Goldman Sachs

How will AI affect inequality?

PNRJ current events, ethics, futurism, inequality, public policy , , , , , , , , , , , ,

Oct 15 JDN 2460233

Will AI make inequality worse, or better? Could it do a bit of both? Does it depend on how we use it?

This is of course an extremely big question. In some sense it is the big economic question of the 21st century. The difference between the neofeudalist cyberpunk dystopia of Neuromancer and the social democratic utopia of Star Trek just about hinges on whether AI becomes a force for higher or lower inequality.

Krugman seems quite optimistic: Based on forecasts by Goldman Sachs, AI seems poised to automate more high-paying white-collar jobs than low-paying blue-collar ones.

But, well, it should be obvious that Goldman Sachs is not an impartial observer here. They do have reasons to get their forecasts right—their customers are literally invested in those forecasts—but like anyone who immensely profits from the status quo, they also have a broader agenda of telling the world that everything is going great and there’s no need to worry or change anything.

And when I look a bit closer at their graphs, it seems pretty clear that they aren’t actually answering the right question. They estimate an “exposure to AI” coefficient (somehow; their methodology is not clearly explained and lots of it is proprietary), and if it’s between 10% and 49% they call it “complementary” while if it’s 50% or above they call it “replacement”.

But that is not how complements and substitutes work. It isn’t a question of “how much of the work can be done by machine” (whatever that means). It’s a question of whether you will still need the expert human.

It could be that the machine does 90% of the work, but you still need a human being there to tell it what to do, and that would be complementary. (Indeed, this basically is how finance works right now, and I see no reason to think it will change any time soon.) Conversely, it could be that the machine only does 20% of the work, but that was the 20% that required expert skill, and so a once comfortable high-paying job can now be replaced by low-paid temp workers. (This is more or less what’s happening at Amazon warehouses: They are basically managed by AI, but humans still do most of the actual labor, and get paid peanuts for it.)

For their category “computer and mathematical”, they call it “complementary”, and I agree: We are still going to need people who can code. We’re still going to need people who know how to multiply matrices. We’re still going to need people who understand search algorithms. Indeed, if the past is any indicator, we’re going to need more and more of those people, and they’re going to keep getting paid higher and higher salaries. Someone has to make the AI, after all.

Yet I’m not quite so sure about the “mathematical” part in many cases. We may not need people who can solve differential equations, actually: maybe a few to design the algorithms, but honestly even then, a software program with a simple finite-difference algorithm can often solve much more interesting problems than one with a full-fledged differential equation solver, because one of the dirty secrets of differential equations is that for some of the most important ones (like the Navier-Stokes Equations), we simply do not know how to solve them. Once you have enough computing power, you often can stop trying to be clever and just brute-force the damn thing.

Yet for “transportation and material movement”—that is, trucking—Goldman Sachs confidently forecasts mostly “no automation” with a bit of “complementary”. Yet this year—not at some distant point in the future, not in some sci-fi novel, this year in the actual world—the Governor of California already vetoed a bill that would have required automated trucks to have human drivers. The trucks aren’t on the roads yet—but if we already are making laws about them, they’re going to be, soon. (State legislatures are not known for their brilliant foresight or excessive long-term thinking.) And if the law doesn’t require them to have human drivers, they probably won’t; which means that hundreds of thousands of long-haul truckers will suddenly be out of work.

It’s also important to differentiate between different types of jobs that may fall under the same category or industry.

Neurosurgeons are not going anywhere, and improved robotics will only allow them to perform better, safer laparoscopic surgeries. Nor are nurses going anywhere, because some things just need an actual person physically there with the patient. But general practictioners, psychotherapists, and even radiologists are already seeing many of their tasks automated. So is “medicine” being automated or not? That depends what sort of medicine you mean. And yet it clearly means an increase in inequality, because it’s the middle-paying jobs (like GPs) that are going away, while the high-paying jobs (like neurosurgeons) and the low-paying jobs (like nurses) that remain.

