Intro. [Recording date: September 8, 2016.]
Russ Roberts: What we're going to talk about today is your evolution from trader to photographer and what you learned along the way. And of course you were in a front row seat for some important moments of American financial history in the recent decades. And now you're in the front row seat of a place where there aren't that many people seated, which is the people exploring the lives of folks who are struggling in America in particular ways; and I found what you've written about both of those things--trading and your photography work--to be absolutely fascinating. So, I want to start with your work as a trader. I want to start with the Mexican bailout, the Mexican crisis. What were you doing at that time in the trenches--this is in 1995. But what were you doing in the lead-up to that and how did you experience it?
Chris Arnade: Yeah. I had gotten--first of all, thanks for having me, again. I had gotten a job offer from Solomon Brothers, one of the premier bond houses back in the old Wall Street--the one that's written about in Liar's Poker. I got that offer; and I joined in August 1993, coming out of a Ph.D. program in physics from Johns Hopkins. And I came to Wall Street knowing nothing about Wall Street. Six months earlier I didn't know what a bond was, I didn't know what a stock was. But I had found out there were jobs being offered to people like myself on Wall Street, and I trained myself. And they had put me in Research. And my job was to apply my mathematical analytic background to look at trying to judge value and trying to understand the financial markets. And in particular I was to focus at the time on the international markets, something that had just started to get back into being hip again, which was investing in Latin America. They called it 'emerging markets'--so, Mexico, Brazil, Argentina. And for the first year on Wall Street I helped the traders think about the products they were selling, think about the markets. And some time, middle of 1994--I actually think it was November of 1994--I was promoted to the Desk to trade, be a trader, in these products we were selling into Mexico and Brazil.
Russ Roberts: A little learning is a dangerous thing. Exciting.
Chris Arnade: Yeah. That first year and a half was a quick immersion into learning about markets and trying to forget a lot of my math and physics. But, they had promoted me to the Desk really quickly. And within--I think I started somewhere in November, December--on a trading floor, the ones you see on the TV, a large empty floor with maybe 500 people sitting in front of computer screens all next to each other. And the product we were focused on was helping clients, as well as helping our own bank, Solomon Brothers, investment banking, invest in Mexico. And Mexico was the hot product at the time. There was NAFTA (North American Free Trade Agreement), there was a bunch of strong incentives for people to get into Mexico. And so we offered them a product to get into Mexico. And then, very shortly in my career, December 20, I believe it was, in 1994, Mexico--which at that time had what most countries had, which was to offer incentives for people who become investors in their countries; they basically had their currency fixed: they had, removed any risk of devaluation, any risk of additional confusion. They said, 'Well, our currency is going to be fixed, the Mexican peso.' And then on December 20th, they changed their mind about that and they devalued the peso.
Russ Roberts: It's fixed until is isn't.
Chris Arnade: Yes, it's fixed until it isn't. And that set off a whole chain of events. I think they even gave it the name, 'The Tequila Crisis.'
Russ Roberts: Yup.
Chris Arnade: That was in many ways one of the first tests of kind of the new financial model, what at that point was--and a test of the new, incoming Clinton Administration, how they would handle their dealings with it in financial markets. Which at that time was undergoing large changes from sleepy, private partnerships to large public companies and largely being deregulated.
Russ Roberts: And I would add, people investing their own money to a world where people were investing other people's money.
Chris Arnade: Right. That was part of the transition--
Russ Roberts: The transition from partnership to public company is, I've suggested, partly the attractiveness of being able to borrow money and should not have been the case, particularly before that.
Chris Arnade: That's very much the case. When I joined Wall Street in 1993, it still had the culture of a partnership; and a lot of the senior managers still behaved as if this was their company, in the sense that their money was invested in the company and what happened to the company happened to them personally. That changed over my career on Wall Street. But the Mexico Crisis was in many ways the first test of the new, global financial markets.
Russ Roberts: So, before you go on, I want to talk briefly about the kind of product you were selling. Which was kind of complicated; and we don't have to go into all the details. But I think it's interesting when people think about, 'Gee, this sector of the world markets,' or 'This country is doing well: I ought to get in on that,' it's not so straightforward. Because, for one reason, especially in emerging markets, they don't have a well-developed stock market where you can say by an index of their stock funds. And so it's not always--what was creative about what Solomon Brothers and other banks were doing, was giving investors a vehicle for investing. And it was a complicated vehicle. Correct?
Chris Arnade: That's correct. My desk job was helping--was not in equities as much as bonds--was helping people invest in basically Mexican government bonds. And that's harder done than said, because there's a lot of regulations; there's different tax regimes, different issues that people initially don't think about, like: How do you prove ownership of a bond? How do you--you just can't go into a country and buy a bond and, you know, be done with it. There's a lot of issues: custodial issues, ownership issues, regulatory issues, tax issues. And what own bank and other banks were offering was a simple vehicle: We sell you this vehicle that says you own, you effectively have the ownership of a T-Bill (Treasury Bill) or a bond in Mexico--
Russ Roberts: And that was a bond presumably with an attractive rate of interest, because it was somewhat risky--
Chris Arnade: I believe the [?] at the time the Mexican bonds were 35% yield, or 30% yield. But it was denominated in pesos, so you had the risk of a devaluation. You took the risk of the currency between Mexico and the United States. Now, on top of that, besides just facilitating customers going in and buying these things, we also provided them leverage. And that was a big additional benefit.
Russ Roberts: Explain.
Chris Arnade: So, if the customer gave us $100, let's say, and said, 'I want to invest in Mexican bonds,' we gave them exposure to $400-worth of bonds by lending them money. Kind of like non-recourse finance, they call it--very similar to what--your $100 was a down payment on an exposure to a much larger size of bonds. So, we lent money to the customers as well. It was a kind of structured product: We give you exposure; you get you invested in Mexico; and at the same time we lend you money to do it.
Russ Roberts: Let's just stop there for a second. The advantage of leverage is that--the upside is very, very large, because you are only spending $100 of your own but you are effectively holding $400 of the asset. The downside is that if it goes down, you can get damaged very badly.
