The correct answer: All of the above.
When you look at the elements that were crucial to the creation of each of these debacles of the past decade, it’s amazing how much they all have in common. And not just in how they began but in how they ended: with those responsible being amazed at what happened, because … who could have known?
Well, I’m amazed at the amazement, because each of these disasters was entirely predictable. And, indeed, every one of them was predicted. But those who rang the alarm bells were aggressively ignored, and we let those responsible get away with the “Who Could Have Known?” excuse (“the struggle of memory against forgetting” continues).
Let’s start with Iraq, an unnecessary war that has cost America’s parents the lives of more than 4,300 sons and daughters, and American taxpayers three-quarters of a trillion dollars and counting (not to mention the future cost of $422 billion to $717 billion to care for American veterans through healthcare and disability coverage)—money desperately needed for some long-overdue nation rebuilding here at home.134, 135 And for what? As the Center for American Progress’s “Iraq War Ledger” puts it: “there is simply no conceivable calculus by which Operation Iraqi Freedom can be judged to have been a successful or worthwhile policy.136 The war was intended to show the extent of America’s power. It succeeded only in showing its limits.”
In the run-up to the war, General Eric Shinseki, a heroic combat officer who had risen to become the army’s chief of staff, told Congress that a successful occupation of Iraq would require “several hundred thousand” troops on the ground.137 U.S. deputy secretary of defense Paul Wolfowitz told Congress he found that “hard to imagine.”138 But when defense secretary Donald Rumsfeld’s attempt to win the war on the cheap failed, everyone acted shocked. Who could have known?
The Bush administration also told the public that the rebuilding of Iraq would cost taxpayers no more than $1.7 billion.139 To say the administration massively underestimated would be a massive understatement.140 The New York Times described our reconstruction efforts there as “an effort crippled before the invasion by Pentagon planners who were hostile to the idea of rebuilding a foreign country, and then molded into a $100 billion failure by bureaucratic turf wars, spiraling violence and ignorance of the basic elements of Iraqi society and infrastructure.”141 Who could have known?
At the same time the warning signals about Iraq were being ignored in Washington, many on Wall Street were ignoring the signs of their own impending disaster.
In late 2002, Charles Prince was put in charge of Citigroup’s corporate and investment bank.142 The banking giant was already knee-deep in toxic paper and aggressively looking the other way.143 Prince was so successful at averting his eyes that, five years later, when he was told that his bank owned $43 billion in mortgage-related assets, he claimed it was the first he’d heard of it. Isn’t that something he should have known? Or did he prefer not knowing?
Prince had plenty of help ignoring the obvious, particularly from Robert Rubin. According to a former Citigroup executive, despite ascending to the top of the Citi food chain, Prince “didn’t know a CDO from a grocery list, so he looked for someone for advice and support.144 That person was Rubin.”
But when it all came tumbling down, both Rubin and Prince portrayed themselves as helpless victims of circumstance, because, well … who could have known?
“I’ve thought a lot about that,” Rubin said when asked if he made mistakes at Citigroup.145 “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.” What he means, of course, is the facts as he chose to know them at the time.
Former Fannie Mae CEO Franklin Raines suffered from the same affliction.146 According to Raines, he can’t be blamed for what happened at Fannie Mae because mortgage stuff is so, well, complicated. In fact, he can’t even understand his own home mortgage: “I know I can’t and I’ve tried,” Raines told a House committee. “To this day, I don’t know what it said.… It’s impossible for the average person to understand.” In other words, who could have known?
But isn’t it interesting that the complexity and opacity of these things somehow always redounds to the benefit of those in charge?
We saw a familiar insistence on ignoring all warnings in the Bernie Madoff scandal.147 “We have worked with Madoff for nearly twenty years,” said Jeffrey Tucker, a former federal regulator and the head of an investment firm that lost billions to Madoff. “We had no indication that we … were the victims of such a highly sophisticated, massive fraudulent scheme.” Who could have known?
Well, financial fraud investigator Harry Markopolos, for one. Not only did he know, he did everything he could to make sure everybody else knew as well.148 In 1999, after researching Madoff’s methods, Markopolos wrote a letter to the SEC saying, “Madoff Securities is the world’s largest Ponzi Scheme.” He pursued his claims with the feds for the next nine years, with little result.
One would think the “Who Could Have Known?” excuse has been exposed as a sham enough times to render it obsolete, but there are always new incentives to not know.
In the wake of 9/11, Condoleezza Rice assured us nobody “could have predicted” that someone “would try to use an airplane as a missile.”149 Except, of course, the 1999 government report that said “Suicide bomber(s) belonging to al-Qaeda’s Martyrdom Battalion could crash-land an aircraft packed with high explosives (C-4 and semtex) into the Pentagon, the headquarters of the Central Intelligence Agency (CIA), or the White House.”150
After Katrina, the Bush White House read from the “Who Could Have Known?” hymnal: No one could have predicted that the storm would be a Category 5, and that this could result in the levees being breached.151 We now know, of course, that plenty of people knew that the levees could be breached and said so before the storm hit.