Likewise, consider “legal services”, which is one of the few industries that Goldman Sachs thinks will be substantially replaced by AI. Are high-stakes trial lawyers like Sam Bernstein getting replaced? Clearly not. Nor would I expect most corporate lawyers to disappear. Human lawyers will still continue to perform at least a little bit better than AI law systems, and the rich will continue to use them, because a few million dollars for a few percentage points better odds of winning is absolutely worth it when billions of dollars are on the line. So which law services are going to get replaced by AI? First, routine legal questions, like how to renew your work visa or set up a living will—it’s already happening. Next, someone will probably decide that public defenders aren’t worth the cost and start automating the legal defenses of poor people who get accused of crimes. (And to be honest, it may not be much worse than how things currently are in the public defender system.) The advantage of such a change is that it will most likely bring court costs down—and that is desperately needed. But it may also tilt the courts even further in favor of the rich. It may also make it even harder to start a career as a lawyer, cutting off the bottom of the ladder.

Or consider “management”, which Goldman Sachs thinks will be “complementary”. Are CEOs going to get replaced by AI? No, because the CEOs are the ones making that decision. Certainly this is true for any closely-held firm: No CEO is going to fire himself. Theoretically, if shareholders and boards of directors pushed hard enough, they might be able to get a CEO of a publicly-traded corporation ousted in favor of an AI, and if the world were really made of neoclassical rational agents, that might actually happen. But in the real world, the rich have tremendous solidarity for each other (and only each other), and very few billionaires are going to take aim at other billionaires when it comes time to decide whose jobs should be replaced. Yet, there are a lot of levels of management below the CEO and board of directors, and many of those are already in the process of being replaced: Instead of relying on the expert judgment of a human manager, it’s increasingly common to develop “performance metrics”, feed them into an algorithm, and use that result to decide who gets raises and who gets fired. It all feels very “objective” and “impartial” and “scientific”—and usually ends up being both dehumanizing and ultimately not even effective at increasing profits. At some point, many corporations are going to realize that their middle managers aren’t actually making any important decisions anymore, and they’ll feed that into the algorithm, and it will tell them to fire the middle managers.

Thus, even though we think of “medicine”, “law”, and “management” as high-paying careers, the effect of AI is largely going to be to increase inequality within those industries. It isn’t the really high-paid doctors, managers, and lawyers who are going to get replaced.

I am therefore much less optimistic than Krugman about this. I do believe there are many ways that technology, including artificial intelligence, could be used to make life better for everyone, and even perhaps one day lead us into a glorious utopian future.

But I don’t see most of the people who have the authority to make important decisions for our society actually working towards such a future. They seem much more interested in maximizing their own profits or advancing narrow-minded ideologies. (Or, as most right-wing political parties do today: Advancing narrow-minded ideologies about maximizing the profits of rich people.) And if we simply continue on the track we’ve been on, our future is looking a lot more like Neuromancer than it is like Star Trek.

What about a tax on political contributions?

PNRJ ethics, market failure, public policy, Uncategorized , , , , , ,

Jan 7, JDN 2458126

In my previous post, I argued that an advertising tax could reduce advertising, raise revenue, and produce almost no real economic distortion. Now I’m going to generalize this idea to an even bolder proposal: What if we tax political contributions?

Donations to political campaigns are very similar to advertising. A contest function framework also makes a lot of sense: Increased spending improves your odds of winning, but it doesn’t actually produce any real goods.

Suppose there’s some benefit B that I get if a given politician wins an election. That benefit could include direct benefits to me, as well as altruistic benefits to other citizens I care about, or even my concern for the world as a whole. But presumably, I do benefit in some fashion from my favored politician winning—otherwise, why are they my favored politician?

In this very simple model, let’s assume that there are only two parties and two donors (obviously in the real world there are more parties and vastly more donors; but it doesn’t fundamentally change the argument). Say I will donate x and the other side will donate y.

