Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
By Kevin Phillips
Viking, New York, 2008
256 pages
$25.95
Money is "bad," in the historical sense, when a leading world economic power passing its zenith—before the United States, think Hapsburg Spain, the maritime Dutch Republic (when New York was New Amsterdam), and imperial Britain just before World War I—lets itself luxuriate in finance at the expense of harvesting, manufacturing, or transporting things. Doing so has marked each nation's global decline. To institutionalize the dominance of minimally regulated finance at this stage of U.S. history is a bad idea.
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... prior eminence of the United States in petroleum matters has left not only an outdated infrastructure but a spectrum of disabilities, unwarranted smugness, vested interests, and booby traps. These range from currency vulnerabilities and lack of a serious national energy strategy to apparent policy inertia in Washington, where many officeholders seem unable to understand how much has changed for the United States over the last decade.
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Let me underscore: except tangentially, this book is not about elections. It is about the insecurity of America's future as the leading world economic power, given a debt-gorged and negligent financial sector, and the vulnerability caused by the nation's expensive dependence on imported oil.
Kevin Phillips, author of bestsellers American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21stCentury and American Dynasty: Aristocracy, Fortune, and the Politics of Deceit in the House of Bush, turns his full attention to the economy in his latest book, and the news he brings is—not to surprise you or anything—bad.
Bad Money looks at the big picture, the thinking and policies behind what Atrios has come to label so endearingly Big Shitpile, the meltdown of the mortgage industry. Phillips adds to the pile by drawing in the entire financial sector for examination and the explosion of poorly understood "financial vehicles" that make up the get-rich-quick schemes that the captains of industry (particularly the financial industry) have been pushing for the past few years. He takes a lap or two around the oil crisis and ties it altogether in a neat, albeit depressing, package.
Don't come to the book expecting in-depth definitions of the complicated investment instruments that have made the news of late (CBO's, for example). Phillips provides very quick and cursory sketches of the complex details of individual financial shenanigans; indeed, as the author makes clear, one of the problems is the dizzying multiplication of ill-understood alphabet combinations that even the sales reps don't understand when they pitch them. One thing, however, has become increasingly clear: America doesn't make shit anymore. And it's one of the major factors leading to our economic decline, even if no one wants to talk much about it. Selling each other--and overseas investors--our public and private debt is more than a risky business. According to Phillips, it's killing us off, both economically and politically.
Bingeing on debt is reckless, and financialization has a long record of being an unhealthy late state in the trajectory of previous leading world economic powers. Moving money around instead of making things is always dicey, and the U.S. transformation has been the most grandiose to date.
While we've heard quite a bit from economists and politicians over the past decade bemoaning the public deficit, Phillips believes the bigger threat to national economic health by far is the overlooked explosion of private debt. Sure, America, has always borrowed (at least in the past century) to spur economic growth and long-term investment in industry and infrastructure. But the nature of more recent borrowing is alarming on multiple levels, largely related to ... well, we don't make shit anymore.
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 twenty-five or forty years ago. Why? 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 tend thousand hedge funds to double the leverage of their various self-serving speculations.
In other words, money borrowed today isn't filtering down through the economy to provide jobs, and it certainly isn't being put to use in any way that is helping to stabilize the dollar. Which leads, as most financial paths do these days, to our reliance on oil and our relations with the oil-producing nations. The weakening dollar is part of what's feeding the rise in oil prices as OPEC nations, years ago convinced to make the dollar the currency that prices were pegged to, find themselves compelled to charge more because of its devaluation, which in turn leads to more domestic pain, which in turn leads to more devaluation and so on.
And in the midst of this painful spiral, America has been quietly busy fiddling with leading economic indicators and measurements (what Phillips straightforwardly calls "gimmicks"), which understandably leaves potential investors leery of investing in propping up our sputtering economic engine. In particular, he points to the jerry-rigging of the Consumer Price Index and the jiggering of the "standard of living":
The current interlacing of gimmicks, by contrast, far from representing the costs of a constant standard of living, has been described by critics as measuring downward mobility—an index that, in the words of one, "more closely represents the costs of holding to an ever declining standard of living," such as a family shifting between hamburger, pork, and chicken depending on the price.
