January 30, 2015
Nicholas von Hoffman on Kevin Phillips’ ‘Bad Money’
Posted on Oct 31, 2008
He quotes an admonitory passage to the same effect from a 1904 speech to his nation’s bankers by British Colonial Secretary Joseph Chamberlain which might apply to the United States 104 years later: “Granted that you are the clearinghouse of the world, [but] are you entirely beyond anxiety as to the permanence of your great position? ... Banking is not the creator of our prosperity, but it is the creation of it. It is not the cause of our wealth, but it is the consequence of our wealth.”
With the ascendancy of finance comes the maldistribution of capital. Money is invested in the wrong places. Gigantic amounts of capital are borrowed for unproductive purpose, for things which have no payback. “The debt the United States has been piling on in the last few years has provided only 30-40 percent as much stimulus per dollar to the national economy as did the debt added 25 or 40 years ago. Why?” Phillips asks. “Because money borrowed in 1970 or 1984 to be spent on factories, new jet fighter aircraft, teachers, or interstate highways had a lot more grassroots impact than money borrowed by 10,000 hedge funds to double the leverage of their various self-serving speculations.”
Roads, factories, research, productive companies, education are undercapitalized, the money which might have been sent in their direction having been sucked off into the catastrophic frivolities of Wall Street, Greenwich, Conn., and wasteful finance. Capital which ought to have been used to lower costs and increase productivity was used to play the destructive games which have left once healthy corporate organizations gasping for breath, too weak to modernize, too depleted to compete and too fragile to prosper.
The distraining of capital to all the wrong places was accompanied by the debt-credit explosion. As pesky and difficult as contending with public indebtedness, especially the federal deficit, is, Phillips foresaw that it is private-sector debt which is likely to destroy us. On this he quotes Warren Buffett, another figure who warned that the country was steering toward catastrophe: “You can’t turn a financial toad into a prince by securitizing it. … Wall Street started believing its own PR on this—they started holding the stuff themselves, maybe because they couldn’t sell it. It worked wonderfully until it didn’t work at all. Wall Street is reaping what they’ve sown.”
Beyond Wall Street’s suffering for Wall Street’s crimes, Phillips describes the American descent into a debt-dependent economy in which the most important activities have been building subdivisions and erecting malls with money borrowed from abroad. The middle-class masses drive home to the houses they cannot afford and zoom off to overly hypothecated malls, using oil they have no means to pay for, in order to incur additional debt on their credit cards.
The risks of a financial system constructed of toothpicks were plain to Phillips and scores of others outside of it and to none within. With the assistance of battalions of idiot savants from MIT and Harvard, the much admired math “quants,” the investment bankers boasted that they had found a way to ensure that the more borrowed the less the risk.
While Wall Street entertained the fantasy that it had perfected an algorithm which had eliminated risk from the financial equation, ordinary people were finding their lives increasingly uncertain. The ascent of Wall Street to something approximating total power, however brief that reign may be, has brought with it awareness of the disparities of wealth and income. Less publicity has been given to how much riskier life has become for America’s middle class.
Ordinary families face a 1-in-5 chance of seeing their incomes drop by half, according to figures compiled before the present “slowdown” or “slump” or “weakening” or recession. Phillips recalls the work of Harvard’s Elizabeth Warren, quoting her that “middle-class families have been threatened on every front. … Even with two paychecks, family finances are stretched so thin that a very small misstep can leave them in crisis. As tough as life has become for married couples, single-parent families face even more financial obstacles in trying to carve out middle-class lives on a single paycheck. And at the same time that families are facing higher costs and increased risks, the old-fashioned rules of credit have been rewritten by powerful corporate interests that see middle-class families as the spoils of political influence.”
As for the future, Phillips’ attitude is decidedly saturnine. Long years of national prosperity and success, he fears, breed political arteriosclerosis, making change next to impossible. His assessment of the Democrats is anything but hopeful: “Gone on the Democratic side is the southern and western geography of opposition to northeastern financial elites under the aegis of Thomas Jefferson and Andrew Jackson, Franklin D. Roosevelt and Harry S. Truman. Instead, there is a new democratic politics of new national elites—financial, high-tech and communications. … For both parties, the bottom line is usually the same: the bottom line. Fundraising. Money.”
“Bad Money” was finished before Barack Obama secured the Democratic nomination, but the points Phillips makes about the connection between Wall Street and the Democratic Party are still germane. Robert Rubin, an oft mentioned Obama adviser, was Bill Clinton’s secretary of the treasury and is an ex-CEO of Goldman Sachs and presently in top management at Citigroup. Of Rubin and the other Wall Street Democrats, Phillips writes: “The new profinance Democrats were not the same as the older profinance Republicans. They were more engaging, less out of the Union League of Philadelphia or 1950s New Yorker cartoons. Behind the scenes, some might contentedly bailout endangered bondholders, put impoverished nations through the behavioral wringer of the International Monetary Fund, or operate consumer finance units that bilked a lower income clientele. But in their public personas, most took a different tack. In deference to their multiple Democratic coalition-mates, they donated to the NAACP; joined the boards of environmental groups; embraced technology, education, free trade and globalization; and worried about the growing international gap between the rich and the poor as well as the gap in the United States. There was also, as we’ve seen, another broader enabler: the new popular acceptance of finance.”
This is not the message of rebirth and hope of the Obama campaign, but Phillips has a long track record and a good one. He is no man to ignore.
Nicholas von Hoffman, a former columnist for The Washington Post and a former commentator for CBS’ “60 Minutes,” is a regular columnist for The New York Observer. He is the author of numerous books, including “Hoax: Why Americans Are Suckered by White House Lies” and “Capitalist Fools: Tales of American Business From Carnegie to Forbes to the Milken Gang.”
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