Assuming that donations are all that matter, the probability my party will win the election is x/(x+y).

Fortunately that isn’t the case. A lot of things matter, some that should (policy platforms, experience, qualifications, character) and some that shouldn’t (race, gender, age, height—part of why Trump won may in fact be that he is tall; he’s about 6’1”.). So let’s put all the other factors that affect elections into a package and call that F.

The probability that my candidate wins is then x/(x+y) + F, where F can be positive or negative. If F is positive, it means that my candidate is more likely to win, while if it’s negative, it means my candidate is less likely to win. (If you want to be pedantic, the probability of winning has to be capped at 0 and 1, but this doesn’t fundamentally change the argument, and only matters for candidates that are obvious winners or obvious losers regardless of how much anyone donates.)

The donation costs me money, x. The cost in utility of that money depends on my utility function, so for now I’ll just call it a cost function C(x).
Then my net benefit is:
B*[x/(x+y)+F] – C(x)

I can maximize this by a first-order condition. Notice how the F just drops out. I like F to be large, but it doesn’t affect my choice of x.

B*y/(x+y)^2 = C'(x)

Turning that into an exact value requires knowing my cost function and my opponent’s cost function (which need not be the same, in general; unlike the advertising case, it’s not a matter of splitting fungible profits between us), but it’s actually possible to stop here. We can already tell that there is a well-defined solution: There’s a certain amount of donation x that maximizes my expected utility, given the amount y that the other side has donated. Moreover, with a little bit of calculus you can show that the optimal amount of x is strictly increasing in y, which makes intuitive sense: The more they give, the more you need to give in order to keep up. Since x is increasing in y and y is increasing in x, there is a Nash equilibrium: At some amount x and y we each are giving the optimal amount from our perspective.

We can get a precise answer if we assume that the amount of the donations is small compared to my overall wealth, so I will be approximately risk-neutral; then we can just say C(x) = x, and C'(x) = 1:

B*y/(x+y)^2 = 1
Then we get essentially the same result we did for the advertising:

x = y = B/4

According to this, I should be willing to donate up to one-fourth the benefit I’d get from my candidate winning in donations. This actually sounds quite high; I think once you take into account the fact that lots of other people are donating and political contributions aren’t that effective at winning elections, the optimal donation is actually quite a bit smaller—though perhaps still larger than most people give.

If we impose a tax rate r on political contributions, nothing changes. The cost to me of donating is still the same, and as long as the tax is proportional, the ratio x/(x+y) and the probability x/(x+y) + F will remain exactly the same as before. Therefore, I will continue to donate the same amount, as will my opponent, and each candidate will have the same probability of winning as before. The only difference is that some of the money (r of the money, to be precise) will go to the government instead of the politicians.

The total amount of donations will not change. The probability of each candidate winning will not change. All that will happen is money will be transferred from politicians to the government. If this tax revenue is earmarked for some socially beneficial function, this will obviously be an improvement in welfare.

The revenue gained is not nearly as large an amount of money as is spent on advertising (which tells you something about American society), but it’s still quite a bit: Since we currently spend about $5 billion per year on federal elections, a tax rate of 50% could raise about $2.5 billion.

But in fact this seriously under-estimates the benefits of such a tax. This simple model assumes that political contributions only change which candidate wins; but that’s actually not the main concern. (If F is large enough, it can offset any possible donations.)
The real concern is how political contributions affect the choices politicians make once they get into office. While outright quid-pro-quo bribery is illegal, it’s well-known that many corporations and wealthy individuals will give campaign donations with the reasonable expectation of influencing what sort of policies will be made.

You don’t think Goldman Sachs gives millions of dollars each election out of the goodness of their hearts, do you? And they give to both major parties, which really only makes sense if their goal is not to make a particular candidate win, but to make sure that whoever wins feels indebted to Goldman Sachs. (I guess it could also be to prevent third parties from winning—but they hardly ever win anyway, so that wouldn’t be a smart investment from the bank’s perspective.)