Chris Arnade: That's correct. It's very much like it's supercharged: 'I want to invest in Mexico, but I want to supercharge it.' And it's something that, you know, started a very dangerous process of, once we walked into the world of providing leverage--providing access was one thing; helping customers get into Mexico was one thing. Providing them leverage--giving them supercharged Mexico access--is a lot riskier. It's a lot more profitable, it can be; but it can also be a lot riskier. And when the currency devalued, when the crisis started, it went from being very good to very bad very quickly.
Russ Roberts: Who were some of the customers? Who was buying these structured assets?
Chris Arnade: Well, a lot of mutual funds; a lot of pension funds; a lot of hedge funds. Primarily hedge funds. But also, we were. We were doing it for ourselves as well. So, we, the bank, had proprietary positions on--so, if we provided--we did customers, say, in a hedge fund in Greenwich, Connecticut, they would also--they would do $200 million and we would do $200 million, because we would ride along, as they say. So, we also were investing our own money in it. Because it was a trade that everybody wanted to do. And it was, what you call on Wall Street, surfing the wave: when the wave comes, you surf it.
Russ Roberts: Strike while the iron is hot. Make a killing while Mexico is having this great economic resurgence, and not just enjoy it but amplify it.
Chris Arnade: And the period of time was very conducive to taking risk. We were coming out of a pretty rough recession from the late 1980s and Clinton was in power, and there was a NAFTA in the air; and it was, you know, Latin America itself was coming out of default--they had defaulted in the 1980s; they were making these strong claims that they were not--they would be large, trading, global partners. So, globalization was in the air, and so it was a natural thing to say, 'I'm going to take advantage of this movement and I'm going to invest in Mexico.'
Russ Roberts: And so why--just a small correction--I think the recession was in 1991. And it was actually fairly mild. So, I think it was more like a speed bump than a serious recession. And I think it did encourage a lot of people to be overly optimistic about how things were going to be going. And certainly the Mexican economy did very well initially as NAFTA went into place. What went wrong? Why did Mexico have to devalue and why did they ultimately face the risk of default on those bonds that were the underlying asset for the products that you were selling?
Chris Arnade: A lot of the above--
Russ Roberts: If you know--
Chris Arnade: A lot of the above different ideas: budget deficits, current account deficits, spending too much money, not taking enough money in. Having a fixed exchange rate. Generally, when markets go up too fast, they often go down quickly afterwards. I don't have a good answer in terms of what I think is the reason.
Russ Roberts: But as some point--it doesn't matter--at some point it became clear that the government of Mexico was going to struggle to repay the promises, to honor the promises that it made with their bonds.
Chris Arnade: Right. They initially devalued--once they devalued the currency--I believe it was 3.12 or something--and then they devalued it 15%, 20%, to give themselves a competitive advantage. They wanted to have a weaker currency so they could export more. But this hurt the investments of everybody in Mexico. So, if you were a foreigner and you had bought one of my products, or our products, you now lost a little money because Mexico had devalued. And that began an exodus. People started feeling very uncertain. They didn't have any confidence any more in Mexico, because 'You had told me the currency was fixed; now it is floating; now it's not fixed.' So people started leaving.
Russ Roberts: And of course that makes it harder for Mexico to use debt to finance any of the promises they've made previously. Because obviously--
Chris Arnade: That is correct. And so it became a vicious cycle, where people started leaving and that put more pressure on the currency and the currency devalued more. They tried to hold the currency, but they were running out of money, in terms of their Central Banks. And so, it eventually got to be very ugly, near the end of December, the end of 1994, into the beginning of 1995.
Russ Roberts: What was it like in the office in those days?
Chris Arnade: Well, I had to cancel my vacation. It was my first 6 months on the Desk, and you know, there was a sense of chaos. I was supposed to go for Christmas vacation to visit my family in Florida, and that never happened. For me it was great in terms of personal because I learned a lot; and it was--to use a better--it was exciting. But, you know, it was a time and place where--I think I slept in the office one weekend, that first weekend, prior to Christmas, just trying to understand the positions we had been put in. One of the things I think a lot of people don't understand on the outside is--and some of the chaos that takes place in investment banking, is--nobody really understood the product we were selling until the crisis happened.
Russ Roberts: Because you didn't need to--
Chris Arnade: And then we realized--right. And then we realized, 'Wait.' We'd gotten ourselves into a really bad position. We had put ourselves into a really ugly position where we stood to lose a lot of money on risk we took that we didn't understand. And so, you know, when I say I spent a week in the office, that week in the office was trying to help the group understand what we had gotten--the risk we had gotten ourself into. And that literally meant putting every trade--2000, 5000 positions--into a large spreadsheet, by hand, so I could, you know, graph the risk.
Russ Roberts: Just see how much money you might--it was at risk of losing.
Chris Arnade: Right. And I remember that one day when Mexico had announced they were going to devalue again, I had a little print-out of the money we would lose. We didn't know where the currency was going to open. It didn't open till 10 o'clock, New York time. And during that weekend, I put together a graph, a table, of: If it opens here, we lose this much; if it opens here--some of the numbers were huge: if it opens at 6 [e.g., 6:1 'new' Mexican pesos per U.S. dollar versus previous ~3.4:1--Econlib Ed.] we lose $40 million dollars; if it opens at 12 we lose, you know, $500 million dollars. And I just remember standing there, this kid who had just gotten this job on Wall Street was holding this little piece of paper--
Russ Roberts: Destiny--
Chris Arnade: and handing it to the CEO (Chief Executive Officer) in the firm, you know, who is looking at it. And kind of blaming me. I'm just delivering the bad news, but he kind of implied that I'd gotten us into this awful mess.
Russ Roberts: And what did open at, do you remember?
Chris Arnade: It opened, I think at 5 spot 8, 5.8; we lost on that move about $25 million dollars, in that one day. And it came as a shock, because no one had really thought they had this awful risk.
Russ Roberts: And of course it wasn't over at that point. You didn't know--it could get a lot worse.
Chris Arnade: Yeah. It was by no means over. We didn't know where it was going to go. It just opened there and we didn't know where it was going to go next. And for the next week and a half it was really just complete, all hands on deck, trying to figure out, trying to manage--you know, how we say, it's like being on a small ship in a hurricane--trying to always just figure out how to survive the next wave or blast of wind. Because when these crises happen, you start finding out you have all this exposure and risk you didn't know you had, because it's kind of like, mathematical-speak, it's second- and third-order effects that come into play.
