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An Inside Look at an Inside Job

November 2010

A review of Inside Job, produced, written, and directed by Charles Ferguson, produced by Audry Marrs, 108 minutes, narrated by Matt Damon.

detail of movie poster

In this disturbing and often infuriating look at the financial meltdown, the Academy Award-nominated (No End in Sight) documentary filmmaker Charles Ferguson promises viewers an inside look into the “inside job” (use intended to convey criminality) that he believes explains the financial meltdown and subsequent recession. Inside Job is a well produced, artfully edited, and dramatic reconstruction of the rise and fall (and rise) of the Wall Street financial industry. Most of us are painfully aware of what happened to the economy, so this film packs into less than two hours what took two years to unfold, and so the emotional impact is commensurate with the eye-blurring number of events tightly repackaged in cinematic gravitas.

With Inside Job I expected a Michael Moore-like liberal attack on all things free market, but that is not the case here. Instead, there is what is said and what is not said. In other words, there were no lies of commission, but there were some lies of omission. What is said in Inside Job (that I found to be accurate although Ferguson does not phrase it this way) is that, in fact, we do not practice free market capitalism because the government (both Bush and Obama administrations are indicted in the film) are in bed with Wall Street tycoons, reducing risk taking through the moral hazard of promised bailouts. The whole point of capitalism is to make a profit by taking risks. Low risk taking typically results in slow and steady growth, whereas high risk taking historically produces both high profits and steep losses. By entering the business of risk protection, the government is sending a clear signal to the market: don’t worry about taking big risks with your own and investors’ money; we’ll bail you out. In profits we’re capitalists, in losses we’re socialists. This is what Ralph Nader would call corporate welfare, and in the case of the financial meltdown and subsequent bailout he would be right.

What infuriates in particular in the film is just how much of an old-boys club Wall Street is (and what little chance any of us little guys have in competing fairly), and how much of the club roster includes prominent politicians and members of the Federal Reserve. It reminded me of my research on doping in sports, in which it has become abundantly clear that nearly everyone seems to turn a blind eye to the problem and former athletes are now running the sanctioning bodies and doping agencies are in the pay of said sanctioning bodies. When Ferguson reminds us that Obama left in place all the major players in the game—Bernanke, Geithner, Paulson, Sumners, et al.—it made me think of what would happen if Major League Baseball put Barry Bonds in charge of ending steroid use, or Marion Jones was the executive director of the World Anti-Doping Association.

The greed of Wall Street bankers and financiers is the leitmotif throughout Inside Job, and there is certainly no shortage of it on Wall Street. As one trader noted, there is no point of going anywhere near that part of Manhattan if your primary goal is not to make a pile of money. But Wall Street greed is only half the story; the other half is Main Street greed. Those greedy bankers were giving questionable loans to greedy buyers, and everyone was hoping to cash in through escalating risk taking in financial and real estate markets.

Now, behavioral economists have demonstrated that humans are normally very risk averse. Specifically, the research shows that losses hurt twice as much as gains feel good. That is, in order to get someone to invest their hard-earned money you have to convince them that the potential gains are twice as much as the possible losses. So why weren’t all these Wall Street bankers and Main Street buyers risk averse? Two reasons: short term thinking and reduced risk signals. First, potential home buyers and investors mistakenly assumed that the increasing trend line in housing prices would continue unabated indefinitely. Two, loan officers and their financial institutions intentionally and deceptively reduced the normal risk signals sent to potential customers in hopes that the artificial bubble would not burst. It did, and here we are.

Since corporations and financial institutions are run by people, they should show the same risk aversion that individuals do when investing money and granting loans. Normally they do, but over the past decade something happened to remove or delay the risk. That something was a combination of government intervention into the financial marketplace and private repackaging and selling of loans to organizations too distant from the risk to feel averse to the potential loss. For example, in the spring of 1999 a pilot program was launched by Fannie Mae and Freddie Mac. Recall that Fannie and Freddie are government-run organizations that do not make loans directly to customers—they buy loans from banks, which make those loans directly. So, here already the risk was removed a step from the brains of the risk assessors, but risk aversion was further attenuated by government interference with the pricing mechanism that normally adjusts for risk.