Lynda Powell at the University of Rochester has documented the many subtle but significant ways that these donations have influenced policy. Campaign donations aren’t as important as party platforms, but a lot of subtle changes across a wide variety of policies add up to large differences in outcomes.

A political contribution tax would reduce these influences. If politicians’ sole goal were to win, the tax would have no effect. But it seems quite likely that politicians enjoy various personal benefits from lobbying and campaign contributions: Fine dinners, luxurious vacations, and so on. And insofar as that is influencing politicians’ behavior, it is both obviously corrupt and clearly reduced by a political contribution tax. How large an effect this would be is difficult to say; but the direction of the effect is clearly the one we want.

Taxing donations would also allow us to protect the right to give to campaigns (which does seem to be a limited kind of civil liberty, even though the precise interpretation “money is speech” is Orwellian), while reducing corruption and allowing us to keep close track on donations that are made. Taxing a money stream, even a small amount, is often one of the best ways to incentivize close monitoring of that money stream.

With a subtle change, the tax could even be made to bias in favor of populism: All you need to do is exempt small donations from the tax. If say the first $1000 per person per year is exempt from taxation, then the imposition of the tax will reduce the effectiveness of million-dollar contributions from Goldman Sachs and the Koch brothers without having any effect on $50 donations from people like you and me. That would technically be “distorting” elections—but it seems like it might be a distortion worth making.

Of course, this is probably even less likely to happen than the advertising tax.

Several of the world’s largest banks are known to have committed large-scale fraud. Why have we done so little about it?

PNRJ core principles, current events, ethics, financial fraud , , , , , , , , , , , , ,

July 16, JDN 2457951

In 2014, JPMorgan Chase paid a settlement of $614 million for fraudulent mortgage lending contributing to the crisis; but this was spare change compared to the $16.5 billion Bank of America paid in settlements for their fradulent mortgages.

In 2015, Citibank paid $700 million in restitution and $35 million in penalties for fraudulent advertising of “payment protection” services.

In 2016, Wells Fargo paid $190 in settlements for defrauding their customers with fake accounts.

Even PayPal has paid $25 million in settlements over abuses of their “PayPal Credit” system.
In 2016, Goldman Sachs paid $5.1 billion in settlements over their fraudulent sales of mortgage-backed securities.
But the worst offender of course is HSBC, which has paid $2.5 billion in settlements over fraud, as well as $1.9 billion in settlements for laundering money for terrorists. The US Justice Department has kept their money-laundering protections classified because they’re so bad that simply revealing them to the public could result in vast amounts of criminal abuse.
These are some of the world’s largest banks. JPMorgan Chase alone owns 8.0% of all investment banking worldwide; Goldman Sachs owns 6.6%; Citi owns 4.9%; Wells Fargo 2.5%; and HSBC 1.8%. That means that between them, these five corporations—all proven to have engaged in large-scale fraud—own almost one-fourth of all the world’s investment banking assets.

What shocks me the most about this is that hardly anyone seems to care. It’s seen as “normal”, as “business as usual” that a quarter of the world’s investment banking system is owned by white-collar criminals. When the issue is even brought up, often the complaint seems to be that the government is being somehow overzealous. The Economist even went so far as to characterize the prosecution of Wall Street fraud as a “shakedown”. Apparently the idea that our world’s most profitable companies shouldn’t be able to launder money for terrorists is just ridiculous. These are rich people; you expect them to follow rules? What is this, some kind of democracy?