Russ Roberts: But part of the challenge is--it's one thing for, as you said, Solomon Brothers had invested their own money; but of course they had sold products to a lot of clients, who, when they saw the headline about Mexico devaluing had a thought, 'Hmm. Don't I own some stuff in Mexico? I wonder what happened to that.' And they call. And you have to explain to them that that asset that you told them was going to be this fabulous thing is not so fabulous. So there's a lot of that, too; you've written about it.
Chris Arnade: Right. Dealing with customers who are angry--the Chief Economist for Latin America at the time had written a piece, on December 15th--
Russ Roberts: Chief Economist for Solomon Brothers.
Chris Arnade: Yeah, for Latin America, not for the United States--who was the Chief Economist for the Latin American region, had written a piece, December 15th or December 13th, saying the probability that Mexico devalues is 0. Zero. He didn't say 'Small.' He said 'Zero.' And then he went on vacation. He never came back.
Russ Roberts: Yeah. So, Chris Arnade missed his vacation. He got his, but not such a good deal.
Chris Arnade: So you had a lot of customers calling up saying, 'Hey, you just said that the probability of Mexican default was zero. What's going on?' So, you know--everybody was in a sinking ship. And people tend to blame whoever they can blame, whoever, to get out. And so you are trying to doing a combination of survive, yourself, and also help your customers survive, in the most equitable way. Some people aren't equitable, but we did our best to be, you know, as above-board as possible.
Russ Roberts: So, the U.S. government at that point, somewhere around there, intervenes, in a very--what was described by many at the time to be a modest intervention. They merely guaranteed $50 billion dollars of Mexican debt, which gave Mexico the opportunity to refinance, because people now knew that the U.S. government stood behind it.
Chris Arnade: That's right. And the person who spearheaded that movement was Larry Summers. Who was just newly appointed, I believe as the Under-Secretary of the Treasury, to Rubin. And he kind of became the blueprint for a lot of behavior, in terms of government behavior towards Wall Street, going forward. But--our customers at the time had a lot of risk. We had a lot of risk. But our competitors, other banks, were doing this in much larger size than we were. So, when that, when the government bailed out--I'll use that word, bailed out--Mexico--and it wasn't just the government: it was the IMF (International Monetary Fund); it was a consortium--when they did that, they really bailed out us. And they really bailed out other banks. Including Lehman. Lehman was the one who was rumored to have had the largest exposure to Mexico, Lehman Brothers, who still existed then. So, personally it was a great benefit to us on Wall Street. It wasn't sold as that.
Russ Roberts: No.
Chris Arnade: No. But it really set in motion--it kept us from--it's hard to explain how much we could have lost, because there were some very technical things going on. But when we had sold these products, we didn't really do our homework correctly and we had a lot more risk than we thought we had. And there was a genuine probability, chance that we were going to lose a lot of money had the bailout not happened. And that wasn't lost on--I don't believe that was lost on the regulators, on the Treasury when they put together this bailout: They knew that Wall Street was exposed in a heavy way.
Russ Roberts: So, this really, to me was kind of a turning point. We'd had examples like this before--1984, Continental Illinois. But I always like to point out that Alan Greenspan, who was supposedly this great Ayn Rand libertarian--he testified in front of Congress and said it was a terrible idea, but we had to do it. So, basically, here was the so-called great capitalist free market guy saying that we have to cushion the losses for people who made bad bets. And have them lose zero instead of paying the real price they should have paid. And at the same time, Time Magazine--I think this was the event--put Summers, Greenspan, and Rubin on the cover, the 'three men who saved the world'--
Chris Arnade: It really was--when you look back at the Times [time?], and I look back at the Times, it really was sold as saving the world. And I can't tell you the relief we felt on Wall Street because we went from facing a half billion dollar loss, $250 million dollar loss--it's hard to know what we would have lost--to making money. And, you know, they could easily say, and you said, six months later, it all worked. Mexico is doing better--
Russ Roberts: The guaranteeing never had to be invoked; it was free; [?]--
Chris Arnade: Right, right. The Treasury can say, 'We made money on this.' And then they did. Technically they made money. They put in $50 billion; they got back more than $50 billion. So it became viewed as this win-win: everybody won. Treasury won. The markets won. What is lost, which is harder to see--and this is a big problem when you do policy--it's easy to look at numbers and say, 'Look, my policy worked because the following numbers show that it worked.' It's very hard to look at longer-term consequences. And certainly, I can tell you from a personal standpoint, one of the longer-term consequences of that bailout was a lesson, 'Hmmm, you know, I can get myself into a bad position and I'm pretty sure I'm going to get bailed out.'
Russ Roberts: And if I had a complicated asset, structured product, that I didn't fully understand and I didn't lose any money on it the first time, the incentive to fully understand it the second time goes way down.
Chris Arnade: Yeah, exactly. It's kind of like you go through a dangerous curve speeding and your car starts tipping over but it doesn't, and you go, 'Hey, that was fun. Let's do it again. There's no consequences.' And it really, it's hard for me to explain to people who weren't there how much it really changed the culture. It helped transform the culture--that was already transforming, the culture of Wall Street--from relatively cautious--cautious because it was their money and they suffered consequences when they lost--to being these large bureaucracies that generally felt less responsibility to the broader markets. And to themselves. And to their customers.
Russ Roberts: So, it's easy for us, now, with that hindsight--although you were on the ground and you have a different perspective than I do--but I always try to put some weight on people who, at the time were aware of these issues. So, in an essay I wrote on the financial crisis, I quoted Willem Buiter--I don't know if I've pronounced his last name correctly--but at the time he was an economics professor at the University of Cambridge. He now is, ironically, the Chief Economist at City Group--
Chris Arnade: Yes, I know[?] him.
