Book Review: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
Bad Money provides an extraordinary insight into the way in which long term excesses in the United States financial system has stalled world economic activity. The book was written between August and December 2007. This was immediately after the drop in confidence in stock markets in August, that year. However, the book was first published in the United States in April 2008, some six months prior to the credit meltdown that occurred in October, 2008, in the final weeks of the presidential election campaign.
This timing means that the book is not just a prediction that this boom cannot go on forever. It is an informed discussion of the reasons for the stock market panic. It provides a detailed analysis of the strategic problems then facing the US economy. And, without seeking to predict exactly what would happen, Bad Money explained that those problems would involve a tumultuous working through. A tumultuous working through is exactly what has been happening since the credit meltdown occurred.
As a result, the book enjoyed non-fiction and business best seller ranking immediately after its publication. However, the melt down of October saw the book return to best seller status as Americans looked around for informed discussion of what had beset the world’s economy. In this context, Scribe Publications,2 an independent publisher owned and run by Henry Rosenbloom in Melbourne, has released an Australian edition which makes the book readily available to Australian readers interested in the causes and underlying nature of the current economic gloom.
Kevin Phillips was an important strategic electoral adviser to Richard Nixon. He later served as a Special assistant to the Attorney-General for two years. His 1969 book, The Emerging Republican Majority predicted the way in which the Reagan and the Bush senior and junior presidencies would achieve electoral success.3
The ensuing forty years has, however, seen Phillips emerge as an influential and trenchant critic of the way in which American politics is conducted. He is, in particular, a strong critic of the Republican Party and the politics which has emerged from the influence of the evangelist right, an important contributor to the broad coalition on which the Republican Party has, as predicted in Phillips’ 1969 work, relied for its electoral strength.
Phillips’ analysis highlights the important structural shift in the United States economy from reliance on wealth creation through manufacturing industry to wealth creation through financial services. In 1950, manufacturing had been nearly three times the size of the financial services component and was nearly a third of US gross domestic product. By 1980, manufacturing was still nearly a third larger than financial services. Shortly before 1990, financial services became the larger component. By 2005, manufacturing had shrunk to a mere 12% of GDP and financial services represented 20%, double its size of fifty-five years earlier. The figures for contribution to total US corporate profits indicate an even more dramatic transformation. In many respects, references of politicians to the difference between Wall Street and Main Street had become irrelevant. In terms of importance to the economy, Wall Street had replaced Main Street.
The growth of the financial services sector was made possible by dramatic increases in private debt in the United States. Domestic financial debt had gone from 12% of the US GDP in 1969 to 107% in 2006. The process had accelerated in the first decade of this century. Outstanding home mortgage debt had increased by 102% in the six years from 2001 to 2007.
With a few key graphs and tables of figures, Phillips unwraps layer after layer of the debt bubble that led to the credit crunch of October 2008. He describes the multiplicity of financial products by which home mortgages and domestic loans were bundled together and sold on, producing more money for more loans thereby avoiding the normal central bank controls on lending and money supply. He describes the political connections between the finance industry and leading figures and candidates in both political parties, including hedge fund support for the candidacies of current President Barack Obama and his Secretary of State, Hilary Clinton. Phillips canvasses the way in which private debt was simply ignored as an important economic issue by political, media and academic commentators. He describes the way in which former governor of the Federal Reserve, Alan Greenspan, had seen debt based products as the new driver of wealth generation in the United States. He goes on to chronicle how Greenspan had become a serial bubbler, bailing out, over more than a decade, financial institutions whose excesses in one area had led to crashes, only to allow more and greater excesses (and new investment bubbles) to develop.
Bad Money was written before the credit crunch occurred. Also, it does not attempt to tell the future. It paints a picture, however, of great financial recklessness and an economy very dependant on financial products premised on an ever rising real estate market. Any current suggestion that things will “turn around” with a bailout plan or two sounds distinctly like Pollyanna or Candide. The financial crisis cannot be understood without understanding the dramatic transformation which the US economy had undergone, particularly, in the last decade.
Bad Money is more than just a discussion of circumstances that led to a stock market crash. Kevin Phillips has, for many years, been concerned with grand themes. Bad Money is the fourth of a series of books in which Phillips has discussed the political and historical factors impacting upon America’s position in the world. The earlier books indicate their themes by their titles: Arrogant Capital: Washington, Wall Street, and the frustration of politics (1994); Wealth and Democracy: a political history of the American Rich (2002); and American Theocracy: the perils and politics of radical religion, oil and borrowed money (2006).
