largely remaining formally independent of both) was common to all advanced countries at this time. Is it an accident that modernism, a self-consciously "advanced" art, distinguished by its focus on concepts rather than ordinary appearances, occurred at the same time as the rise of a conceptually-oriented class of technocrats?

I think not.

In fact, the so-called avant-garde of the early 20th century art world could be better described as bringing up the rear or hitching a ride on coattails of this social dynamic, which had been in train for a couple decades when the art world finally woke up and clambered onto the bandwagon.

So if changes in the art world generally echo or reflect changes in the real world -- a proposition that can be illustrated by countless examples -- what do our contemporary arts show us about developments in the real world today? When you look at, say, a Frank Gehry building, with its billowing, twisted, slanted forms, what is being conveyed? I’d read it as saying, "These twisted planes are walls if I say they are. I (the architect, that is) have got the advanced materials and computer software to make them work (more or less) as walls, and I’ve got a patron with enough dough to disregard commonplace utilitarian considerations."

To put it another way, why does Gehry design this way? Because he can. Gehry’s buildings are, viewed in a social context, remarkably arrogant statements about power: Gehry, backed up by the power of technology and the power of big money, delivers willful novelty. The emotional kick from this style comes from the demonstration that he’s got the muscle to pull this off, to ignore all the petty constraints that bind us lesser mortals.

A similar feeling about the ability of power to write its own version of reality (because those in power, like Gehry’s clients, have the muscle to make their version of reality stick) came over me while reading a story on Bloomberg about the recent decision of rating agencies to affirm the strongest possible financial ratings of MBIA, the monoline insurer.

Feb. 27 (Bloomberg) -- Moody's Investors Service and Standard & Poor's say MBIA Inc. has enough capital to withstand losses and justify its AAA rating. MBIA's debt investors aren't so convinced.

Credit-default swaps indicating the risk that Armonk, New York-based MBIA's bond insurance unit won't be able to meet its obligations are trading at similar levels to companies such as homebuilder Pulte Homes Inc., which is rated 10 steps lower.

Credit default swaps are insurance policies being taken out by people who hold MBIA debt; they will pay off if MBIA defaults. The cost of these insurance policies rises when the perception of MBIA’s financial position becomes shakier, as you would expect. While there’s no guarantee that the providers of such insurance know the exact likelihood of an MBIA default, they are at least playing with their own money and are at risk of losing a bundle if they estimate such risks incorrectly. This is in contrast to the rating agencies, which function as governmentally-mandated oracles on matters of creditworthiness, with no financial downside to the agencies if they’re wrong.

And I mean that governmentally-mandated part quite literally: there are only five "statistical rating agencies" including Moody’s and S&P that are legally permitted to rate debt by the SEC, and many organizations are required by law to invest only in rated debt. I don’t know about you, but which group would you trust to be more careful in their evaluations of creditworthiness: the sellers of credit default swaps, who have their own money at risk, or the rating agencies? (The rating agencies can't even be sued for rating malpractice, since their ratings are constitutionally protected "speech." To paraphrase Mel Brooks, it is good to be a flunky of the King!)

Anyway, back to Bloomberg:

The discrepancy illustrates the skepticism debt investors have about the safety of MBIA's rating after the company posted $3.4 billion of losses on subprime mortgages last quarter. Moody's and S&P both said that while at least $4 billion of writedowns lie ahead, MBIA's management has made enough changes to warrant the top rating.

This skepticism is, I think, fairly understandable when you understand the business MBIA is in. MBIA is in exactly the same line of business as credit default swaps. That is, MBIA provides insurance coverage for organizations that issue bonds against the possibility of default. (The term monoline insurer derives from the fact that when these insurers first were set up their only line of business was insuring municipalities who were issuing debt. A few years ago, however, the monoline name became technically inaccurate when these companies started insuring complex structured finance securities which, sadly, have proved a whole lot more risky than municipal bonds, hence MBIA's troubles.) Obviously, the value of insurance policies such as those sold by MBIA depends crucially on MBIA's financial strength; if the insurer doesn’t have the bucks to pay off on behalf of the policy holder when the policy holder defaults, then the insurance provided would be worthless. In effect, MBIA rents out its AAA credit rating to the organizations that buy its policies, enhancing their creditworthiness with its own financial strength.

