Even worse, consider what it was like to be an honest person in one of those firms. We don’t know if anyone ever knocked on Lloyd Blankfein’s door and said, Listen, Lloyd, it isn’t very nice to tell the world to buy this stuff when we know it’s awful and we’re making billions of dollars betting against it. And you shouldn’t lie to Congress about it, either. Did anyone ever say that to Lloyd? Probably not. But if someone ever did tell him that, I rather doubt that he or she received an immediate promotion and a big bonus. And we do know what happened to a number of people, in various firms including Citigroup, Merrill Lynch, Countrywide, AIG, and others, who tried to call attention to the unethical and unsustainable behaviour they saw. Almost without exception, they were severely penalized for it.
And yet, anyone graduating from business school, law school, or anyplace else anytime in the last two decades certainly noticed that finance was the quickest, surest way to get rich. This diverted a considerable number of the most intelligent, most ambitious, best-educated people from productive work into quasi-criminal activities that have damaged, not improved, our economic welfare. And while the financial bubble was the largest and worst of these activities, it was far from the only one.
Something similar now holds for economics and other academic disciplines relevant to politics and regulation (law, political science, and public policy). Which economists, finance professors, and industrial economists have made the most money, obtained the most senior positions, become the most famous, testified in Congress most frequently? Larry Summers, Glenn Hubbard, Laura Tyson, Frederic Mishkin, Martin Feldstein, Alan Greenspan, Hal Scott, Richard Schmalensee, Jerry Hausman . . .
Given this parade, put yourself in the shoes, once again, of someone young and honest, particularly someone who wants to do research on, say, the financial crisis. As we noted above, you would face a sobering tableau. Who would supervise your PhD thesis, judge your grant applications, consider whether to give you permanent tenure at an American university, referee the articles you submit to journals? Answer: people who make millions of dollars defending the financial sector. In contrast, who is going to pay you hundreds of thousands of dollars per year to sit on their board of directors, testify to the US Congress on their behalf, advocate their interests in antitrust cases, appear for them before regulators? Nobody, is the answer.
As for politics, lobbying, and government policy—enough already said. At present, these are not professions that attract and reward the honest and selfless.
This is dangerous. A nation that allows predatory, value-destroying behaviour to become systematically more profitable than honest, productive work risks a great deal. All societies depend heavily on idealism and trust, including the willingness of ordinary citizens to behave honestly and to make sacrifices. While many citizens do not yet realize how unfair their society has become, that condition will not last indefinitely. Unfortunately it will probably last long enough that the current generation of predators will die wealthy and comfortable. But most of us would not enjoy living in a society dominated by cynicism and dishonesty.
CHAPTER 10
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WHAT SHOULD BE DONE?
WE ALL HAVE OUR own list of the reforms that are most needed. Here, very briefly, is mine. These are very easy things to write down, and very hard things to accomplish in the current economic and political climate.
• Bring the financial sector under control. This, in turn, has many elements, most of which have been widely discussed. We need to reform, and tightly regulate, compensation structures at the individual, corporate, and industry levels; break up the largest banks; greatly strengthen the power and political independence of regulation and white-collar criminal law enforcement; tax financial transactions; tax financial sector income fairly; and close legal loopholes for activities such as “innovations” designed for tax avoidance or for betting against one’s own securities. The natural result of proper re-regulation of the financial sector will be to reduce its size, concentration, and political power. This will have many benefits, ranging from increasing the supply of talented people for more productive activities to reducing pressures for political corruption.
• Control the impact of money on politics. Easier said than done, especially in the US, but this is very important. Lobbying and political contributions should be heavily taxed; government and regulator salaries should be raised sharply, in return for strict prohibitions on revolving-door behaviour; and some form of public campaign financing for political campaigns should be made mandatory.
• Reform the tax system, both individual and corporate, so as to raise revenues, increase fairness, and mitigate against the formation of hereditary and financial oligarchies. Extremely high estate taxes are one important element of this, as is the fair taxation of very high financial sector incomes.
