Glover- these are my final edits. I’ve rewritten the essay, but also left some of my thoughts in red. You may want to look back at the history and see my initial thoughts as well.

I’m admittedly not an expert in this area (despite my economics major, I avoided all macro courses, I also interviewed for an analyst job in a CMBS group, but my lack of knowledge was what held me back). I tried to highlight the areas where I thought the writing was somewhat unclear, but you may think your writing will be clear to someone with a better understanding of the topic, in which case keep what you have. I really liked your writing for the most part; this is a well-written piece.

At first I was struck by a lack of solution. It seems like what you’re getting at is that fundamental change is necessary. I provided a possible solution in the form of character/ethics education – in this context a system by which you try and influence the decisions that individual actors will make by instilling virtues in them starting at a young age. For any ethics program to have real success I think it must start at a young age and continue through adult life. This may be a way to have a system in which individual actors are allowed to make their own economic decisions but we can hopefully influence their decisions on a larger scale to be of the ethical variety.

Neoliberal Blues

-- By GloverWright - 17 Apr 2010

Introduction: A Reckoning

On Friday, April 16 -- the same day that Senate Republicans issued a statement against the Democrats' financial-reform bill that would, for the first time, regulate derivatives -- the Securities and Exchange Commission filed a civil complaint in the Southern District of New York against Goldman Sachs & Co., alleging fraud in the structuring and marketing of a collateralized debt obligation (CDO).

The SEC alleges that, at a client's behest, Goldman bundled a group of subprime residential mortgage-backed securities (RMBS's) identified by the client -- hedge fund manager John Paulson -- as likely to fail into a CDO in which Paulson took a negligible equity stake. From the beginning, Paulson intended to take a short position against the CDO by purchasing credit-default swaps (CDS's). Goldman then fraudulently marketed the CDO as a legitimate vehicle in which investors might take a long equity stake, without mentioning Paulson's involvement. The CDO, of course, failed, and Paulson collected on insurance of about $1 billion.

The SEC's complaint charges Goldman with fraudulent interstate transactions and manipulative and deceptive devices. Such charges remain relatively untested in the emerging area of structured-credit litigation. Thus the outcome of the case, public anger at Goldman notwithstanding, is far from determined. And this uncertainty helps to disclose a greater difficulty that ultimately we must face -- an incommensurability between certain ethical considerations that we wish to impose on society via the law and the principles of the financial world in which entities like Goldman and Paulson have been allowed, and encouraged, to thrive.

The problem is that the law remains circumscribed within the economic sphere of individual choice. Influencing choice through the law is ineffective when those making and enforcing the laws have interests in maintaining the current system. In this case the SEC is not able to effectively litigate against the Goldman’s of the world because they typically have worked for, or are trying to work for Goldman. Instead of imposing ethical consideration through the law we will be far better off doing so through our education system.

I shortened up the explanation of the complaint. If you decide to go back and put in the sections that were violated, I believe they are from two separate acts. There is also one other alleged violation in the complaint. I would also hesitate to generally say these are untested in structured-credit litigation (it’s not what the article you linked to seems to say), so I softened it but you may want to consider adjusting this point entirely to instead highlight how this is new in the area of RMBS. I’m not sure my explanation of the problem is really what you’re looking for. Maybe I’m missing what you’re getting at, but I think the idea of separating it out and explaining it a little more would be useful.

A Fiscal (Re)Ordering

In July 1944, the 44 Allied nations restructured the international monetary system in order to promote economic stability and revitalization in war-torn Europe and Asia. In effect, the Allies agreed to a global gold standard, limiting credit and ensuring that international trade surpluses and deficits more or less balanced out.

This system worked pretty well for a couple of decades, but in 1971 the United States unilaterally went off the gold standard, thereby foreclosing the possibility of fixed exchange rates and introducing volatility into the foreign exchange market in which currencies were now floating. Along with that volatility came the need to create financial instruments with which investors could manage the risks to which they were exposed by currencies -- particularly the dollar, which remained the world's reserve currency -- whose present value was unstable and whose future values were uncertain.

Thus did what David Harvey calls the "embedded liberalism" of the postwar period -- "characterized by ... a social safety net" ensured by state interventions in the international economy and domination of national economies via the regulation of fixed exchange rates -- give way to neoliberalism favoring a "free" market allowing for maximal individual (economic) autonomy and, by extension, exposure to risk. The logic of capital was no longer constrained by production -- currency markets obviate the need for buying and selling goods and services -- nor by a more or less fixed resource in accord with which money was issued and valued. Rather, capital oriented itself towards circulation and began to flow globally in directions determined both by risk assessments (and not necessarily by efficiency concerns). And as capital divorced itself from production -- as wealth lost touch with its material basis, on account of the fact that a material basis was no longer necessary -- the accumulation of capital became, logically, an end in itself.

I shortened up the Bretton Woods explanation mainly in an attempt to get this under the word limit.

You lose me here in the last paragraph. I understand there to be a three-step sequence: 1) neoliberlism comes into prevalence; 2) neoliberalism leads to capital’s divorce from production; and 3) the divorce from production leads to capital as an end in itself.

I don’t understand the links happening in steps 2 and 3. I would try to rewrite and clarify the connections, but I don’t understand how the connections happen. You may want to clarify this sequence and why one leads to another.

And So Now

Thorstein Veblen was right about at least two things. We are status-conscious creatures, and though we may no longer engage in exactly the kind of conspicuous consumption that he wrote about in 1899, we remain in the thrall of waste -- of accumulating not because we derive utility from the things we accumulate but because we are bound by our natures to accumulate as much as we can of whatever it is that our era happens to prize. In our time that is finance capital, which often serves no purpose but its own. And we remain driven also to emulate those who have accumulated the most. In late 2007, for example, a representative of a Mongolian investment bank with whom I was interviewing told me, excitedly, that the bank had just structured the country's first RMBS for sale on the international market. Even a country with fewer than 3 million people, 30 percent of whom are nomadic and probably another 50 percent of whom live in dilapidated Soviet-era apartments, is trying to emulate our system.

I eliminated the derivatives sentence, I thought it set the focus of the reader to profits as the ultimate end instead of capital. You seem to be making the case that capital is an end in itself. Although, I think that point could use some further explanation.

I think the Mongolian example is really on point and well-written, it pained me to shorten it, but I did so to conserve space.

All this is to say that even if the SEC succeeds in its case against Goldman, and even if the Democrats pass their financial-regulation bill, the economic principles according to which our current world has been constructed remain opposed to the kinds of ethical considerations which those favoring reform would like to see implemented and enforced by courts and legislatures. A lawsuit -- a whole host of lawsuits, civil or criminal -- will not bring fundamental change.

For fundamental change to come about we need to change the mindset of those making the decisions. A system of charachter education can be a way of influencing decision makers. Through education, starting at a young age and continuing through higher education, we can instill virtues in individuals in the hope that they will use the autonomy given to them to make ethical choices instead of defrauding others. In this way perhaps we can change what our era prizes from capital to brownie points.

Instead of having a clear solution like I've attempted to provide you could make clear that you think a fundamental change would be a good thing or a bad thing. Are you suggesting we should go back to an embedded liberalism type system? Would that solve the problem?

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