This is important to the discussion because MBIA has insured hundreds of billions of dollars of debt, much of which is held by banks, pension funds, and other investment vehicles. If MBIA's super high AAA rating were taken away by the rating agencies, the ratings of the securities it insures would also drop, and thus become less valuable, triggering writeoffs throughout the financial world. In other words, a whole lot of people have a lot to lose if MBIA doesn’t maintain its credit rating. As many people have observed, the rating agencies (S&P, Moody's, Fitch, etc.) are hardly eager to be accused of having caused the end of the financial world as we know it. Under such political pressure, can our heroic rating agencies maintain their oracular objectivity -- which is of course their ostensible raison d’etre?

Obviously, a lot of people, including the author of the Bloomberg story think the answer to that question is a big fat no:

The decisions by Moody's and S&P to retain the ratings protected as much as $637 billion of debt from downgrade, avoided fire sales of municipal bonds and helped save banks from as much as $70 billion of losses, based on Oppenheimer & Co. estimates.

The people running MBIA naturally think such cynicism about how they kept their rating is entirely unjustified. Again from the Bloomberg story:

MBIA Chief Executive Officer Jay Brown, who returned to the post last week after the ouster of Gary Dunton, said the ratings decisions were unrelated to concerns a downgrade would roil credit markets. "I think that’s dead wrong," Brown told CNBC Television.

Well, in a sort of riposte to Mr. Brown’s attitude of being shocked, simply shocked to see that people thought politics had anything to do with his rating, financial blogger Mish Shedlock compared the financial numbers of MBIA with the pharmaceutical firm of Pfizer, which recently lost its AAA rating.

His summary is as follows:

• Profit margin -61.76% [for MBIA] vs. +17.07% [for Pfizer]
• Return on Equity -35.54% [for MBIA] vs. +12.13% [for Pfizer]
• Revenue $3.12 Billion [for MBIA] vs. $48.61 Billion [for Pfizer]
• Earnings Per Share -$15.22 [for MBIA] vs. +$1.20 [for Pfizer]
• Total Cash $5.73 Billion [for MBIA] vs. $20.30 Billion [for Pfizer]
• Total Debt $17.44 Billion [for MBIA] vs. $8.69 Billion [for Pfizer]

Do the financials of MBIA look "gilt edged"? Heck, do they look investment grade at all?

Remember, Pfizer has to only ensure the repayment of $8.69 billion of debt with its financial strength, while MBIA is guaranteeing the repayment of $637 billion of other people's debt as well as $17.44 billion of its own debt. It is awfully hard to see how Pfizer's debt could be considered riskier than MBIA's.

Mr. Shedlock is hardly the only person who has his doubts about the objectivity of MBIA’s credit rating, and, in fact, the whole function of rating agencies in today’s financial markets. From the Bloomberg story:

The ratings firms "certainly have less credibility than they had before," said Dan Castro, chief credit officer of the structured finance business at GSC Group in New York. "On the other hand, the affirmation gives investors a sigh of relief.'"

Just like with Mr. Gehry’s architecture, the aesthetic kick out of all this is the demonstration that rating agencies (with the government’s arm draped conspicuously over their shoulder) have the muscle to pull this off, to ignore all the petty constraints that bind us lesser mortals.

Ah, what a brave new world we live in! And to think you could see it coming by just looking at the work of starchitects!



posted by Friedrich at February 29, 2008


Have major investors such as pension funds become reluctant to buy MBIA-insured debt? If the answer is no, it's evidence that maybe MBIA's woes aren't all that dire.

Posted by: Peter on February 29, 2008 3:17 PM

Dear Friedrich von Blowhard~

What's conveyed to me by Frank Gehry buildings is their astounding beauty as works of art, and the techno-sociological arguments you wrap them in fail to pull them down. Indeed, viewing his archutecture unbinds petty restraints, at least for this lesser mortal.

Your dismissal of Gehry seems dependant upon denouncing the architect's motives, not his architecture. Would you condemn St. Peter's Baldocchino because Bernini willfully convinced Urban VII of the novelty of his design?