Kevin Phillips has spent much time doing comparative studies of the rise and decline of dominant world powers. The decline of Hapsburg Spain; the decline of Holland as a maritime power and finally the United Kingdom’s loss of primacy to the United States in the first half of the twentieth century form his principal case studies. Phillips draws on the insights gained to analyse trends in contemporary economics and politics in the United States. His observation in Bad Money is that the most recent events reinforce observations made in the earlier books. He observes that the status of the United States as the dominant economic power in the world is threatened both by events occurring in the United States and by the increasing strength of would be rivals including the Russian Federation; China; and various countries in the Middle East.
Bad Money brings together themes that, at first, seem unrelated. The behaviour of the much expanded financial services sector clearly has the potential to weaken the performance of the US economy (although the credit crunch of October, 2008 appears to be impacting on many other economies including some that might be seen as future competitors). The increased reliance on income from wealth rather than production of goods is cited by Phillips as symptomatic of the decline of the three previous dominant powers. (In the case of Spain, this involved an obsession with accumulation of gold and precious metals from its overseas possessions.)
Phillips also places regards energy supplies as historically important in the ability of great powers to maintain their dominance. In the case of Holland, its access to wind and air power to drive its manufacturing industry (and wind power to drive its ships) gave it an edge over rivals. However, the ability of Great Britain to harness its ample coal reserves led to challenges to Holland’s pre-eminence which it was not able to overcome. In the case of the United States, the twentieth century was the age of oil. The United States, with its own production and its ability to control Middle Eastern oil, was able to dominate the century. The many difficulties now facing the United States in the area of energy supplies and energy security include the imminence of peak oil; the decline of production at home; and the increasing propensity of oil producing nations to assert their independence. Oil producers had previously supported the US currency by pricing oil in US dollars and by buying US treasury bonds. Increasingly, such producers are turning to other currencies.
Great powers can respond to challenges by exhibiting smart politics. Historically, however, Phillips observes a tendency of nations in decline to exhibit the politics of paralysis. Part of the argument in Bad Money is that both the Democratic and Republican Parties face difficulties in addressing the great themes which are affecting the nation. These include the impact of the religious right, particularly, on the Republicans. The difficulties also include the influence of the financial services industry, the purveyors of private debt, on both parties.
Bad Money addresses grand themes. Kevin Phillips presents his argument clearly in his introductory chapter. He then painstakingly presents the evidence on each point in succeeding chapters. Statistics are used judiciously and presented clearly in graphical and tabular forms. Trends are shown as developing over decades. At the same time, however, recent changes are woven into the broader picture. The opinions of experts are cited to support and advance the argument. Since the intention of Bad Money is to draw attention to issues and themes which have been ignored by mainstream opinion, the argument must, however, remain a minority view and, for every expert cited, there must be many who have expressed contrary views.
The events of the last eighteen months, however, strengthen the position of those who have warned of the dangers of the financialisation of the economy. The oil price highs that preceded the credit crunch give greater influence to those who have seriously considered and discussed the implications of peak oil. The analysis contained in Bad Money must be taken seriously.
Even, on a narrower basis, Bad Money is a valuable text. The detailed examination of the reckless values and practices of the financial services industry is important in itself. The book explains the products, invented to be bundled and marketed across the world, which were based on the ability of ordinary people to repay mortgages which were always beyond their means to do so. The book explains the magnitude of the industry built upon this pack of cards. The book explains how the confidence on which the house of cards depended leaked away.
Despite the fact that Bad Money was written before October, 2008, it provides insights into what is happening to the Australian and international economies that are generally not available from mainstream discussion of those events. Understanding sometimes requires more than repeated use of the phrase “credit crunch”
Stephen Keim SC
Footnotes
- http://www.scribepublications.com.au/
- See http://www.scribepublications.com.au/.
- The speaking circuit agency, Leigh Bureau, provides a bio of Phillips at http://www.leighbureau.com/speaker.asp?id=125. A more complete background may be found in Wikipedia at http://en.wikipedia.org/wiki/Kevin_Phillips_(political_commentator).