• Greatly strengthen antitrust policy and the regulation of corporate governance. Antitrust policy and analysis have fallen victim to corruption in two ways: first, the corruption of US government policy through campaign finance, lobbying, and revolving-door hiring; and second, the corruption of the economics discipline that supplies the economic analysis, and the personnel, behind antitrust decisions. In the areas of industrial organization, regulation, corporate governance, and antitrust theory, the economics discipline doesn’t just need reform; it needs a five-organ transplant and a yearlong stay at a reeducation camp. More generally, America needs to figure out how to keep large, mature industries from going the way of General Motors, U.S. Steel, AT&T, Microsoft, or for that matter Citigroup and Merrill Lynch, either by deep reforms in corporate governance, by breaking up large and stagnant companies, or by creating other mechanisms for new entry in mature industries.
• Improving educational opportunity and quality is fundamental. A country cannot compete economically, elect wise leaders, or call itself a fair society if it has a 25 percent school dropout rate, or if only the wealthy can attend good schools. Here, there is a fairness issue that not even a bank CEO can openly deny. If there is one thing that nearly everyone can agree on, it is that all children deserve a fair chance. If a child is born in a poor area, or to drug-addicted parents, it isn’t the baby’s fault. And yet the ways we handle school funding, child nutrition, foster care, and child poverty remain shameful, especially in the US, and if anything threaten to become more so. Beyond this, a well-educated population yields a far happier, more prosperous society. As it stands, we are wasting a startlingly high fraction of our people, in ways that are painful and very expensive.
• Create a truly universally accessible, high-speed broadband Internet infrastructure,both wireline and wireless. Broadband deployment should be viewed in much the same terms that a government deploys a national road system. If anything, broadband deployment is more important than transport, as a way to decrease foreign energy dependence, ensure security, and reduce global warming.
What the future holds
THERE IS A wide range of possible futures before us. One of them is simply more of the same, both economically and politically. In this case, we will be ruled by an ever more powerful oligarchy—roughly the top 1 percent—and will continue to function quite well for a sizeable minority—roughly the top 10 percent—while becoming increasingly harsh for the majority of the population. Elite education will continue to supply people for high technology, financial services, and for the senior management of global companies whose markets and labour forces will be far from the US and UK. Most other people will just survive, and a very large, poor, angry underclass will form. One might call this a Brazilian outcome—although actually Brazil has been moving towards greater equality and opportunity, not less.
This outcome reflects not only America’s current power arrangements but also, in part, the dark side of the Internet revolution. Although the Internet is overwhelmingly, and in so many ways, a force for good, for openness, and for the elimination of artificial barriers to knowledge and communication, it is also a powerful tool of managerial
control. It is now possible to manage a gigantic global corporation from almost anywhere. As a result, the management of US-headquartered firms may find it surprisingly easy to adapt to a world in which neither their employees nor their customers are primarily American.
In this case, American elites will remain extremely wealthy, and their political power could last a long time. But while such an outcome could last a couple of decades, there are several reasons to doubt that it will ultimately be sustainable. First, the financial sector will probably continue to produce bubbles and crises, and eventually their economic and political consequences will become impossible to ignore. Second, at some point the world will not allow the US to continue borrowing unsustainably. Twenty years from now, China and India will have global currencies. And third, Americans are a rowdy lot, and they’re not likely to put up with such a society forever.
However, the processes described above will not be reversed easily. And the general record of nations in decline suggests that internal reform occurs only under two conditions. The first is a very long period of growing frustration that finally boils over—as we saw in the Arab world. The second is a major crisis—as in the Great Depression. In 2008 many thought that the financial crisis might be enough, and that Barack Obama might seize his historical moment. Not so, as it turned out. Will it take another, even worse crisis?
Alas, as of this writing (early 2012), it appears possible that the Eurozone debt crisis could eventually provide us with one. Many of the same analysts who warned in vain about the mortgage bubble—Simon Johnson, Nouriel Roubini, and Charles Morris among them—are now warning that the unemployment and sovereign debt problems of Greece, Portugal, Ireland, Italy, and Spain are unsustainable and will likely trigger another crisis.