Is this just always how it has been? Has corruption always been so thoroughly infused with finance that we don’t even know how to separate them? Has the oligarchy of the top 0.01% become so strong that we can’t even bring ourselves to challenge them when they commit literal treason? For, in case you’ve forgotten, that is what money-laundering for terrorists is: HSBC gave aid and comfort to the enemies of the free world. Like “freedom” and “terrorism”, the word “treason” has been so overused that we begin to forget its meaning; but one of the groups that HSBC gladly loaned money to is an organization that has financed Hezbollah and Al-Qaeda. These are people that American and British soldiers have died fighting against, and when a British bank was found colluding with them, the penalty was… a few weeks of profits, no personal responsibility, and not a single day of prison time. The settlement was in fact less than the profits gained from the criminal enterprise, so this wasn’t even a fine; it was a tax. Our response to treason was to impose a tax.

And this of course was not the result of some newfound leniency in American government in general. No, we are still the nation that imprisons 700 out of every 100,000 people, the nation with more prisoners than any other nation on Earth. Our police officers still kill young Black men with impunity, including at least three dozen unarmed Black men every year, many of them for no apparent reason at all. (The precise number is still unknown, as the police refuse to keep an official database of all the citizens they kill.) Decades of “law and order” politicians promising to stop the “rising crime” (that is actually falling) have made the United States very close to a police state, especially in poor neighborhoods that are primarily inhabited by Black and Hispanic people. We don’t even have an especially high crime rate, except for gun homicides (and that because we have so many guns, also more than any other nation on Earth). We are, if anything, an especially vindictive society, cruel, unforgiving, and violent towards those we perceive as transgressors.

Except, that is, when the criminals are rich. Even the racial biases seem to go away in such circumstances; there is no reasonable doubt as to the guilt of O.J. Simpson or Bill Cosby, but Simpson only ended up in prison years later on a completely unrelated offense, and after Cosby’s mistrial it’s unclear if he’ll ever see any prison time. I don’t see how either man could have been less punished for his crimes had he been White; but can anyone seriously doubt that both men would be punished more had they not been rich?

I do not think that capitalism is an irredeemable system. I think that, in themselves, free markets are very useful, and we should not remove or restrict them unnecessarily. But capitalism isn’t supposed to be a system where the rich can do whatever they want and the poor have to accept it. Capitalism is supposed to be a system where everyone is free to do as they choose, unless they are harming others—and the rules are supposed to be the same for everyone. A free market is not one where you can buy the right to take away other people’s freedom.

Is this just some utopian idealism? It would surely be utopian to imagine a world where fraud never happens, that much is true. Someone, somewhere, will always be defrauding someone else. But a world where fraud is punished most of the time? Where our most powerful institutions are still subject to the basic rule of law? Is that a pipe dream as well?

What really happened in Greece

PNRJ critique of neoclassical economics, current events, market failure, public policy , , , , , , , , , , , , , , , , , , ,

JDN 2457506

I said I’d get back to this issue, so here goes.

Let’s start with what is uncontroversial: Greece is in trouble.

Their per-capita GDP PPP has fallen from a peak of over $32,000 in 2007 to a trough of just over $24,000 in 2013, and only just began to recover over the last 2 years. That’s a fall of 29 log points. Put another way, the average person in Greece has about the same real income now that they had in the year 2000—a decade and a half of economic growth disappeared.

Their unemployment rate surged from about 7% in 2007 to almost 28% in 2013. It remains over 24%. That is, almost one quarter of all adults in Greece are seeking jobs and not finding them. The US has not seen an unemployment rate that high since the Great Depression.

Most shocking of all, over 40% of the population in Greece is now below the national poverty line. They define poverty as 60% of the inflation-adjusted average income in 2009, which works out to 665 Euros per person ($756 at current exchange rates) per month, or about $9000 per year. They also have an absolute poverty line, which 14% of Greeks now fall below, but only 2% did before the crash.

So now, let’s talk about why.

