Even as we learn less and less, the impassable jungle of idiotic punditry grows and multiplies and mutates and regenerates, ultimately infecting something like 55% of us overall. In moments like the current one – where I am hysterical, but do not know who or what to believe – I have developed a habit of asking people smarter than me just what in the ever-loving fuck is going on. Bruce Gibney is one such person.
Author of the invaluable recent surveys The Nonsense Factory: The Making And Breaking of the American Legal System and A Generation Of Sociopaths: How The Baby Boomer Generation Betrayed America, Gibney has been arguably the single most perceptive chronicler-on-page of the American experiment over the past several years. A Silicon Valley stalwart who was one of the initial investors in PayPal and has played major roles in the rise of Spotify, Lyft and Airbnb, he is uniquely equipped to read the pulse of America’s most privileged elite.
But Gibney has never been afraid to bite the hand that feeds him. You might wanna say he wants to bite that hand so badly. Unsparing and prophetic in equal regard about the potentially incalculable consequences of our current corporate-tech duopoly, he’s never failed to take our modern dystopian nightmare to task. Following last year’s LG&M conversation about the legal system, we reconnected to discuss his impression of the coming apocalypse, the best ways to keep the economy on track and whether or not this is truly “the last Boomer bailout.”
EN: I guess we should begin with life in the Bay Area. What has been the experience of “sheltering in place” so far? How strictly enforced are the prohibitions and how do you anticipate community response will be over the short- and long-term? What measures will be taken to address the city’s massive homeless population?
BG: San Francisco is quiet. The affluent half of the Bay Area is comparatively well-positioned to endure “shelter in place” – it’s the region most accustomed to telework, online shopping, and so on. It’s also a place where a lot of people have lived through natural disasters like earthquakes, or at least prepared half-heartedly for them.
As for social order, voluntary compliance seems fairly high and overt enforcement hasn’t seemed to feature much. Unfortunately, it’s easy to conflate tech utopia with the entire Bay Area: in reality, there’s a large, traditional service community in San Francisco and tourism is a bigger part of the economy than a lot of people realize, so there’s pain.
On the plus side, Bay Area civic governments, by American standards, were early, aggressive, and coordinated across jurisdictions. I also think that the community will remain reasonable and helpful for some time, because it’s unusually affluent, educated and technocratic, and because Sacramento has been prepared by long experience to not expect much from the federal government and is more institutionally prepared than most states to go it partly alone.
As usual, the homeless population is an exception. State and local governments weren’t able to make significant progress during three largely calm and abundant decades. I can’t see them doing so in the midst of a pandemic.
EN: The contraction in the markets seems obvious in retrospect, but you were predicting it long before it became a fait accompli. I’m curious to know what you think of the Fed’s response and whether you think a full recovery is a months- or a years-long proposition? What would be your advice to investors who might wish to remain in the market long term, but who count on regular dividends to finance their day-to-day operations?
BG: The Fed was fairly quick off the mark and deserves full credit for being responsive. But the Fed also deserves some blame for leaving policy too loose for too long. After 2008, one reason the Fed kept rates low was for the explicit purpose of making stocks and other speculative assets more attractive than cash and highly rated debt, to reflate the system. As a result, the real (inflation-adjusted) returns on cash and some bonds were zero and often negative; in the choice between risky speculation and the certainty of small, ongoing losses, people opted for the former. The Fed knew this would be the case. By the way, this affects people who aren’t directly in the market. A large number of pension funds, for instance, were hoping that stocks could make up for funding shortfalls and low bond yields – and that hope, while never mathematically sound, can’t even be sustained as a hypothetical today.