In that pilot program the nation’s largest underwriter of home mortgages came under pressure from the Clinton administration in its desire to achieve an “ownership society,” along with insistence from the Department of Housing and Urban Development (HUD) that Fannie and Freddie increase their portfolio of loans made to lower and moderate-income borrowers from 44 percent to 50 percent by 2001. That meant granting loans to higher risk customers.

There’s nothing wrong with corporations and institutions taking higher risks, as long as they adjust for it by charging more. The higher price acts as a risk signal to both buyers and sellers, thereby dialing up their emotion of risk aversion. This is what Fannie Mae was already doing by only purchasing loans that banks made charging three to four percentage points higher than conventional loans. But under the new program implemented in 1999, higher-risk people with lower incomes, negligible savings, and poorer credit ratings could now qualify for a mortgage that was only one point above a conventional 30-year fixed rate mortgage (and that added point was dropped after two years of steady payments).

In other words, the normal risk signal sent to high risk customers—you can have the loan but it’s going to cost you a lot more—was removed. Lower the risk signal and you lower risk aversion.

None of this is part of Inside Job, and that’s a shame because it misses an opportunity for a deeper look into the well of human nature that can lead any of us down a greedy path of blind profit seeking through rent seeking—the term used by economists to describe actions of individuals or firms to seek profits through political manipulation instead of economic competition. The problem is not greed per se, since that is part of our nature that when channeled properly through clearly defined and strictly enforced rules can result in much human progress. The problem is the attenuation or elimination of risk signals that keep greed in check.

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Of Testosterone and Pheromones

November 2010

This post is a review of Client 9: The Rise and Fall of Eliot Spitzer, Directed and Produced by Alex Gibney.

Client 9 movie ad

CLIENT 9 IS AN ARTFULLY PRODUCED, smartly edited, and dramatic reconstruction (and revisionism) of the rise and fall of “The Sheriff of Wall Street,” the man who dared to challenge the “Masters of the Universe,” Eliot Spitzer. Most of us are well aware of what happened to Spitzer in his fall from grace in a now all-too-familiar story of sexual shenanigans gone awry, but there is a redemption story here as well. Whether that works for viewers or not probably depends on one’s political persuasions and personal predilections on matters political and prostitutional.

Alex Gibney, whose previous film was another rise-and-fall epic tale entitled Enron: The Smartest Guys In the Room, is unabashedly sympathetic to Eliot Spitzer in Client 9 (his designation by the madam who orchestrated his hook ups). In an on-camera narrative that runs throughout the film, Spitzer makes no excuses for either his overweening ambition as the left’s lawman against Corporate Corruption, or for his biblical-like fall from grace as the right’s punishment for those who fly (and pry) too high and deep. The central thesis of Client 9 is that Spitzer was the victim of Wall Street heavy-hitters who would brook no probes into their sleazy back-room deals that Spitzer was on the verge of uncovering just before he was busted for his personal patronage of a high-paid prostitution ring. A cast of characters is then paraded throughout the film as those who would bring Spitzer down: the former Republican Majority leader of the New York State Senate Joe Bruno, the former chairman of A.I.G. Maurice R. Greenberg, the former director of the New York Stock Exchange Kenneth G. Langone, and a flamboyant Republican political consultant named Roger Stone. Hinted at but never directly stated, the film implies that had Spitzer not been sabotaged in his investigations of Wall Street corruption the economic collapse might have been averted. The evidence for the central thesis is circumstantial; the evidence for the covert thesis is nonexistent.