There’s a standard narrative you’ve probably heard many times, which goes something like this:

The Greek government spent too profligately, heaping social services on the population without the tax base to support them. Unemployment insurance was too generous; pensions were too large; it was too hard to fire workers or cut wages. Thus, work incentives were too weak, and there was no way to sustain a high GDP. But they refused to cut back on these social services, and as a result went further and further into debt until it finally became unsustainable. Now they are cutting spending and raising taxes like they needed to, and it will eventually allow them to repay their debt.

Here’s a fellow of the Cato Institute spreading this narrative on the BBC. Here’s ABC with a five bullet-point list: Pension system, benefits, early retirement, “high unemployment and work culture issues” (yes, seriously), and tax evasion. Here the Telegraph says that Greece “went on a spending spree” and “stopped paying taxes”.

That story is almost completely wrong. Almost nothing about it is true. Cato and the Telegraph got basically everything wrong. The only one ABC got right was tax evasion.

Here’s someone else arguing that Greece has a problem with corruption and failed governance; there is something to be said for this, as Greece is fairly corrupt by European standards—though hardly by world standards. For being only a generation removed from an authoritarian military junta, they’re doing quite well actually. They’re about as corrupt as a typical upper-middle income country like Libya or Botswana; and Botswana is widely regarded as the shining city on a hill of transparency as far as Sub-Saharan Africa is concerned. So corruption may have made things worse, but it can’t be the whole story.

First of all, social services in Greece were not particularly extensive compared to the rest of Europe.

Before the crisis, Greece’s government spending was about 44% of GDP.

That was about the same as Germany. It was slightly more than the UK. It was less than Denmark and France, both of which have government spending of about 50% of GDP.

Greece even tried to cut spending to pay down their debt—it didn’t work, because they simply ended up worsening the economic collapse and undermining the tax base they needed to do that.

Europe has fairly extensive social services by world standards—but that’s a major part of why it’s the First World. Even the US, despite spending far less than Europe on social services, still spends a great deal more than most countries—about 36% of GDP.

Second, if work incentives were a problem, you would not have high unemployment. People don’t seem to grasp what the word unemployment actually means, which is part of why I can’t stand it when news outlets just arbitrarily substitute “jobless” to save a couple of syllables. Unemployment does not mean simply that you don’t have a job. It means that you don’t have a job and are trying to get one.

The word you’re looking for to describe simply not having a job is nonemployment, and that’s such a rarely used term my spell-checker complains about it. Yet economists rarely use this term precisely because it doesn’t matter; a high nonemployment rate is not a symptom of a failing economy but a result of high productivity moving us toward the post-scarcity future (kicking and screaming, evidently). If the problem with Greece were that they were too lazy and they retire too early (which is basically what ABC was saying in slightly more polite language), there would be high nonemployment, but there would not be high unemployment. “High unemployment and work culture issues” is actually a contradiction.

Before the crisis, Greece had an employment-to-population ratio of 49%, meaning a nonemployment rate of 51%. If that sounds ludicrously high, you’re not accustomed to nonemployment figures. During the same time, the United States had an employment-to-population ratio of 52% and thus a nonemployment rate of 48%. So the number of people in Greece who were voluntarily choosing to drop out of work before the crisis was just slightly larger than the number in the US—and actually when you adjust for the fact that the US is full of young immigrants and Greece is full of old people (their median age is 10 years older than ours), it begins to look like it’s we Americans who are lazy. (Actually, it’s that we are studious—the US has an extremely high rate of college enrollment and the best colleges in the world. Full-time students are nonemployed, but they are certainly not unemployed.)

But Greece does have an enormously high debt, right? Yes—but it was actually not as bad before the crisis. Their government debt surged from 105% of GDP to almost 180% today. 105% of GDP is about what we have right now in the US; it’s less than what we had right after WW2. This is a little high, but really nothing to worry about, especially if you’ve incurred the debt for the right reasons. (The famous paper by Rogart and Reinhoff arguing that 90% of GDP is a horrible point of no return was literally based on math errors.)

Moreover, Ireland and Spain suffered much the same fate as Greece, despite running primary budget surpluses.