Russ Roberts: the last time I looked. Yeah, I know him. So, at the time, in 1995, after this bailout--and by the way, you said the Treasury put in $50 billion, made it richer[?], and they didn't even put in the $50. They just risked it, and they didn't have to put it in as it turned out, in some sense. Here's what Buiter said. He said,
This is not a great incentive for efficient operations of financial markets, because people do not have to weigh carefully risk against return. They're given a one-way bet, with the U.S. Treasury and the international community underwriting the default risk. That makes for lazy private investors who don't have to do their homework figuring out what the risks are And I paraphrase it as 'All profit and no loss makes Jack a dull boy.' If you don't risk the downside you are not going to be as prudent as you otherwise would be. The other point I want to make, and I think it's just really important--you've really touched on it in an important way--is the way it was sold. And we talk on this program about the Bootlegger and Baptist hypothesis in government regulation. So, the Bootlegger and Baptist--you have a bootlegger who wants liquor sales to be banned on Sunday so that he can make money selling illegal whiskey out of the back of his car. The Baptists don't want liquor sales on Sunday because they think it's God's day, the Lord's day, and it's not appropriate to drink on Sunday. So, the politician bans liquor sales on Sunday because it's the Lord's day. He doesn't mention the fact that he's making a lot of bootleggers happy. And this is a perfect example of it. And it disgusts me that my profession continually justifies these kind of bailouts looking at the upside: 'Oh, we saved the world; there was no crisis; we made sure Mexico didn't default; that would have thrown things into turmoil; that would have been bad for Mexico; we could have had a recession in the United States.' All of which is true--possibly, though we'll never know. We don't know whether Lehman Brothers would have gone bankrupt or would have had a catastrophic, systemic problem as a result. What we do know is that they later had an even worse one--because they had been incentivized to be less cautious with other people's money; and other people were happy to give them that money because they thought that they'd get it back anyway. And so, to me, this is--I don't know what the "real reason" was. I just know that the thing that gets waved around like a banner is, 'We saved the world.' What really happened is, for sure they saved Wall Street. And that was just the quiet part that nobody talked about other than the occasional remark from Willem Buiter.
Chris Arnade: And I think--it also occurred exactly at the same time that--how banks were being run and how they were being structured was dramatically changing. So, again, when I joined Wall Street, you still had companies--Goldman, for instance--which was a private partnership. And Solomon Brothers had been a private partnership: they were[?] the first to go public, I believe in 1987, 1986. But I had gotten there early enough that a lot of the senior management had been partners and still behaved in a way in which they thought of every decision as--the way they thought was, 'Is this a prudent risk to take for me?' For the bank, that is, not just for me. And that changed as the companies got larger and became more bureaucratic. And traders like myself didn't have to put our money at risk. That really changed how people took risk. The two combined, the fact that it wasn't your money at risk, and, even more, now government in some sense was underwriting failure, really incentivized people to just go crazy.
Russ Roberts: So, you and I--I've followed you on Twitter for a while now and I've read a number of your essays--you and I don't agree on a lot of things, politically.
Chris Arnade: No, that's right.
Russ Roberts: But we agree on this. So, why is it, that you think, that we don't have more company? There are people who are angry about the bailouts. There are people who are angry about TARP (Troubled Asset Relief Program). Why is it that so many--what are your thoughts--well, let me ask it a different way. When you think about your colleagues at the time, and the management above you, if you told them the way you see the effects of this, would they say, 'Yeah, I think you're right'? Or would they say, 'No, no, no, no, no, you are over-exaggerating. It really was necessary. It's important,' blah, blah, blah? What do you think other people think about this?
Chris Arnade: I think, you get kind of two camps. I think the bulk of the camp is, 'We needed to do it,' which is--and again, not to get too political here, just the kind of what I call the squishy middle of both parties--which is that, you know, we just need to do whatever we do to promote growth and move on. Kick-the-can-down-the-road crowd. The technocrats--I call them the technocrats--who just looked in from a sheerly numbers' perspective and said, 'Hey, you know, Mexico's growth did better; U.S. growth did better; the stock market did better.' It's kind of these people who really only look at spread sheets and how they analyze things. There was a tale [?] in Wall Street of both political parties, mostly libertarian-leaning people, who looked at it and said, 'No. This is just wrong.' But it's very hard to say something's wrong when it benefits you. Let's be honest.
Russ Roberts: We all have our own inner Bootlegger and Baptist. We know there are inner reasons for why we do what we do, and we tend to focus on the ones we think are high-minded rather than self-interested.
Chris Arnade: It's hard for me to really try to explain to people how out-of-control Wall Street got. Even from--I was there from 1993 to 2012; and even from 1993 to the crisis it was just speeding up and speeding up and speeding up. And, you know, it was hard for me to really grasp what I'd gotten myself into coming from absolutely no financial background, when I got there, 1993. It seemed kind of in control but moving out of control. But by 2000, you know, 2005, it was completely out of control. [?]
Russ Roberts: But at the time, in 1995, I assume your main reaction to this set of events was relief.
Chris Arnade: Oh, hell, yeah. I could finally get to go on vacation in February, you know. And--believe me, I got paid a lot. Let's be honest: I'd gone from making $12,000 as a grad student to my first year as a research guy getting paid $180,000. You rarely get a bump up in pay of magnitude, you know.
Russ Roberts: Yeah, and that was real money back in 1995.
Chris Arnade: Yeah. For somebody who was a Ph.D. in physics who thought he was going to make $30,000 a year--I mean, that was big. And those things really impact you. You can try to be as ethical as possible, but when you get money waved at you--
Russ Roberts: It's very hard.
Russ Roberts: So, let's go ahead in the timeline. Let's go to 2008, with the TARP bailout of, I think it was $700 plus--$710? $720?--billion dollars--
Chris Arnade: Right.
Russ Roberts: You've written about how, and I've talked about how Paulson came to Congress and said, 'If we don't get this money to give to the banks, the world's going to end.' Literally, he said that. And incredibly, Congress said, 'No.' So, what was the reaction? Talk about what happened in the trenches, and what were you doing at that time and how did you guys react to it?
Chris Arnade: I was a proprietary trader at that time--I was risking the bank's money.
Russ Roberts: Where were you working?
Chris Arnade: I was one of the--
Russ Roberts: You weren't at Solomon Brothers any more, right?