Then there is the high priest of “Who Could Have Known?”, Alan Greenspan, who, looking back in October 2008 on the makings of the financial crisis he helped create, delivered this “Who Could Have Known?” classic: “If all those extraordinarily capable people were unable to foresee the development of this critical problem … we have to ask ourselves: Why is that? And the answer is that we’re not smart enough as people.152 We just cannot see events that far in advance.”
In other words, it’s simple biology: We humans are only smart enough to create situations in which the rich are beneficiaries of huge wealth transfers from the middle class—but we have not yet evolved to the point where we can foresee that this is what we’re doing.
In truth, the problem is not that we are “not smart enough as people.” As we’ve seen time after time, smart enough people are all too willing to ignore facts they don’t like or that don’t happen to benefit them in the short term. And to lessen personal culpability, they institutionalize not knowing—constructing oversight systems deliberately designed to be ineffective and accordingly unable to provide those in power with information they don’t really want to know.
We had our warning signals for the financial crisis: They were called Enron and WorldCom and Global Crossing. Those outrages set the stage for the much larger, more sophisticated, and much more dangerous excesses that drove the housing and banking meltdown.
But the broken system that allowed the scandals at Enron and the rest was never really reformed. Yes, there were window-dressing changes and Band-Aid legislation. But the guiding philosophy—that the free market would regulate itself, and that corporate America always knew best—remained in place. Indeed, it was given much freer rein.
So it’s been déjà vu all over again, with one big difference that makes this latest crisis so painful: the scale of it all. The impact on average Americans has been so much more devastating and long lasting. And here’s the bottom line: If we don’t reform the system—really reform it—the next financial collapse will surely be more than we can withstand.
It’s the thing that will send us over the edge, making the idea of Third World America more than just a scary harbinger of things to come. It will be our reality. So it’s time to say good-bye to the “Who Could Have Known?” era. It’s time to know things again—and to acknowledge that we know them. And to make things right before it is too late.
LINDA D. WILSON
Perhaps my story is no different from that of millions of other middle-class workers who are experiencing an enormous test of their faith. I have an MBA and more than twenty-five years of human resources experience. I worked for the same company in Louisiana for twenty-two years. Despite countless layoffs and downsizings, I was either promoted or changed positions every two to three years, expanding my HR skills and knowledge. I can honestly say I never concerned myself with getting a pink slip. I served on local boards and committees, volunteered for good causes, donated to charities, and served at my church. My near-perfect credit score and disposable income allowed me to live with little debt and pay down my mortgage from thirty to seven years.
I overcame a birth defect—a cleft palate. After surgery, I had to learn to talk again. I attended college on a track scholarship, and in my senior year I competed in the U.S. Olympic Track & Field trials. From there, I earned my bachelor’s degree and started my career. While working full-time and successfully climbing the corporate ladder, I had an idea for an event planning system. I filed for and received a U.S. patent. However, working full-time in a competitive environment left me with little time to launch a business and new product, so I put it on the back burner. Instead, I focused on a seemingly safer and more stable corporate career path—guaranteed paychecks, benefits, pension, and a 401(k). Like most other members of the middle class I believed that with enough hard work and determination I would be successful. It was what my parents taught me by example and what they expected me to demonstrate in everything I did.
In 2005, I adopted two girls—sisters. My ten-year-old was diagnosed with HIV and works extra hard to learn and be successful in school. I set them up with a financial plan and invested in real estate, which I planned to leave them for their inheritance.
Then, Hurricane Katrina destroyed my home and rental properties in New Orleans. My family and friends were displaced and scattered across the country. So after working for the same company for twenty-two years, I resigned and relocated to Texas, along with my parents and five sisters. I put my career on hold to rebuild our lives. Two years later, I’m still unable to land a suitable full-time position (at any level)—despite more than twenty-five years of expertise.
The world has obviously changed for the middle class. Now the only guarantee that today’s worker can expect is that you put in a day’s work, you get a day’s pay—that’s it.
So, like millions of other middle-class workers, I’m being forced to reexamine my career, lifestyle, priorities, interests, goals, and future. Although I’ve exhausted my savings and face insurmountable debt, I’ve decided to step out in faith—or better yet, take a leap. I’m managing my own business full-time, designing products to help people plan and organize their everyday lives. I’m determined to establish a business as an inheritance for my children.
5
SAVING OURSELVES FROM A THIRD WORLD FUTURE
And now for something completely different … some good news: Third World America is not a done deal.
Despite the overwhelming evidence that the wheels are coming off our national wagon, I believe deeply that America can still accomplish great things: that our greatness is not necessarily a thing of the past—indeed, that our best days can still lie ahead of us.