Another thing the Fed must have known, but couldn’t do much about, was that low rates would allow companies to issue a ton of debt. That seemed viable even in an era of indefinite (albeit low) growth. But that’s not our era; the economy has had a heart attack. For companies, economic lockdown pushed revenue off a cliff; in this environment, companies won’t be able to cover their interest payments for long. That leads to downgrades and defaults, which lead to selling, tighter credit, and further downgrades, in an awful feedback loop. And even companies that can cover interest payments eventually need to roll over their debt – unlike personal debt, institutional debt is quasi-perpetual–and creditors aren’t excited about renewing loans when they need cash themselves. By the way, none of this required gazing into a crystal ball. What’s surprising is how mechanical, how formula-driven, a lot of this stuff is – both as a matter of financial modelling and as a matter of regulations about ratings, reserves, and so on. It’s not possible to predict when a biological pandemic strikes, but it’s pretty easy to see which financial populations are susceptible to a pandemic.
I do think a range of legal and political adjustments will need to be made so that the Fed can selectively buy up a lot (at least $1 trillion soon, probably a lot more later) of corporate debt. The alternative is more layoffs, major bankruptcies like Boeing, the collapse of mid-size banks in oil states, and financial contagion. This is not popular on the hard left or the hard right, but it’s what needs to be done. The alternative is unnecessary economic damage and the consolidation of market power in the players left standing. The question for hyper-partisans is: do you want to be a super-power that can’t manufacture commercial airplanes and a nation where the only oil company is Exxon and the only retailers Amazon and Walmart? Or should Congress and the Fed suck it up and bail people out?
And to answer your last questions directly: a lot of company dividends are not sustainable. Some oil and gas companies can’t cover their dividends now. As for how long this lasts, the global and American economies cannot sustain a wide lockdown for more than a few weeks without grave injury. With the usual disclaimers, as a long-term investor, I wouldn’t (and I haven’t) run for the exits, not as long as there’s a lot of forced selling (as there is now, which is why the bond market is behaving so oddly). But “long-term” could really be long; the better part of a decade to see new highs if more countries look like Italy than Taiwan.
EN: It seems fair to stipulate that the Trump administration’s initial response to the pandemic was inadequate in both word and deed. In recent days, they have seemed to better identify the extent of the crisis and begun taking more serious measures to address the human and financial toll. Setting aside political biases to the degree possible, I’m wondering what you make of the executive response to the pandemic and what consequences might have been mitigated with a better managed and communicated game plan?
BG: The administration has done a terrible job so far. What’s especially frustrating is that America had the benefit of experience – not just of countries which suffered the pandemic earlier, but of our own experience in dealing with economic crises in 2001 and 2008, with proto-pandemics like SARS/MERS/Ebola, and our occasional need to put manufacturing on a war-footing. I think if the administration had simply admitted that a range of outcomes were possible and that the U.S. would take all appropriate steps, erring on the side of being somewhat premature, some of the pain could have been avoided.
I don’t think that’s hindsight reasoning. Above all, the government is an insurance company with an army. The whole purpose of an insurance company is to insure. It’s not acceptable for Geico to say “oh, well, we’re not sure if we can cover your fender bender because there were a lot of fender benders today, and we didn’t think about that.” And it isn’t acceptable for the government to say that either. What the government needed and needs to say is what Geico says: we’ve got you covered. Food? We’ve got plenty, and we’ll helicopter it to you if we have to. Bank deposits? FDIC limits waived; deposits guaranteed; don’t even worry about it. Masks? We’ll tell 3M to make them all day long, cover their losses, and indemnify them from liability if they make a couple mistakes under pressure. Jobs? If necessary, we’ll cover payroll for businesses – after all, we’re the ones who shut those companies down. Drugs like vaccines that might have no market? We’ll give pharma tax credits to take the chance. Etc.
Of course, it’s too late for some interventions, and no government can do everything. But the government, with the support of private industry, can do a lot. The problem is that when making promises, credibility counts. And this administration has no credibility.
EN: This is a delicate question to phrase, but as a person who has researched and written a great deal about the pervasive influence of the Boomer generation in our institutions, I wonder what you make of the fact that the largest social mass-mobilization effort since WWII has essentially occurred over the past week in an effort to vouchsafe the future well-being of the elderly? There is obviously no other acceptable moral position, but is it fair to extrapolate a certain irony from this outcome, particularly as so many from the Boomer generation who have served in office have gone to great lengths to malign and curtail those very government agencies and scientific research organizations that now seem set to save them?