Chris Arnade: Yeah. I was at Citibank. Solomon had become Citibank, through various mergers. We had been bought by Smith Barney, and then they were bought by Travelers. So we were Citigroup at this point. We had gone from a company of 5000 to a company of 250,000. And so, you know, I had been one of the people who had been skeptical about the markets' dramatic rally--credit markets, basically starting in 2003. So, I had been skeptical but gotten run over; and as they say, I kept expecting this to happen, but much earlier than it did happen. So, I was in a seat where people around me lost a lot of money; and the firm lost a lot of money. And the people 5 rows over, 10 rows over, lost $50 billion dollars--I mean, tons of money. And, you know, I had expected the markets to blow up. I hadn't expected it to go as far as it did. And, I think there was just a sense of disbelief. There were a lot of people personally who were just very leveraged, and they were a bit like, 'I don't know what I'm going to do. The banking center is collapsing and I have a vacation house in the Hamptons; I have 5 kids in private school.' People were personally miserable. But the situation at the time, right up to TARP--and I'll never forget when someone mentioned this idea that there was going to be a bailout. It just propagated the trading floor like almost as if--you know, everybody immediately fell in love. It was just everybody--
Russ Roberts: It's a cure for cancer.
Chris Arnade: Yeah. The trading floor's mood--I remember when the rumor first broke--just, it went from somber to laughing and high-fives. It was interesting, looking back: There was never a moment, once the rumor came out, than anybody expected it not to happen. It was just a sense of--and I don't know if you remember when the first vote came in the House of Representatives--the first vote failed.
Russ Roberts: Yup.
Chris Arnade: And I remember, it was like 4:30 in the afternoon, 3:30 in the afternoon. And we had all been told it was going to pass. Everybody just assumed it was going to pass, because this was so obviously right. It was--$700 billion was the number?
Russ Roberts: $720.
Chris Arnade: There was no--it was just a Bill saying--but no real details. And so, I remember us watching the vote on C-SPAN (Cable-Satellite Public Affairs Network), and as the vote clearly started turning to being lost, people didn't believe it. People just looked at it and said, 'No, no, don't worry. It's going to turn. It's going to turn.' Even when the numbers were clearly there's no way it could turn, there was this immense denial. That's how certain people were that it had to happen. And it really was [?] that way: This has to happen.
Russ Roberts: Because they were right, of course. It's all Congress really did is say--Paulson showed up basically with a piece of paper and said--seriously, I've talked to people on Capitol Hill about this--he showed up I think with a single sheet of paper that said something like, 'Just give me this blank check.' And they said, 'Are you out of your mind? It doesn't work that way.' They voted it down. And then, as a friend of mine once said, to my horror, 'Well, then they fixed it, right?' No, they didn't fix it. They larded it up with a bunch of pork for Congress--that, the final TARP Bill has all kinds of special provisions that are just unbearably painful to read about. You can read them--the special payoffs to a car manufacturer for their green car that somehow other cars don't get because they are not the right kind of green. And a lot of payoffs in that.
Chris Arnade: You know, one thing that--putting my pro-TARP hat on, my old banker hat on--it really was, really did save the markets in some senses. You know, but it came with no strings attached. I--where we differ, you know, where we probably differ in terms of what we feel about it was--it was just $720 million, sorry, $720 billion--sorry, I always, million, billion--that came really with no strings attached. And, if there ever was a time to attach strings, to say, 'Okay, guys, you know what?' The way I put it is, people say, 'Well, look: TARP made money.' It made money because you are not accounting for--they sold it cheap. There was nobody else willing to offer, solve Wall Street's--I mean, $720 billion dollars of money with no strings attached. You have to charge people when you give them things to save them. So, Treasury made money only in the sense that it gave it away free. Had it actually charged the market rate for what they offered--and think about it: They offered Wall Street--
Russ Roberts: Salvation
Chris Arnade: they were going to be a savior. Salvation. You have to charge a price for salvation. And they gave Wall Street salvation at no charge. So of course it made money with no charge. But that's just not proper accounting. And so, I always tell people that--there's a lot of details that got glossed over. But in the bailouts, there were all different things you could have done. You could have asked Wall Street to take a loss on certain products: they call it a haircut. [?]
Russ Roberts: Tim Geitner said [?]
Chris Arnade: We were prepared to take a haircut. I had a spreadsheet built of, you know, just accepted--here's what's going to happen if we take a 50% haircut. Wall Street, for all it's problems, were generally--we're big boys. We can take losses, sometimes. That's kind of what we're supposed to do. And so people were prepared to take a greater--people were prepared to take a greater hit than they took. And the government really played their hand very badly, in that sense. They could have gotten a lot more concessions. I think they could have gotten a lot more out of the Street than they did.
Russ Roberts: Tim Geitner said, 'No haircut.' People started to try--people negotiated. As you say, AIG (American International Group) and others were willing to say--they were willing to take something. Or they could have been asked to take something. And they were not even asked. And you say, they played it badly. I think they played it very well, in this sense: that they took care of their customer, which was Wall Street. For us, the non-bankers, they played it badly. But I don't think that was their goal. It's like when Hank Paulson talked to Lloyd Blankfein 20-something, 30-something times before the TARP came out--my joke was that they weren't talking about what their kids did over the summer. They were talking about, I'm sure Blankfein was explaining to him this was absolutely essential and I'm sure they both convinced themselves they were doing God's work when in fact they were sucking money out of the rest of us and making sure that nobody lost their house in the Hamptons. That's just unacceptable.
