Nicholas von Hoffman on Kevin Phillipsı Bad Moneyı
http://www.truthdig.com/arts_culture/item/20081031_nicholas_von_hoffman_o
n_kevin_phillips_bad_money/
Posted on Oct 31, 2008
By Nicholas von Hoffman
Americans, rich or poor, have consciously or otherwise bought into the
master-nation proposition that really bad things do not happen to the
USA. We might suffer setbacks and commit a blunder once in a while, but
we are too big, too rich, too smart, too powerful and too blessed to be
visited by a national catastrophe. That the whole goddamn economy could
melt right out from under our feet is an unimaginable event, an
occurrence out of history when crackly voiced recordings captured
President Franklin Roosevelt talking to the Okies.
Such disasters may overtake Argentines or Malaysians or Bulgarians or
Russians or even, occasionally, the English, but not the red, white and
blue über-nation. Yet in the space of a year the U.S. has gone from
über-nation to under-nation, or at least a nation under water as
hundreds of thousands have lost their jobs, been tossed out of their
homes and seen the savings of a lifetime decimated. Americans have seen
many of the most respected business institutions revealed as
organizations run by confidence men whose cupidity is yoked to their
pride and their stupidity in believing that they could run their ruinous
games forever.
At this juncture the dimensions of the disaster are not clear. An honest
count would show 10 or 11 percent of the labor force is out of work. If
the numbers continue to climb at the present rate, by this time next
year they will begin to match those of the gray days of the New Deal era.
By then we may begin to tell each other that none of this misery had to
happen. There was no end of warnings and no one was more prescient or
more persistent in foretelling what lay in store for us than Kevin
Phillips. In the long run up to the vortex, Phillips was one of those
who repeatedly warned of what was coming. No one did it more cogently,
more learnedly and more forcefully than he.
In his new book, ³Bad Money,² Phillips discusses why so few paid
attention to a topic so important to their own well-being.
³Many people today think that todayıs finance is too complicated for
ordinary citizens to fathom or handle. Bubbles aside, other financial
terms used by the mediacredit derivatives, securitization, and even
current account deficitdo not lend themselves to conversations in
neighborhood bars or beauty parlors. Americans are excusing themselves
accordingly,² writes Phillips. ³Still, if the farmers of more than a
century ago could study and understand Sherman Silver Purchase Act
provisions and details of the nationwide currency shrinkageand many
studied and somehow managedcanıt we expect as much today?²
Answering his own question, Phillips says, ³Alas, probably not,² and,
given that many 21st-century Americans have the power of concentration
of a flea with attention deficit disorder, one cannot argue with him.
Had they heeded what he was saying, the disaster engulfing them and much
of the world might have been mitigated. But it is still not too late to
learn from Phillips. ³Bad Money² is a map describing the economic
terrain in which we are struggling to stay upright and slightly solvent.
It is a clearly written treatise demanding no knowledge of Greek letter
formulas, one which ought to command the attention and interest of such
non-fleas as there may be left among us.
For them this is a useful book because it does not address bailouts and
the other hysterical emergency measures which dominate the news, stopgap
remedies and economic analgesics though they may be. Temporary relief
from pain not withstanding, Kevin Phillips lays out the actualities
which must be dealt with before the throbbing will stop.
He begins by describing a distorted economy whose profits have no
material reality other than notations on paper or electronic digits.
That is the bad money from which the book draws its title, sterile
money, not so much earned as won by financial manipulations and
³products² whose names we have just recently learned, to our loss.
Phillips quotes Raymond Dalio of Bridgewater Associates: ³The money
thatıs made for manufacturing stuff is a pittance in comparison to the
amount of money made from shuffling money around. Forty-four percent of
all corporate profits in the U.S. come from the financial sector
compared with only 10 percent from the manufacturing center.²
Sixty years ago, Phillips writes, about 30 percent of the American gross
domestic product was attributable to manufactures and about 10 percent
to financial. The numbers now are approximately reversed. Until recent
times the United States made its living across the globe by selling
manufactures and raw material. In our time, however, under the aegis of
the new economy the nation has tried to live by selling nugatory
services of a vaguely financial nature to foreigners who have not been
buying enough to keep the American economy from going deeper into the
red, year upon year.
³ [T]his faith in finance was not new, but oldand it played wayward
Pied Piper to prior leading world economic powers,² Phillips writes. ³On
the edge of decline the Spanish had gloried in their New World gold and
silver; the Dutch, in their investment income and lending to princes and
czarinas; and the British, in their banks, brokers, and global financial
network. In none of these situations, however, could financial services
succeed in upholding the national preeminence that had been earlier
built by explorers, conquistadores, maritime skills, innovative science
and engineering, the first railroads, electrical dynamos, and great iron
and steel works. Invariably, power and greatness passed to new
explorers, innovators, and industrialists.²
He quotes an admonitory passage to the same effect from a 1904 speech to
his nationıs bankers by British Colonial Secretary Joseph Chamberlain
which might apply to the United States 104 years later: ³Granted 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.²
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.
³The 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?² Phillips asks.
³Because 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.²
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: ³You canıt turn a financial
toad into a prince by securitizing it. Wall Street started believing
its own PR on thisthey started holding the stuff themselves, maybe
because they couldnıt sell it. It worked wonderfully until it didnıt
work at all. Wall Street is reaping what theyıve sown.²
Beyond Wall Streetıs suffering for Wall Streetıs 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 ³quants,² 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 Americaıs middle class.
Ordinary families face a 1-in-5 chance of seeing their incomes drop by
half, according to figures compiled before the present ³slowdown² or
³slump² or ³weakening² or recession. Phillips recalls the work of
Harvardıs Elizabeth Warren, quoting her that ³middle-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.²
As for the future, Phillipsı 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: ³Gone 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 elitesfinancial, high-tech and
communications. For both parties, the bottom line is usually the same:
the bottom line. Fundraising. Money.²
³Bad Money² 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 Clintonıs 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: ³The 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 weıve
seen, another broader enabler: the new popular acceptance of finance.²
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 CBSı ³60 Minutes,² is a regular columnist for The
New York Observer. He is the author of numerous books, including ³Hoax:
Why Americans Are Suckered by White House Lies² and ³Capitalist Fools:
Tales of American Business From Carnegie to Forbes to the Milken Gang.² ]
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