Wednesday, September 17, 2008

book review: "bad money' by kevin phillips

I'm currently reading “Bad Money” by Kevin Phillips. I’m not done with it yet, so I can’t tell you for sure how the story ends – but I’m pretty sure it looks a lot like events in the financial world this week.

Old political junkies may know Phillips as a senior strategist for Richard Nixon who is credited with being the principal architect of the Republicans’ “Southern strategy.” Among other things, he coined the terms “Sunbelt” and “New Right” and in the ‘60’s correctly foresaw their role in bringing about “The Emerging Republican Majority” – which was also the title of his best known book.

Over the decades he has written 12 other books and has become thoroughly disenchanted with the Republican party and its embrace of the religious right and what he calls “market triumphalism.”

His latest book, “Bad Money,” describes the forces underlying the current financial crisis.

From the
Salon review of the book:
What is amazing is how lucid Phillips manages to be in 200 or so pages that were assembled on very short notice. The credit crunch that paralyzed Wall Street last August is the catalyst, but Phillips is up-to-date, economically speaking, right through the end of 2007. And he's lucky, even if the country isn't -- nothing that has happened since the new year began disproves Phillips' main theme, which is that Wall Street's chickens have come home to roost. The opposite is true -- every day brings further evidence that flaws in the foundation on which the United States is constructed are cracking wide open.
In his three most recent books, "Wealth and Democracy," "American Theocracy" and "American Dynasty," Phillips obsessed over what he describes as "the scary intersection of oil, debt, and religion." He doesn't so much repeat himself in "Bad Money" (although regular readers will find a great deal that is familiar) as he delivers a masterly recapitulative summation. The dots have all been connected, the picture
is now complete.

Phillips has warned for years about the inevitably malign consequences of what he calls the "financialization" of the American economy. Sometime in the mid-'90s, he writes, financial services overtook manufacturing as the biggest chunk of the U.S. gross domestic product. If you believe, as Phillips does, that all the furious activity on Wall Street masterminded by the likes of Citigroup and Goldman-Sachs and Merrill Lynch is just a bunch of speculation and froth that doesn't actually result in the
creation of anything real, then there has never been a better time for
triumphantly pointing out the disasters that ensue when the rest of the world
also realizes that Wall Street is wearing no clothes. …

From the
Los Angeles Times review:
Over the last three decades, financial services have expanded from 11% of America's gross domestic product to a record 21%, while manufacturing has declined from 25% to 13%. [Phillips] rejects the notion that this shift simply reflects a healthy adaptation to a "post-industrial" economy. Instead, he argues that the emergence of hedge funds and ever-more exotic bundles of financial derivatives amounts to a "financialization" of the American economy that has facilitated a ruinous expansion of private, as well as public, debt. Failed energy policies -- or rather, the avoidance of any policy -- have made the United States vulnerable to what may be the coming peak in oil production, thereby further weakening the dollar, which is essentially backed by the global petroleum economy.

The numbers Phillips cites are staggering (and the book is full of numbers, charts, graphs and tables – a data junkie’s dream but a bit of a slog perhaps for the casual reader): By 2007 total indebtedness in the US was three times the size of gross domestic product, a ratio that surpassed the record set in the years of the Great Depression. He puts public debt -- federal, state and local government obligations – at around $11 trillion. From 2001 to 2007 alone, domestic financial debt – what individuals and families owe – grew from $8.5 trillion to $14.5 trillion, and home mortgage debt ballooned to from $4.9 trillion to almost $10 trillion, an increase of 102 percent. All private debt -- financial, corporate, and mortgage – totals a staggering $37 trillion. Our current financial crisis, starting with the mortgage meltdown in the summer of 2007, brought the party to an end. Since then we have been experiencing what a security analyst quoted by Phillips calls “one of the slowest-moving train wrecks we’ve seen.”

Add to these amounts the unknown total of various exotic derivatives and other unregulated and unreported forms of leverage and it’s clear there are many trillions of dollars of obligations that are never going to get repaid. The process of paying that debt down to the extent possible, writing it off to the extent it isn’t, and building up equity to support what remains is know as “de-leveraging” – expect to hear that term a lot in coming months and years. How that de-leveraging process will take place, no one really knows. The Fed and Treasury are current preoccupied with ensuring that it doesn’t take the form of a sudden financial collapse that brings the “real” economy down with it. But the alternative is a painful process over many years – maybe decades – until we are again living within our means. And that will entail accepting that we, as a nation, are not as rich as we think we are (and as our current levels of spending would seem to indicate).

Phillips could be talking about the events unfolding this week when he writes:

Bingeing on debt is reckless, and financialization has a long record of being a dangerous late stage 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...

Money is "bad," in the historical sense, when a leading world economic power
passing its zenith … and lets itself luxuriate in finance at the expense of harvesting, manufacturing, or transporting things. Doing so has marked [other powers’] global decline. To institutionalize the dominance of minimally regulated finance at this stage of U.S. history is a bad idea.

Ya’ think?

New York Times review notes:
The second component of the perfect storm is the upheaval in the oil industry. Domestic production peaked in 1971, and there are signs that production worldwide is also peaking. (Mr. Phillips cites experts who believe it already has.) And with the emergence of new economic powers like China and India, demand has risen dramatically and prices have been climbing steadily; by 2004 a rapidly growing China had become the second largest oil consumer, after the United States. Despite the bad news at the gas pump, however, America has actually been getting a cost break, because the major suppliers price their oil in dollars. But with the dollar falling, OPEC has been talking about moving into other currencies. Were that to happen, “the effects,” Mr. Phillips says tersely, “could be painful.”

For all but a very small minority, Americans have collectively been getting poorer over recent years. The most recent economic expansion (that has either ended or stalled) is the first in US history where the real income of the average family actually declined. Only those in the top couple of percentiles of income captured all the gains from our economic growth during that time. And much, if not most, of that has gone to those in the financial industry who have gotten rich by moving money around. Those gains have been goosed with massive amounts of leverage – leverage that will saddle our economy for many years after the financial “Masters of the Universe” have retired to greener pastures.

Why haven’t middle income voters reacted to these events? Here’s Salon again:
Phillips' two other preoccupations over the past decade are the rise of the religious right and increasing U.S. dependence on foreign oil. Previously, he has argued provocatively that Pentecostal-style belief in the imminence of the Rapture nurtures a get-rich-now, who-cares-about-the-future mentality in regions of the U.S. where hard times once bred economic populism and skepticism of men who wear top hats and monocles. What happened to Kansas? The short answer is, it got religion.

Republicans who can’t win elections on the issues distract voters by engaging in culture wars. Economy in the tank? How about a “pit bull with lipstick” to create a big distraction until we can get through another election.

Phillips has astutely diagnosed our national condition:
My summation is that American financial capitalism, at a pivotal period in the nation's history, cavalierly ventured a multiple gamble: first, financializing a hitherto more diversified U.S. economy; second, using massive quantities of debt and leverage to do so; third, following up a stock market bubble with an even larger housing and mortgage credit bubble; fourth, roughly quadrupling U.S. credit-market debt between 1987 and 2007, a scale of excess that historically unwinds; and fifth, consummating these events with a mixed fireworks of dishonesty, incompetence and quantitative negligence.

Well put.

We’re seeing some of the consequences unfold this week. The choice we make on November 4 will play a big part in how this story plays out.

1 comment:

Ann said...

kevin phillip's early 90s book "the politics of rich and poor" is also a must read and sounds like a good book end for this latest tome - i look forward to reading, thanks for the comprehensive review.