Chris Arnade: The power of bubble-think is extraordinarily strong, and you become part of the culture. Everybody is friends with everybody, thinks the same way. Even if you don't feel like you are corrupt. Even if you are not--you are trying to do your best to be ethical--you are part of a system that is by nature corrupt. Now, you know, one of the things that--the other dirty little secret from the TARP period, from the Crisis: the individuals most responsible for the losses, the people who lost the $50 billion dollars, the people who made the decisions that lost $100 billion dollars--they personally did very well. So,--
Russ Roberts: Unacceptable--
Chris Arnade: if you look at 250,000 employees [?] at Citibank--oh, 240,000, 235,000 employees did their job. And made money. It was the 15,000 who lost $100 billion dollars, who, you know, who did--and those, that segment of the people who lost. And I'm not just talking about Citibank. I'm talking about Lehman. I'm talking about--
Russ Roberts: Bear Stearns--
Chris Arnade: all other firms that--Bear Stearns, and Bank of America, and Merrill--the people who, the individuals who generally lost the most money did the best financially. So, there was really nobody who came out of the Crisis who should look back and say, 'I feel bad about what I did,' from a very selfish perspective. They did well, financially. Russ Roberts: Well, you said, 'No strings attached.' There was a government policy in place, FDICIA (Federal Deposit Insurance Corporation Improvement Act of 1991), that had strings attached. That basically said when you blew up, management got replaced. TARP was basically an extra-legal, ad hoc, cobbled-together way to avoid that. And the other point, I think, to make is, that, you said they did very well. The leaders of Bear Stearns and Lehman's, just to take the two examples that got a lot of attention--Jimmy Cayne and Richard Fuld--they "lost a lot of money" when the equity portion of their investment was wiped out. They were still left with enormous amounts. It wasn't like they were--I like what Jimmy Cayne said: 'The only people who are going to suffer are my heirs, not me, because when you have $1.6 billion and you lose a billion, you are not exactly, like, crippled. Right?' So, yes, he lost a billion relative to, because he rolled the dice and he lost. But he was left with $600 million dollars. And he should have, maybe arguably, lost it all. But he didn't.
Chris Arnade: What was Chuck Prince's payout when he got fired as CEO (Chief Executive Officer) of Citibank in 1980? $40 million? He got a $40 million parachute? $30 million parachute?
Russ Roberts: But that's peanuts compared to--you know, Fuld also lost a billion dollars of paper wealth on the equity that he lost in Lehman. But he kept over $500 million dollars.
Chris Arnade: Yeah. They did well.
Russ Roberts: He did well. You know, people say, 'Oh, they did pay a price.' Well, they paid a price relative to what they could have paid if the world had worked out perfectly the way they had hoped. That's not the way capitalism works.
Russ Roberts: Okay. So, let's--I'm going to get down off my soapbox now, return to the Chris Arnade story. Sorry. So, when this happened, when the second vote occurred, TARP did pass. Lots of happiness and celebration on the floor. What was your mood, personally, when that happened? And why did it change over time? What happened to you that changed the way you perceived it?
Chris Arnade: I was getting--you know, if you had asked me, 2002, 1998, what I thought about Wall Street, I would say, 'Hey, look, it's not the best thing to be doing with your life ethically, but it's benign. It's not positive, but it's not negative.' You know, it's a job. 2008, 2009, I'm starting to realize, 'Hey, man, we really messed up. This is no longer just--we did some bad things.' And I had thought at the time--I expected everybody else to come to that--or a large majority to come to that same conclusion, that: Boy, we had done some really bad things; we've got to change. What I found was the exact opposite, that people said, 'Well, what do you mean? We didn't mess up. We didn't do anything. What do you mean?' I had some jaw-dropping conversations on the Citibank trading floor with people who had just gotten bailed out. I mean, Citibank was saved. We were saved. We ignore[?] stockman town [?] from 52 to 2 [?]. And the government stepped in. And there are people who ended up on guarantees getting paid saying, 'What do you mean? How dare the government try to tell us what to do! We didn't mess up. We didn't mess up at all.' And that was really disheartening, to really feel like you are now in this company or in this industry that you no longer respect. I mean, I stayed there for another 5 years. I did proprietary trading. I was left alone. I started at that point pivoting most of my personal time to my photography. And doing things outside of work. And I just became more and more disenfranchised with--disenchanted with Wall Street and how the industry behaved.
Russ Roberts: And at some point you quit.
Chris Arnade: Yeah. In 2012, I quit. And we went our separate ways. I took a package and left. About 2010, I had started--during the Crisis and prior to the Crisis, as a way to relax I'd go on long walks through New York--really like 20 mile walks--to neighborhoods that were most people on the go. Some of those walks took me up into what are New York's poorest neighborhood, New York City's poorest neighborhood--Hunt's Point, which is in the Bronx, which is by all metrics one of the highest crime, one of the lowest--the average family income was $19,000. And I was spending more and more time up there, documenting and just spending time with people who were homeless street addicts. So I had this really surreal 2-year period where during the weekends and some nights I was documenting and taking pictures of people--addicts, street addicts, people living in crack houses and during the day coming and working on Wall Street. Trading.
Russ Roberts: Different kind of addicts.
Chris Arnade: Yes. And at some point something had to give, and it just got to be too weird; and I stopped paying attention to my job. And so I said, 'I've got to get out of here.' And I left Wall Street. And for the last 45 [4-to-5?] years I've been focused on my photography and writing.
Russ Roberts: So, beside some point, you've also been in a lot of rural communities, in West Virginia and Kentucky if I remember correctly. What are you looking at there? Who are you talking to when--what are you trying to understand?
Chris Arnade: I've been--for 4 years, 3 years, 3 and a half years, I did, [?] essay addiction and poverty in the Bronx. And then about two years ago I said I need to see the rest of America. So, for the last two years I've been driving about 150,000 miles on my car, in that time, just driving to communities, I always say where people--people live, nobody visits. I was just in Prestonsburg, Kentucky, which is a town, a coal-mining town in Kentucky. I was in Kingsport, Tennessee, which has the highest heroin addiction in the United States. One of the highest. El Paso, Selma, Alabama, Buffalo, I'm going to Milwaukee. I'm looking more and more, I'm trying to understand poverty in the United States, addiction. And what I'm seeing, you know, and I'll compare it to my experience on Wall Street, is what I'm seeing is a part of America that is--you know, I've come to the conclusion based on these two[?]? experiences that there are two very, very, very different Americas in this country, and neither of them understand each other. And one, basically, Wall Street people and others like them have an amazing advantage. And the rest of people, in Selma, Alabama and people in Prestonsburg, Kentucky, have amazing disadvantage.
Russ Roberts: So, the people in those poor communities--one of the things that I think it's important to remember is that these communities are shrinking. For the most part. People are leaving these poor towns; they are going to different cities. They are going to bigger towns and bigger cities. So, it's sometimes misleading to look at the people who are there, say, compared to 25 years ago, because it's not the same people. And opportunities are not there any more. And the economy is not healthy, either because coal is not in demand or because the educational skills, the people who are there, aren't so useful; and so the ones who do have the good skills just leave to go do something more productive and more meaningful elsewhere. But, for the people who are there, we have this impression--there is sort of this revolt against the elites, against globalization, against free trade. And, how much of that, in your perception is the elites's imagining of what's making people angry versus something else? How aware of it are they? Do they talk about it? Do they see themselves of victims of policy decisions in Washington, whether that's accurate or not? Do they see themselves that way?