So… what did happen? If it wasn’t their profligate spending that put them in this mess, what was it?

Well, first of all, there was the Second Depression, a worldwide phenomenon triggered by the collapse of derivatives markets in the United States. (You want unsustainable debt? Try 20 to 1 leveraged CDO-squareds and one quadrillion dollars in notional value. Notional value isn’t everything, but it’s a lot.) So it’s mainly our fault, or rather the fault of our largest banks. As far as us voters, it’s “our fault” in the way that if your car gets stolen it’s “your fault” for not locking the doors and installing a LoJack. We could have regulated against this and enforced those regulations, but we didn’t. (Fortunately, Dodd-Frank looks like it might be working.)

Greece was hit particularly hard because they are highly dependent on trade, particularly in services like tourism that are highly sensitive to the business cycle. Before the crash they imported 36% of GDP and exported 23% of GDP. Now they import 35% of GDP and export 33% of GDP—but it’s a much smaller GDP. Their exports have only slightly increased while their imports have plummeted. (This has reduced their “trade deficit”, but that has always been a silly concept. I guess it’s less silly if you don’t control your own currency, but it’s still silly.)

Once the crash happened, the US had sovereign monetary policy and the wherewithal to actually use that monetary policy effectively, so we weathered the crash fairly well, all things considered. Our unemployment rate barely went over 10%. But Greece did not have sovereign monetary policy—they are tied to the Euro—and that severely limited their options for expanding the money supply as a result of the crisis. Raising spending and cutting taxes was the best thing they could do.

But the bank(st?)ers and their derivatives schemes caused the Greek debt crisis a good deal more directly than just that. Part of the condition of joining the Euro was that countries must limit their fiscal deficit to no more than 3% of GDP (which is a totally arbitrary figure with no economic basis in case you were wondering). Greece was unwilling or unable to do so, but wanted to look like they were following the rules—so they called up Goldman Sachs and got them to make some special derivatives that Greece could use to continue borrowing without looking like they were borrowing. The bank could have refused; they could have even reported it to the European Central Bank. But of course they didn’t; they got their brokerage fee, and they knew they’d sell it off to some other bank long before they had to worry about whether Greece could ever actually repay it. And then (as I said I’d get back to in a previous post) they paid off the credit rating agencies to get them to rate these newfangled securities as low-risk.

In other words, Greece is not broke; they are being robbed.

Like homeowners in the US, Greece was offered loans they couldn’t afford to pay, but the banks told them they could, because the banks had lost all incentive to actually bother with the question of whether loans can be repaid. They had “moved on”; their “financial innovation” of securitization and collateralized debt obligations meant that they could collect origination fees and brokerage fees on loans that could never possibly be repaid, then sell them off to some Greater Fool down the line who would end up actually bearing the default. As long as the system was complex enough and opaque enough, the buyers would never realize the garbage they were getting until it was too late. The entire concept of loans was thereby broken: The basic assumption that you only loan money you expect to be repaid no longer held.

And it worked, for awhile, until finally the unpayable loans tried to create more money than there was in the world, and people started demanding repayment that simply wasn’t possible. Then the whole scheme fell apart, and banks began to go under—but of course we saved them, because you’ve got to save the banks, how can you not save the banks?

Honestly I don’t even disagree with saving the banks, actually. It was probably necessary. What bothers me is that we did nothing to save everyone else. We did nothing to keep people in their homes, nothing to stop businesses from collapsing and workers losing their jobs. Precisely because of the absurd over-leveraging of the financial system, the cost to simply refinance every mortgage in America would have been less than the amount we loaned out in bank bailouts. The banks probably would have done fine anyway, but if they didn’t, so what? The banks exist to serve the people—not the other way around.

We can stop this from happening again—here in the US, in Greece, in the rest of Europe, everywhere. But in order to do that we must first understand what actually happened; we must stop blaming the victims and start blaming the perpetrators.