Eliot Spitzer and spouse, Silda Wall
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In point of fact, in the final on-camera interview statement by Spitzer, when asked if he thought he was the victim of his Wall Street enemies he unhesitatingly denies the thesis and takes full responsibility for his collapse and apologizes to his family for his own misdeeds, pointing no fingers at anyone but himself. In this sense, if the point of the film was to resurrect respect for Eliot Spitzer, it does have that effect through his own words. However, as in all nonfiction works, from books to documentaries, there is here an element of what is said versus what is not said.

What is said is that Spitzer was a crusader for the little guy who stands no chance against the mighty Wall Street bankers and financiers—the regular Joes and Janes whose tiny IRAs and 401Ks are in the hands of high-stakes gamblers who do not give a damn about long-term retirement investments that are the backbone of a stable economy. (Recall in the run-up to the meltdown that far too many people quit saving and started gambling with adjustable rate mortgages but could not “flip this house” before the higher monthly payments came due—more on that in my review of the documentary film Inside Job next week, which also leaves out the greed of American consumers while focusing on the greed of Wall Street bankers and housing lenders.)

What is not said is that Spitzer’s tough-guy, law-and-order crime-busting activities included breaking up and prosecuting prostitution rings in New York, which is how he came to know (intimately) the inner-workings of the system that he then exploited for his personal pleasure, arranging sexual liaisons with women whom he couldn’t even be bothered to engage in conversation with before getting down to the dirty deed of wham, bam, thank you ma’am. (Upon realizing who her client was, one of the women—whose working name was “Angelina” and who was portrayed by an actress in the film—recounted how she really wanted to talk to Spitzer because of his reputation of being so smart and worldly, but apparently Spitzer’s tongue was tied that night.) The liberal man of the people—the voice of the voiceless, the power of the powerless—treated women as little more than fresh flesh. Oddly (or perhaps not) the infamous Ashley Dupré, whose quarter-hour of fame has now come and gone, refused to be interviewed for the film having, I suppose, shed her crocodile tears before a scolding Diane Sawyer in an exclusive ABC television interview (orchestrated with the launch of her singing career).

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Ashley Dupré on the cover of Playboy magazine, May 2010 (click image to enlarge)

Here the film offers some insights into a world few can afford: The $1000 to $3000 an hour call girl. As the head of the Emperor’s Club explained, these are not alcoholic drug-addicted women who were abused as children and kept as virtual slaves to their pimps; these are ambitious beauties who, as one of them explained, likes to have her bank account filled and is now so spoiled with riches, jewels, trips, and the accoutrements of the lifestyles of the rich and famous that she can no longer date regular guys. These women are so hot that one of Ashley Dupré’s co-workers described her as possessing “great pheromones” and “an amazing coochie” (one of the service’s websites even includes a checklist of requests, from blond, brunette, or redhead to shaved, unshaved, or partial) that men could not resist, especially high testosterone men like Eliot Spitzer who can afford rates commensurate with such assets. (During the scandal I recall an interview with an evolutionary psychologist, who explained that you can tell Spitzer has high testosterone because of his boney features and high cheek bones.) One memorably funny line is when the head of The Emperor’s Club explains how she computed a full-day rate: just add a zero to the hourly rate (said with a sophomoric giggle but with a twinkle in her eyes as if to say “I can’t believe this rich bastard fell for this scheme)! A woman who goes for $2000 an hour will give you a full day (and night) of her time (and body) for $20,000. What is not said is what the agency’s commission was, but the women were apparently not complaining, and you can’t exactly go to the labor board to complain.

The salacious material, however, is secondary to the deeper Greek tragedy (think Icarus) theme of hubris and arrogance punished by the gods. Seen in conjunction with the documentary about the collapse of Wall Street and the subsequent recession—Inside Job (in which Spitzer also makes an appearance)—Client 9 is well worth seeing as long as you keep in mind that this film, as all films, has an affective agenda. But do bear in mind that Spitzer landed his own television series on CNN before this film was released. So the resurrection process had already begun.