David Richardson

Posted by: nuuki on February 29, 2008 4:44 PM

I'm not sure what the first part of this post has to do with the second. Maybe you should break them apart so the second half can be linked to directly.

Posted by: Noumenon on February 29, 2008 5:24 PM

Okay, I'm way over my head here but...don't S&P and Moody's have to back up their decision not to downgrade MBIA from AAA to AA with lots and lots and lots of figures. Figures checked by out of house (probably blogging) accountants? I mean they can't just wave a magic wand...or can they?

P.S. A great resource for financial info is:

Posted by: ricpic on February 29, 2008 6:17 PM

Oops. I should've read the whole post before making my comment.

But maybe MBIA is held to a less stringent standard than Pfizer because it's understood that the odds against a run on the bank (of MBIA) are very high as opposed to Pfizer's obligation to pay back a set percentage of its debt by a date certain. I'm just BSing now, but couldn't it be something like that? Fingers crossed.

Posted by: ricpic on February 29, 2008 6:29 PM


At the moment, MBIA is writing very little new business of any kind. I think their problems are real enough.

David Richardson:

I'm glad you like Mr. Gehry's buildings. However, I am not doing aesthetic criticism; I am trying to account for why his designs seem to strike a chord in contemporary audiences. The only way to do this is to try to relate elements of his art to elements outside of art. If you notice, I did the same thing with the shift in painting from conventional representation to more conceptual modes. That is, I related the shift in art to a shift in social class taking place outside art. If we're going to argue, or even disagree, it would be helpful if we got on the same page here.

Dear Noumenon:

I actually think the connection is kind of amusing, but feel free to link to the post and tell people to ignore the first seven paragraphs. That ought to fix it.


Actually, no, the rating agencies don't have to account for their procedures. Nobody regulates them and you can't sue them after the fact for screwing up, so they can pretty much do what they want.

I'm guessing that with the capital the monolines have raised recently, and the fact that they -- to everyone's surprise -- pay out loses only as they actually occur (which on a home loan means they're spread out over many years), means that they are in no imminent danger of defaulting. This, however, is NOT the ostensible definition of a triple A credit rating, but it appears to have become the functional definition being used today. I'd like to think that some kind of reform may control this kind of chicanery in the future, but I'd also like to weigh what I did in high school and have the same head of hair I had at 18, so go figure.

Posted by: Friedrich von Blowhard on February 29, 2008 7:02 PM

My head spins when people start talking about things like "insuring debt"! No wonder the people who can wrap their minds around such concepts (and manipulate them too) make such big bucks-- the rest of us simply have no idea what they're doing. So how could we protest, let alone enforce, anything on them?

But I take what you're saying to be something along the lines of "We're being managed to death. And we're being told to relax, keep working, be happy, because there are certified experts in control. Meanwhile, these experts are in reality accountable to no one, let alone financial or aesthetic fundamentals. And they are massaging and hoodwinking the rest of society so that they can shore up and even improve their own position in it."

Something like that? If so: Sounds about right to me.

Posted by: Michael Blowhard on March 1, 2008 12:56 AM

I agree with the commentator who suggested splitting this post in two. The insight that the twentieth-century trends to professionalisation and abstraction are related is very, very interesting. I'm not it explains the corruption of the bond agencies. How much explanation does that even require? Unaccountable power wielded by a self-interested elite for its own enrichment, to the damage of general society.

Posted by: Intellectual Pariah on March 1, 2008 9:55 AM

I agree with your statement about elites insulated from risk; the whole MBIA thing doesn't surprise me one bit. But wasn't part of the reason behind all this awful modern art that reproducing nature wasn't too hard with the invention of the photograph? Maybe traditional arts have just reached the end of their creativity, etc. and we have new arts like movies instead. There haven't been a lot of good epic poems lately.

Architecture, though; yeah, I agree, the new stuff is ugly.

Posted by: SFG on March 1, 2008 10:42 AM

Speaking of art and finance here's Jim Cramer on the monolines-
"The guy who actually understood this, better than anybody, was in the book Appointment in Samarra [a 1934 novel by John O'Hara]. That is a book about this era, because he's about not telling the truth because of the other people at the country club."

And here are The Long Johns on subprime-

Posted by: AS on March 1, 2008 2:04 PM

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