Chris Arnade: They do see themselves as victims of policy decisions. They may not be actually informed about those policy decisions as people would like them to be. You know, I think what sticks out to me is the anger. The anger is kind of 3-pronged. One of it's very much social. It's a sense of feeling kind of diminished in terms of people caring about them, being made fun of: everything they do is laughed at. If they like NASCAR (National Association for Stock Car Auto Racing.), that's made fun of. If they vape, then that's considered wrong. They eat at McDonald's, that's cheap. So that's kind of just--if they go to church, they are considered silly. So there's a sense of just feeling like very much they are being mocked in terms of their lifestyle. But in terms of policy, I think there's a sense of--there's two frustrations. One frustration, immigration, the idea that companies are just--in so many towns you go to, the factories are just gone. They are, you know, there's a factory, it's just a rusted steel hulk. And it's gone. And that's very visceral to people that their factory has picked up and moved. And then there's anger at TARP, at the bailout, at this idea that, you know, there's two sets of rules: There's a set of rules for me: when my factory moves, I don't get a bailout. But when Wall Street, you know, collapses, they get a bailout. So it may not say to me, 'Hey, I really don't like the fact that AIG didn't get a haircut and it was unfair,' but they say 'I can't you, Wall Street, got a bailout. I can't believe that when they failed, someone was there to help them. Their buddies were there to help them. And nobody is here to help me.' So, it's kind of three kind of sources of anger, I'd say.
Russ Roberts: I want to talk about the first one, because it interests me. I am constantly trying to remind economists that money isn't everything. And that, although work is nice when it brings money, one of the things it also brings is meaning. And I think the problem of the lack of employment in the United States as we've recovered from this recession, especially among less educated Americans, is a huge problem, not because they are poor and unemployed--which is unpleasant, no doubt about it--but because their life is not as meaningful and worthwhile. So, I totally understand that. What I wonder about is this idea of respect. Certainly respect is hugely important to our sense of wellbeing. But when you say things like, 'People don't respect NASCAR,' or church, they being--McDonald's. And among my friends, that's true. Among the people I hang out with generally, higher educated people, those are all the attitudes they hold. But are the people who are enjoying those things--McDonald's, etc.--why do they--how do they perceive that they are not respected? I don't hang out much with people on the Coast, say, who are telling them that--is this something they are perceiving on television? Is it something they are reading about?
Chris Arnade: I think it comes through the media. But I think, again, I think--
Russ Roberts: Or is it something that we, educated people, have convinced ourselves about them that isn't really true? So, that's what--you are talking to them.
Chris Arnade: I think it's a little bit of both. But I feel like--I don't want to get overly simplified but I guess I really do think there's two Americas. And I think the America that's doing well dominates the media, dominates the culture in terms of--you know, Sociologists always talk about there's an in-culture and there's an out-culture. And we signal [?] ways of being in the in-culture, in terms of the television shows, in terms of what's on, movies, and what's kind of made fun of. And I think there's a fair amount of people who make fun of the culture of poverty, in terms of how people get by. If people go to church. If people, you know, go to NASCAR. Or those sort of things. I think it does filter across through the media. And I think some of it also is, comes from a place of being frustrated already and then taking any perceived slights, you know, magnifying them. So, you know, we may not be as--they may be more overly sensitive than they should be, but that comes from a place of also being just frustrated, economically--feeling very much like they are left behind.
Russ Roberts: So, I talked to, recently spoke with Angus Deaton, which I think will air before this episode does. And we've talked to others about the apparent rising mortality in the 45-54 year-old white, non-Hispanic class. And Andrew Gelman has pointed out it's mainly among women, not men.
Chris Arnade: Yes, it is. That's right. It is.
Russ Roberts: Have you--you know, people are speculating it's despair; it's people overdosing on drugs, or trying to get high because their lives are so bad. Again, as a very casual, street-sociologist, what do you see that might be relevant for that discussion?
Chris Arnade: I was just talking to a minister in Prestonburg who just buried a 38-year-old woman, one of his congregants who shot herself in the stomach. And I spent time in the 9 days in Prestonburg. Some of it's just boredom. I always say that--I spend most of my time with addicts, of all races and all types. I always say, 'Where I see hope leaving, I see addiction entering.' Where there are places where people don't feel--the old term is anamie[?ennui? animus?]--where they don't feel integrated. Where they don't feel part of the community; where they don't feel valued; where they don't feel a sense of regulation. Where they feel kind of aimless, meaninglessness. That really is where you see a lot of addiction. And addiction is on the same spectrum of suicide, a different form of suicide, a slower form. But what drives addiction drives suicide. And both cases in my mind, it's come to a kind of aimlessness-ness, meaningless-ness. And it's very hard to say why: This is due to this. In my mind it's a whole bunch of different things. But a lot of it comes from--whether or not it's fair to believe in, a lot of people feel very left behind and very isolated. And you can argue that they shouldn't feel that way, but that is the way they feel.
Russ Roberts: It's not helpful, not a helpful response, actually. I understand the argument. No, no, no, not on your part. I'm agreeing with you. I think the urge to say, 'Well, they shouldn't feel that way. There's all kinds of great things happening and they should be taking advantage'--it kind of doesn't matter, if they really are in despair.