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Throwing Cold Water on a Hot Topic

November 2010

This post is a review of Cool It, a film by Bjorn Lomborg, directed by Ondi Timoner, produced by Roadside Attractions and 1019 Entertainment. Written by Terry Botwick, Sarah Gibson, and Bjorn Lomborg. Based on the book by Bjorn Lomborg. 88 minutes.

COOL IT (movie poster)

I FIRST MET BJORN LOMBORG IN 2001 upon the publication of his Cambridge University Press book, The Skeptical Environmentalist, which I found to be a refreshing perspective on what had been the doom-and-gloom, end-of-the-world scenarios that I had been hearing since I was an undergraduate in the early 1970s. Back then we were told that overpopulation would lead to worldwide hunger and starvation, that there would be massive oil depletion, precious mineral exhaustion, and rainforest extinction by the 1990s. These predictions failed utterly. I felt I had been lied to for decades by the environmentalist movement that seemed to me to be little more than a political movement that raised money by raising fears.

Lomborg’s publicist thought that I might be interested in hosting him for the Skeptics Society’s public science lecture series at the California Institute of Technology that I organize and host. I was, but given the highly debatable nature of many of Lomborg’s claims I only agreed to host him if it could be a debate. Lomborg agreed at once to debate anyone, and this is where the trouble began. I could not find anyone to debate Lomborg. I contacted all of the top environmental organizations, and to a one they all refused to participate. “There is no debate,” one told me. “We don’t want to dignify that book,” said another. I even called Paul Ehrlich, the author of the wildly popular bestselling book The Population Bomb — another apocalyptic prognostication that served as something of a catalyst in the 1970s for delimiting population growth — but he turned me down flat, warning me in no uncertain language that my reputation within the scientific community would be irreparably harmed if I went through with it. So of course I did because (A) truth is more important than reputation, and (B) no one threatens me and gets away with it. My own Senior Editor, Frank Miele, who is an expert on evolutionary biology and biodiversity (and is one of the fastest and most facile researchers I’ve ever known), challenged Lomborg on several of the chapters in his book, and we had a lively and successful debate.

My experience is symptomatic of deep problems that have long plagued the environmental movement, and for a time the political pollution of the science turned me into an environmental skeptic. That alone would be meaningless, given that I have only ever written one article on the subject (my June 2006 Scientific American column explaining that I flipped from climate skeptic to believer), but I believe that the environmental extremists had a similar effect on millions of others who remain skeptical in the teeth of what now appears to be reasonably solid evidence for anthropogenic global warming.

In fact, the documentary film Cool It, based on Lomborg’s book of the same title that serves as the popular version of his more technical and scholarly first tome, opens with him stating unequivocally that global warming is real and human caused. Wait! I thought Lomborg was a climate denier? That is what his critics have accused him of being, in fact, which apparently is the charge delivered if one does not accept in full all the claims in Cool It’s erstwhile anti-avatar, Al Gore’s film An Inconvenient Truth. Here it might be useful to distinguish the two films by breaking down the subject matter into five questions:

  1. Is the earth getting warmer?
  2. Is the cause of global warming human activity?
  3. How much warmer is it going to get?
  4. What are the consequences of a warmer climate?
  5. How much should we invest in altering the climate?
Al Gore’s answers Bjorn Lomborg’s answers in Cool It
1 Yes Yes
2 Yes Yes
3 A lot Probably a little, very unlikely a lot
4 Cataclysmic. Debatable depending on how much warmer it will get, but very likely the consequences will be minor
5 Trillions of dollars, mostly top-down government programs to curtail oil and coal use and reduce greenhouse gases Billions

Global warming is real and primarily human caused. With questions 3 and 4, however, estimates include error bars that grow wider the further out we run the models because complex systems like climate are notoriously difficult to predict. Lomborg (and myself) provisionally accept the estimate of the United Nations’ Intergovernmental Panel on Climate Change (IPCC) that the mean global temperature by 2100 will increase by around 4–5 degrees Fahrenheit, and that sea levels will rise by about one foot, which Lomborg reminds us is about the same level that sea levels have risen since 1860, without any major (or for that matter minor) consequences. In other words, man-made global warming will be moderate, causing moderate changes.