BG: This is, for better or worse, the last Boomer bailout. I say this not just because the Boomers are old, but because as everyone has known for years, the fiscal and monetary toolkit was never replenished after 2008 and while there’s enough capacity to see us through this crisis, there isn’t enough to manage another giant mess, not anytime soon.
As usual, all of this is being paid for by the Boomers’ kids and grandkids. We should be clear about this. The people who need the government to put a floor under the stock market now are the people who are selling now: Boomers. The people who need disproportionate attention from state-supported health care are the most susceptible to the virus: Boomers. The people who will not be around to pay the trillions we’re borrowing to do this: Boomers.
Of course we should make an all-out effort. And in a just world, the Boomers would say thanks, pay the young back what they could when they could, and finally relinquish politics to another generation. Will any of that happen? I doubt it.
EN: Lastly, I’m going to ask you to make a prediction. Do you think the extraordinary events of the past two weeks represent more of a blip or a full scale sea-change in our workforce, economy and social rituals? What does the future of schools and offices look like in the era of recurrent pandemic? What role will the government play, or should it play, in easing the transition for traditional office workers into an era of remote work and telecommuting? What will become of the service economy? Are there any potentially positive outcomes once the worst of this has passed?
BG: I can only offer guesses. The things most likely to change in an enduring way, I suspect, are the things that we wanted to change anyway but couldn’t because of coordination problems or social stigma. Business travel, for instance, is notoriously wasteful economically and environmentally, and it’s also frequently unpleasant. People still did it – I did it, a lot – because you don’t want to be the first one to be disrespectful and say: we can do this over email and I don’t need to see you or have a 4-hour dinner. I think per capita business travel declines permanently, by mutual unspoken agreement. And I think a lot of existing trends in work accelerate: the all-hands meeting, the offsite, the ritual exchange of business cards in Japan and New York, etc., all become less common, because most of them were useless anyway. And we were already – long before Trump – diversifying away from Chinese supply chains. That will probably keep going. For one thing, China isn’t as cost competitive as it used to be.
Consumer behavior probably also changes; a lot of people who become habituated in 2020 to doing their shopping on-line, or take Lyft and Uber instead of the subway (disclosure: I’ve been an investor in both for a long time), or get accustomed to telemedicine (where regulations permit), won’t go back if they can afford not to. I don’t know what happens with primary schools, where a lot of the learning is socialization that truly does require interfacing with a blob of humanity. But I suspect the landscape of higher education pushes further into streaming (who cares how you hear the adjunct lecture?), excepting small colloquia and lab based classes. Insofar as this crisis might liberate us to do things we would have preferred to do anyway, that’s a positive.
Government needs to untangle some regulations to allow some of this to happen – make it easier for professions to operate across state lines and loosen guild restrictions, reduce in-person requirements for certain events, dedicate lanes and airspace for rideshare and delivery, make sure the U.S. is at first-world bandwidth standards (presently, it isn’t), and so on. Most importantly, the government needs to earn our trust. It needs to deliver without abusing its emergency powers.
I’m not entirely optimistic. The latent premise of my last book was that the U.S. was primed for a state of emergency to devolve into a “state of exception,” where the constitution is de facto set aside. Well, the emergency is here.
I understand that courts, interstate borders, and so on might need to close for a while. I understand that presidential primaries need to be rescheduled, that we might need to federalize a few things, that the military is society’s logistics arm of last resort and might need to be deployed, and that quasi-nationalizations and an infection surveillance state cannot be ruled out in the short term. But my worry is that for the past 80 years, the executive has used emergencies to accumulate power and rarely handed back any of its unconstitutional gains. And I wouldn’t repose too much hope in the courts as bulwarks. The Supreme Court has historically condoned more emergency abuses than it has struck down. And today’s Court is very much inclined toward the executive: a majority of the current Justices (including some on the left) advocated for wide executive power before they were elevated. By all means, pedal to the metal on fighting this virus. But after that, I’d like to see someone step on the brake.