Chris Arnade: My feeling on this is relatively probably different than a lot of people, which is--and it's one of these things because it's really hard: it's hard to say these things because they don't have numbers assigned to them. We like to look at things in numbers. But I just feel very much like we've shifted, over the course of my lifetime at least, to valuing things over valuing community. Valuing material things and a lot of these places where people are frustrated, material things are hard to get: they are hard to keep up with, the rules are stacked against them. And so they have to rely on--'have to'--they rely on community; and I think we value community less than we used to. And I think people know that. So, as you said, people leave. You go to a small town that's lost its factory, and the people who can get out--who want to go to New York City and make a lot of money, get an education--they leave. And what's left behind is people who know they can't get out. They watch people doing better than themself say, 'Bye. I'm gone,' and there's just this real sense of 'Hey, you know, I'm here. I've been left behind.' And part of that feeling of left behind is--some people didn't have a choice about being left behind. Some people stayed because they want to just care for their family. They didn't do so well in school early on, because they had some strikes against them. They had a lot more complications in their personal life. They put value on other things, other than just education; and we move so quickly these days that if you start falling behind early, by 19, 20 you are gone. You are behind. You are over. So, if you didn't do so well in 6th grade and 7th grade and got pooled[?]--you know, left behind--and you didn't get on the escalator moving up quickly, you are kind of stuck where you are. And, you know, you are made to know that.
Russ Roberts: So, there's two parts to that. I think about this a lot. There are two parts to that. One is, the first part, which is: you are left behind; you don't have the financial material wellbeing. I don't think people have gotten any greedier or emphasized things more than community more than they used to. But it is true that there are a lot of people with a lot of nice things. So, when you say there are two types of America, I think that's always been true. The question is how big are they relatively. And it's not just the people on Wall Street doing well. There's a large group of Americans doing very, very well and the standard of living, I believe, is understated in terms of how well the average person has done over the last 30, 40 years. But that doesn't matter. It's still the case that people at the bottom are really--I think it's ever more painful for them, seeing what other people have. And you do perceive that on television; and you do perceive that in the media. And I think then the question is: How important is that perception? And then the final thing is--which I want to close with because you've written some interesting things about it--is that people do find community. You write about how McDonald's is the town square. So, talk about that, and what other forms of civil society and community interaction you are observing in these very poor places.
Chris Arnade: Right. One of the things that I'm kind of pushing back on is the whole bowling[?] loan idea, which is this idea that there isn't community left. There is strong community. It's just not, it's not found in places--it's, you know, one of the things I observed because I was spending time with addicts is you spend a lot of time at McDonald's. You're on the road; you spend time in McDonald's. And part of the reason you spend a lot of time in McDonald's is because that's where people go these days, in some poor towns--to rest, to have free Wi-Fi [Wireless Fidelity, Wireless Internet access], to have a clean bathroom and a place to plug in their phone. It's also where people go in the morning to meet each other. There's morning groups in almost every town. These old--I call them 'old man groups,' where they come and meet each other. And sometimes they are very formal: there are 30 people who come each morning to have coffee with each other. So, even in these places, in these poorer communities, there's a lot of community--I call it 'ad hoc community,' 'self-built community.' It takes place in places like McDonald's. And that just tells you how--that they are doing it in a franchised--the goal is fast food--and you know is, it tells you how strong people's urge for community is. How strong people's urge for being social is. And what I've become convinced of more and more, is, in many ways, what's happened to poor Americans is they have less community in their workplace. The work is less meaningful than it used to be. Work in a factory, you had a bunch of other workers you could hang out with. But if--you know, you work as a cash register or you work kind of a sales rep or something like that or you work in a fast food franchise even, there's less of a community in the workplace. And so you form community outside the workplace. And they are doing it in these very ad hoc manners; and it's working. You know, you see it in churches are becoming even more important in small towns. And McDonald's are. And Walmart parking lots. Even places like that.
Russ Roberts: That fascinates me. What's happening in Wal-Mart parking lots?
Chris Arnade: I mean, you know, like in Prestonburg you have these tables that line the WalMart, where people just hang out on Friday night. So, just, the teenagers go there to hang out. You know? And they meet there, and they all hang out, and they organize, and sometimes they drink beer there. And, you know, it's gotten so bad--or so good, as it is--that the police now patrol it. They patrol the Walmart parking lot with a dedicated policeman on a bicycle. You know. Because so many people hang out in Walmart parking lot. Because it's, you know, that's their community in some senses.
Russ Roberts: So, what I think has changed--and we've been a lot in conversation on this program about the future of work and jobs and artificial intelligence, robots, etc., etc. And the challenges and wonderful potential that all this has. What it seems to me that's changed--you really hit on it when you talked about people in the 6th and 7th grade, they are falling behind. Public schools in America have never been great in the poorest parts of the country. And the richest suburbs have always been pretty good. And people--when they talking about, my friends who rail against public education can immediately forget that the public schools in the rich suburbs are pretty good. In the poorest parts, they are awful. And there's a lot of reasons for that. Some of which is, I believe, the public, the schools, but that's not the only problem for that. I don't want to pretend that that's a magic solution. I do think it would make things better. But I think what's changed in the economy as a whole--meaning that, in the old days--meaning 1950, 1960, 1970--a person who didn't finish high school--eh, it was a disadvantage. Some of them succeeded. Some struggled a little bit. But you could have a decent life. That's not true anymore. And that's mainly a good thing, in the sense that, in the same way that, the same way, that when the car got invented you couldn't make a living as a blacksmith. Okay! Fine. It's not--you know, people who wanted to be blacksmiths are going to have to find different things. The challenge is that for some folks, falling off that escalator of progress from school to high school to college to career--it's much more debilitating than it was 50 years ago. And we haven't, as a country or as a community, in these towns figured out a way to help those folks stay together. It seems to me.
Chris Arnade: Yes.
Russ Roberts: What's your reaction to that?
Chris Arnade: I think that's very fair. I think--you know, the flip side of the advantages of an education growing is a disadvantage of them not having any creation or also growing. I think, you know, I say that, broadly speaking, we've kind of shifted from sorting by race--which was bad--to sorting by education. We tend to reward people who have a--you know, a Wall Street trader is more similar to a professor of sociology at Harvard than he is to a truck driver. You know, they have more in common about how they think and how they behave. And I think the people who are really suffering are the people who don't have that ability or desire or whatever to get an education. And I think it's becoming harder and harder to get by with less education. And I really don't know how to solve that. I mean, I don't know.
Russ Roberts: I don't know, either. I have some ideas, but that's probably for another episode. But thanks for your work, Chris, especially out in the field. I think it's really provocative and interesting. And we'll put up links to your Flickr page where people can look at your photographs and your Twitter account, read. Really interesting stuff there.
Chris Arnade: Thank you very much for having me. It was a really wonderful discussion.