Examining question 4 more closely, Lomborg computes that if global warming continues unchecked through the end of the century there will be 400,000 more heat-related deaths annually, but he then notes that there will be also be 1.8 million fewer cold-related deaths, for a net gain of 1.4 million lives. This is a typical calculation that Lomborg makes in what is essentially an economic triage for global warming — he is not saying that global warming is good or inconsequential, only that its consequences must be weighed in the balance against other problems. For example, Lomborg sites data from the World Wildlife Fund that at most we will lose 15 polar bears a year due to global warming, but what doesn’t get reported is that 49 bears are shot each year. What would be more cost-effective to save polar bear lives — spend hundreds of billions of dollars to lower CO2 emissions and (maybe) lower the mean global temperature by a fraction of a degree, or limit hunting permits?

This leads to question 5 — the economics of global climate change — which Lomborg notes that if all countries had ratified the Kyoto Protocol and lived up to its standards (which most did not), according to the IPCC at best it would have postponed the 4.7°F average increase just five years from 2100 to 2105, at a cost of $180 billion a year! By comparison, although global warming may cause an increase of two million deaths due to hunger annually by 2100, the U.N. estimates that for $10 billion a year we could save 229 million people from hunger annually today.

Economics is about the efficient allocation of limited resources that have alternative uses. If you had, say, $50 billion a year to make the world a better place for more people, how would you spend it? Cool It traces Lomborg’s attempt to answer this question through a group of scientists, economists, and world leaders whom he gathered in 2004 in Copenhagen to reach what he calls the “Copenhagen Consensus.” These experts ranked reduction of CO2 emissions 16th out of 17 challenges. The top four were: controlling HIV/AIDS, micronutrients for fighting malnutrition, free trade to attenuate poverty, and battling malaria. A 2006 Copenhagen Consensus of U.N. ambassadors constructed a similar list, with communicable diseases, clean drinking water, and malnutrition at the top, and climate change at the bottom. A late 2008 meeting that included five Nobel Laureates recommended that President-elect Barack Obama allocate his promised $150 billion in subsidies for new technologies and $50 billion in foreign aid be allocated for research on malnutrition, immunization, and agricultural technologies. For a cool Kyoto $180 billion you can buy a lot of condoms, vitamin tablets, and mosquito nets and rescue hundreds of millions of people from disease, starvation, and impoverishment.

Cool It is an uplifting film, filled with solutions that any green technophile would love: solar, wind, wave, and geoengineering technologies take up a lion’s share of the film. (And true climate skeptics will denounce Lomborg on this front as they do not believe that these alternatives can come close to replacing coal and oil as sources of energy.) To his credit, the unflappable Lomborg, with his boyish good looks and curiosity, includes in his own film harsh disparaging commentary by his long-time critic Stephen Schneider, the Stanford University climate scientist who passed away this past July. In a very classy touch, Cool It is dedicated to Schneider.

* * *

Note: If you are skeptical of Lomborg and his branch of environmental skepticism, read the Yale University economist William Nordhaus’ technical book A Question of Balance (Yale University Press, 2008). Nordhaus computes the costs-benefits of various recommendations for changing the climate by either 2105 or 2205, primarily focused on the cost of curbing carbon emissions. Economists like to compute future profits and losses based on investments made today, adjusting for the value of a future dollar at an average interest rate of four percent. If we spent a trillion dollars today (the equivalent of the recent bailout or the Iraq war), how much climate change would it buy us in a century at four percent interest? Nordhaus’s calculations are compared to doing nothing, where a plus value is better and a minus value worse than doing nothing. Kyoto with the U.S. is plus one and without the U.S. zero, for example, and a gradually increasing global carbon tax is a plus three. That is, a $1 trillion cost today buys us $3 trillion of benefits in a century. Al Gore’s proposals, by contrast, score a minus 21, where $1 trillion invested today in Gore’s plans would net us a loss of $21 trillion in 2105. Add to these calculations the numerous other crises we face, such as the housing calamity, the financial meltdown, the coming pressures of funding Social Security and Medicare, not to mention financing two wars, a failing public education system, and so forth, and suddenly global climate change is put into perspective.