Shamefully, a lot of the "new" ways of measuring the standard of living just happen to make it easier to declare wage and Social Security increases tied to that standard unnecessary. Because, you know, if you take food and gas out of the picture, there's not much increase, eh?
Phillips has come up with a name for this nexus of borrowing madness, false hype, ill-understood investments and outright lying through economic measurements: Bullnomics. And one of the most original and thoughtful observations Phillips makes in the book centers around the political purpose (or at the very least, desirable unexpected consequence) of Bullnomics: the stilling of a historical voice in American politics that has given the "investment class" the heebie-jeebies for a couple of centuries. Behold the silencing of economic populism:
Beyond homage to financial assets and market efficiency, along with reliance on misleading government statistics, Bullnomics as a discernible political and economic force had a third, little appreciated, dimension. This was the de facto anesthetizing, over the last twenty years, of onetime populist southern and western constituencies prominent in the George W. Bush-era conservative coalition. The principal ethers at work were evangelical, fundamentalist, and Pentecostal Christianity, infused with a millennial preoccupation with terrorism, evil, and Islam that greatly strengthened after September 11.
Mix it all together, in other words, and you've got a couple of pretty big regions of the country with residents who don't care what the Wall Street masters of the universe are cooking up as long as the Armageddon train is on schedule, terrorists are kept at bay and fetuses are sanctified through legislation. And it isn't just citizens who've decided not to pay attention. Even those evil, supposedly far-seeing entities, the multi-national oil companies, have been slow on the uptake of the new brash economy as well--although not for the same reasons--and the results are another factor in the pull-down of the economy:
The extent to which the United States has a dated, ghost-of-glories-past petroleum infrastructure is all too evident. The major U.S. oil companies, ExxonMobil, Chevron, and ConocoPhillips, are wealthy but aging behemoths, hard-pressed to maintain production levels, despite large exploration outlays, and no longer enjoying the access to overseas oil fields they once commanded.
One pictures huge, dull-eyed brontosauruses standing knee-deep in a marsh of oil muck after that description. This aspect of Phillips' writing, in both his current and past works, has received less attention than it deserves--his sharp eye for metaphors really bring what could be a dolefully complex and dull subject to life. Take this explanation, for an example: "Since the Financial Services Modernization Act of 1999 dissolved old legal separations and constraints, commercial banking, insurance, securities, and mortgage lending have intertwined like tossed four-colored linguine in a bowl." Such examples abound throughout, and make the book a much breezier read than expected.
Still, the message conveyed is a sobering one. Two final thoughts stand out at the conclusion. One has to do with the unwillingness of the wishful-thinking American electorate (and its candidates) to hear the bad news and truly begin to grapple with its consequences, or to have a serious discussion about lessening its impact.
[Peak oil] is not a happy message. The economics are precarious, the geopolitics is dangerous, but the domestic U.S. politics stand to be awful. If a loosely defined peak, instead of being ten to fifteen years away—which leaves some time for innovation—is actually close at hand, the inadequacies of latter-day American governance could become as important as any geological challenge or technological solution.
The other realization is how desperate is the need for regulation in what Phillips likens to the Wild West of finance. Even the people selling these convoluted securities don't understand them. Yet when they crash and burn, the taxpayer provides the bail out, creating a ridiculous situation in which the bigger and less accountable you are, the more rewarded are your failures. Phillips soundly declares, "If banks are to be rescued because they are too big to fail, they must also become, in the manner of a regulated public utility, too suitably behaved and too responsible to fail."
This book represents a terrific start on understanding the interplay between past policy, current risk, energy and investments. Without such clear-eyed explanation and thinking, it's hard to see how we're going to move ahead and try to find solutions in the hard times that seem inevitable ahead.