After an evening checking out my various high school and college yearbooks for any troublesome content, and checking Mom’s photo albums (I’m good on the yearbooks, but there were a couple cowboy and Indian pics from when I was about 7, that could be troublesome), it got me thinking hard about the power of words, images and narratives. Words will hurt you. Images will hurt you. Narratives will hurt you.
Our industry has to pay attention to the power of words, images and narratives; and particularly right now as the 2020 election cycle gets into high gear.
High school tweets, Texas bar admission applications, and college papers apparently can now ruin careers. Now some may say that’s a good thing and some may say it’s terrible, but let’s face it, it is a thing. In this world of hyper-connectivity, words and images take flight instantaneously and can spread around the market, around a polity, a community or around the globe in a heartbeat. And they never go away. Moreover, there seems to be a view in currency that forgiveness is not possible and balance is no longer relevant and that people are defined by their worst. A sort of the lowest common denominator. Well, heaven forbid that I take sides here, but think, if you will, for a moment on Winston Churchill: Gallipoli, Edward VIII, resistance to Indian independence and certainly some racism towards the people of the Indian subcontinent, but still the savior of the West. Bad outcome? Could happen today?
Why is this relevant? Because we, in the capital markets, should expect to get defined by our worst. No forgiveness. No balance.
I am not here to tell you all to clean up your old yearbook or try to delete content from the internet, although that is probably a good idea; I want to talk about recognizing the power of words and images and their potential impact on our capital markets and the need to be diligent and indeed aggressive and assertive in not allowing negative or damaging narratives about the capital markets to grow without contest.
A couple of examples: There’s been a lot of chatter this past couple of months about whether we are talking ourselves into a recession. The second half of the fourth quarter was very rocky for markets, but arguably not so rocky for the underlying real economy. Yet, we have seen consumer confidence and business confidence begin to decline. There seems to be an enormous disconnect between the notion that “I’m doing fine” and “I’m worried that we’re all doing terribly”. Indeed, there is something to this notion that we could talk ourselves into a recession.
During the Great Recession, we talked ourselves into Risk Retention and the Volcker Rule, among other things, under the banner of “skin in the game” and “banker roulette.” These Mariannes with flags athwart the barricades confronting evil bankers became a meme leading to a massive eruption of regulation both here and around the world. Some of that regulation was undoubtedly thoughtful and efficacious, but much of it was more visceral; unthoughtful responses to a political/commentariat mob-like embrace; of the easy, the simple and powerful narratives about good guys and bad guys, supersized by the 24 hour media cycle. The narrative – of course – was that an unregulated financial sector filled by people conniving for personal gain, reckless (or worse) about consequences, made the Great Recession a certainty. Everyone else was a victim. Let’s be clear, this wasn’t the spontaneous consensus of thoughtful people reviewing data. These conclusions were not self-evident. It wasn’t undeniable. It wasn’t indisputable. It had to be taught, and it was, by the drumbeat of repetition.
This is not an argument that there were no bad players in the financial marketplace or mistakes were not made, but the picture was far more nuanced than what was portrayed by our politicians, by the chattering class and by the media.
But the banking and capital markets truly made a grave error in allowing these notions of evil conniving bankers and capital market participants of all stripes not eating their own cooking, foisting off terrible investments on unsuspecting investor and gambling with taxpayers’ money to grow and ossify into fact. There were very few voices to be heard in contravention of these notions.
Risk retention is near and dear to my heart because it is a stress point in almost every transaction I work on these days, causing bankers and investors to go through complex and expensive gyrations; I wonder for what? Let’s be clear, it’s created a monstrous amount of legal fees and that’s not altogether bad from where I sit, but is the whole capital market system safer because of risk retention? Is it better because Volcker killed off certain types of bank investments and suppressed proprietary trading? I don’t know about you, but I certainly don’t see it. Let me return to data sets which don’t get much attention. Look what happened to the construction lending book during the Great Recession. When the Great Recession happened, construction lending suffered the deepest losses of any species of lending. But no one laid off construction risk through securitization; it was all “on book.” On the other hand, the broadly syndicated CLO market, which was designed to distribute risk for a fee, survived the Great Recession quite well with virtually no losses penetrating the investment grade tranches of CLO securitization debt. Inconvenient facts? Not if no one looks.
How about the Wall? Wise to the wisdom of Michael Jordan, who when asked about a lack of enthusiasm for causes, observed that half the people who buy his sneakers were Republicans; I want to be clear that these mindless narratives that drive bad policy unconnected to the data and indeed unconnected to actual solutions to real problems are an equal opportunity abuse of the left and the right.
What else might we talk ourselves into now? A transaction tax to pay for something or other on a politician’s wish list? Not inconceivable. Would it actually have horrible consequences for capital formation and a healthy economy? Yes. Those who push it will not care. I shudder to think that the Green New Deal might have legs. Look, we are not really going to give up steaks to avoid methane, end air travel and depend entirely on sunshine and wind to power our economy, but this is the type of thing that has the potential of crystalizing ideas that will drive bad policy in ways that rapidly become unhinged from underlying data.
So that all may be true, but what’s it mean for markets today? We have to be vigilant to push back when new narratives develop that begin to drive bad policy. We have to have courage to stand up and say, “No, that’s not right,” and use real data to defend our positions. We are entering another presidential campaign (though it seems that the election cycle is simply a permanent reality today with no or little pause between cycles and electioneering) and a presidential election cycle is the perfect petri dish for deranged narratives.
From the fringes of the populace left and the populist right, finance is often a preferred whipping boy (with a whiff, and perhaps, sometimes more than a whiff, of anti-Semitism) and we have not seen an election cycle in memory where populism has burrowed in so far from the fringes to infect and corrupt the middle. Add the fact that after the longest expansion since World War II there is a recession coming, and the economy will be stressed, and we have a recipe for disastrous policies. Our politicians have taught us all that if something is wrong then someone is responsible and the search for this responsibility may very well end up on the door of financial markets, regardless of the facts.
So this is a call to action. In my spare time, I co-chair the CREFC PAC and – personally – I contribute to the political action committees of several of our major trade organizations. We all have to step up our game. We have to give our industries the resources to fight back when they are assaulted in the popular culture. You’ve all seen the movie. We’ll see it again if we don’t act. First, an idea gains currency then it begins to transmute from notion to ossified fact, then our political class clutches to its breast with fevered but gladdened hands demanding that something be done (to someone, other than them, of course). No one stands up to contest the politicians under the klieg lights. Fair minded people – perhaps – still see both sides and say this issue is complex and that we need to proceed carefully, but their views are drowned out in this spittle-filled yammering of the political class. (Is that over the top? Ok, it’s over the top; let’s see if my editors allow it.) Our major institutions and our trade organizations have to be ready to step up and contest negative narratives and not let them dig deep roots into the popular culture. In the past, we have in large measure, tucked our head under our wing and hoped this would all go away and worry that by engaging we would somehow make it worse. That simply doesn’t work.
This is not to deny there are, and will be, real problems, nor that there are not, or won’t be, bad actors, nor that there are, and will be, sympathetic folks that are hurt by a shrinking economy and financial distress. But, we need to stand up and contest false narratives when they are false, engage in real conversations around real issues and support sensible solutions to actual problems. If we leave it to the politicians shouting through the megaphone of the 24-hour news cycle to a largely financially illiterate population, we will get what we deserve.
Up on the barricades everyone.