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What Do You Believe In?

November 2010

As a skeptic and atheist I am often asked, “What do you believe in?” The ending preposition implies something more than what factual claims are to be believed, such as evolution, quantum physics, or the big bang. What is suggested by the question is what values does one believe in or hold to, especially without belief in God and religion. Here is my answer.

I believe in the Principle of Freedom: All people are free to think, believe, and act as they choose, so long as they do not infringe on the equal freedom of others.

I believe in civil liberties, civil rights, and the freedoms guaranteed in the United States Constitution, including and especially freedom of speech, freedom of association, freedom to assemble peacefully, freedom to petition grievances, freedom to worship (or not), freedom of the press, freedom of reproductive choice, freedom to bear arms, etc.

I believe in the sanctity of private property, the rule of law, and equal treatment under the law.

I believe in free will, free choice, moral culpability, and personal responsibility.

I believe in truth seeking and truth telling.

I believe in trust and trustworthiness.

I believe in fairness and reciprocity.

I believe in love, marriage, and fidelity.

I believe in family, friendship, and community.

I believe in honor, loyalty, and commitment to family, friends, and community members.

I believe in forgiveness when it is genuinely asked for or offered.

I believe in kindness, generosity, and charity, especially voluntary aid to others in need.

I believe in science as the best method ever devised for understanding how the world works.

I believe in reason and logic and rationality as cognitive tools for answering questions, solving problems, and devising solutions to life’s many problems and quandaries.

I believe in technological growth, cultural advancement, and moral progress.

I believe in the almost illimitable capacity of human creativity and inventiveness for our species to flourish into the far future on this planet and others.

Ad astra per aspera!

So, if you are ever asked by a believer what you believe in, offer your own list along these lines of values that you honor, and then ask, “Why, what do you believe in? Do you not honor these values?”

The impetus for essay, which I penned on a plane to Los Angeles on October 15, 2010, was that I was asked this very question the night before during the Q&A after a talk I delivered before a sizable audience at the University of Minnesota in Minneapolis, sponsored by CASH (Campus Atheists, Skeptics, and Humanists), supported by several other Minnesota atheist and humanist groups, and attended as well by many believers. The woman who made the inquiry explained that as an atheist she is often asked this question in a tone implying that atheists cannot or do not believe in anything.

Nothing could be further from the truth, of course, but such is the delimiting effect of religious belief and the myth that without God anything goes. Quite the contrary. Without God, values matter more here and now than they ever could in any projected afterlife proscenium where the moral play is finally enacted.

P.S. The final line above translates as: To the stars with difficulty. The phrase originated with the Roman poet Seneca the Younger and was made famous on a plaque honoring the Apollo 1 astronauts who perished in a fire on the launch pad at Cape Canaveral.

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The Skeptic’s Skeptic

November 2010
In the battle for ideas, scientists could learn from Christopher Hitchens
magazine cover

SCIENCE VALUES DATA and statistics and champions the virtues of evidence and experimentation. Those of us “viewing the world with a rational eye” (as the new descriptor for this column in Scientific American reads) also have another, underutilized tool at our disposal: rapier logic like that of Christopher Hitchens, a practiced logician trained in rhetoric. Hitchens—who is “leaving the party a bit earlier than I’d like” because of esophageal cancer, as he lamented to Charlie Rose in a recent PBS interview—has something deeply important to offer on how to think about unscientific claims. Although he has no formal training in science, I would pit Hitchens against any of the purveyors of pseudoscientific clap trap because of his unique and enviable skill at peeling back the layers of an argument and cutting to its core. (continue reading…)

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