I realize that coming after the litany of all the ways America is falling apart, this might sound overly optimistic. Or delusional. Or the result of hitting the ouzo in despair. I understand that the initial response to the first four parts of this book might be to walk onto one of our crumbling bridges and contemplate jumping off.
But that’s not how the American psyche works. We’ve always been a positive, forward-looking people. A can-do attitude is part of our cultural DNA. And that mind-set is a prerequisite for turning things around. Without it, the seeds of change and innovation will wither in a soil that is an arid mix of negativism and defeatism. With it, we can shake off our cynicism and avoid the slow slide to Third World status.
As a country, we have an unparalleled track record for marshalling our forces and rising to meet great challenges. It is one of our greatest strengths.
After Pearl Harbor, America’s naval force was decimated. But just three years later, as John Kao points out in his book Innovation Nation, “America had a hundred aircraft carriers fully armed with new planes, pilots, tactics, and escort ships, backed by new approaches to logistics, training methods, aircraft plants, shipyards, and women workers” along with “such game changing innovations as the B-29 … and nuclear fission.”1
We had a similar reaction to the Soviets’ launch of Sputnik.2 “We responded with massive funding for education,” writes Kao, “revamped school curricula in science and math, and launched a flurry of federal initiatives that eventually put Neil Armstrong in position to make his ‘giant leap for mankind.’ ”
President Obama captured this essential part of the American character when he announced the kickoff of his Educate to Innovate campaign—a nationwide effort to move American students back to the top in science and math education.3 “This nation wasn’t built on greed,” he said. “It wasn’t built on reckless risk. It wasn’t built on short-term gains and shortsighted policies. It was forged on stronger stuff, by bold men and women who dared to invent something new or improve something old—who took big chances on big ideas, who believed that in America all things are possible.”
Many economists and historians are warning that our current economic downturn has created a new normal—that the country will never be the same. Things are, of course, going to be different. But that doesn’t mean that they are predestined to be worse. However, if we don’t get serious about the crises we face, they will be.
America is rich with resources—both natural and human.4 “America—with its open, free, no-limits, immigration-friendly society—is still the world’s greatest dream machine,” says Tom Friedman. “The Apple iPod may be made in China, but it was dreamed up in America.”
We must stop squandering these resources. If the middle class is to thrive and continue to be the backbone of America, we need to create the conditions that will allow these dreams to flourish–and our country to move forward in wiser ways.
“You can’t cross a chasm in two small jumps,” said World War I–era British prime minister David Lloyd George.5 And you can’t cross it in a series of little steps either. Instead, we have to reconnect with our bold national identity and once again take “big chances on big ideas.”6
Stopping our descent into Third World status won’t be easy. It will take daring initiatives from both the private and public sectors—supercharged with an infusion of personal responsibility.
On the one hand, this moment in our history demands that we stop waiting on others—especially others living in Washington, D.C.—to solve the problems and right the wrongs of our times. Now, more than ever, we must mine the most underutilized leadership resource available to us: ourselves.
On the other hand, the problems our society and, indeed, much of the world are facing are too monumental to be solved solely by individuals. We still need the raw power that only big government initiatives—and big government appropriations—can deliver.
But, as we’ve seen, in today’s Washington, the fix is in. So that’s the first thing we need to fix.
I.
ON A NATIONAL LEVEL
THE MOTHER OF ALL REFORMS
It’s a classic catch-22: The most effective way of fixing the multitude of problems facing America is through the democratic process, but the democratic process itself is badly broken. That is why the first step toward stopping our relentless transformation into Third
World America has to be breaking the choke hold that special interest money has on our politics.
This has to start with a complete reboot of the way we finance our elections. The most effective means of restoring the integrity of our government is through the full public financing of political campaigns.
It’s the mother of all reforms—the one reform that makes all other reforms possible. After all, he who pays the piper calls the tune. If someone’s going to own the politicians, it might as well be the American people. Think of it: No hard money, no PAC money, no endless dialing for dollars, no quid pro dough deals. No more lobbyists sitting in House and Senate offices literally writing tailor-made loopholes into laws. No more corporate welfare giveaways buried in huge spending bills. No more dangerous relaxation of safety regulations that can be traced to campaign donations. Just candidates and elected officials beholden to no one but the voters.
Among those working to make this happen are Harvard law professor Lawrence Lessig and Joe Trippi, who ran Howard Dean’s Internet-fueled 2004 presidential campaign.7 Together they’ve founded Fix Congress First!—an attempt to build a grassroots movement to pressure Congress to pass public financing legislation. And to make sure the legislation can’t be struck down by an activist Supreme Court, the group is also pushing for a Constitutional amendment. “We must,” says Lessig, “establish clearly and without question the power in Congress to preserve its own institutional independence.”8
In May 2010, I was one of about 430,000 people to receive an email from the group with the eye-catching subject line “300 Million Lobbyists,” promoting an effort to create “the biggest lobby in the history of American politics.” And who is part of this all-powerful lobby? You, me, and the rest of the 300 million citizens of the United States.
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