Europe remains dangerously fragmented, both politically and economically, with the EU seemingly incapable of coherent action. Both the American and European economies remain weak, with high unemployment and low growth despite continued deficit spending. And the tools used to contain the crisis of 2008—zero interest rates, buckets of money for the financial system—are no longer as useful or available.
In this environment, instability may begin to enter politics and voter behaviour as well as the economy. The question now is what will happen if popular frustration and desperation continue to grow, given that the current party system does not allow for fundamental internal reform. Will the political and economic system simply fester, or will a movement arise to force real progress? The answers to these questions are presently unknowable. There are both hopeful and alarming signals.
On the one hand, the fact that Michele Bachmann, Rick Perry, Ron Paul, Herman Cain, Newt Gingrich, and Sarah Palin could become major political figures, much less be taken seriously as candidates for president of the US, is worrisome. So is the fact that major portions of American society seem not yet to understand the importance of education to their own, and the world’s, future prosperity. And for now, the influence of corporate money on both major American political parties seems completely intact. Those signs lead to pessimism.
On the other hand, the appearance of the Occupy movement suggests that people are beginning to awaken. Other hopeful signs include investor Warren Buffett’s public rebuke of his billionaire colleagues, and Starbucks CEO Howard Schultz’s pledge to halt all political campaign contributions until the US government addresses the nation’s fiscal problems. But the current problems developed over several decades, and they won’t be solved instantly.
In the meantime, we can do a number of things, both politically and personally. We can take to the streets; support Occupy and likeminded organizations; run for office ourselves; and support candidates who do seem to care. At the personal level, we can save money; place our savings in locally owned banks and credit unions; invest prudently and ethically; and, above all, ensure the education of our children.
Since this book is being published in a US presidential election year, I will close by saying that while President Obama has failed his country in major ways, he is the least of the available evils. So, yes, I will vote for him. But the very next day, I will be thinking about how to replace him and the entire system that produced him and his government.
How this can be accomplished is not yet clear. Earlier, I listed three available avenues: an insurgency within an existing political party; a true, strong third party; and a nonpartisan social movement. Any would face tough obstacles, and perhaps some combination of all three will be required. We might get lucky and one day find that Americans have elected a president who turns out to be deeply committed to fixing the current problems in the political and economic system and who is willing to take a lot of heat. Time will tell. I hope that somewhere there is a courageous young leader in the making, someone who can persuade us all to rise up and throw the rascals out.
ACKNOWLEDGEMENTS
* * *
There are so many people to thank. Many of them I can’t name, for obvious reasons. And I’m sure I’m forgetting some—apologies in advance. First, Charlie Morris, for so much research and work and thinking and help and conversation. Everyone at Crown/Random House, especially Tina Constable, Mauro DiPreta, and Amanda Patten—you’ve been totally great, first and foremost for deciding to publish and support this book, which was a very gutsy thing to do. Thanks to everyone who talked to me, gave me information, corrected my misimpressions, guided me, and debated me, from Larry Diamond to Josh Cohen to Ralph Gomory and many others. And for sure, thanks to everyone who helped me make the film Inside Job—especially but not solely Audrey Marrs, Chad Beck, Adam Bolt, Alex Heffes, Kalyanee Mam, Will Cox, Matt Damon, my former assistant Anna Moot Levin, my current assistant Stacy Roy, Michael Barker, Tom Bernard, Diane Buck, Dylan Leiner, Christina Weiss Lurie, and John Sloss; everyone who appeared in the film; everyone who watched it; and the people at the Cannes, Telluride, Toronto, and New York film festivals who screened it. My book agent Max Brockman, my film agent Jeremy Barber, my film managers John Sloss and Dana O’Keefe, my wonderful lawyer Jackie Eckhouse, and bookkeeper Robin Cutter. Everyone in the film industry who has been so generous to me—which is to say, quite a few people.
Thanks to my lovely girlfriend, Audrey, and all my wonderful friends and family, who tolerated me and survived me and entertained me while I was In The Tunnel, and who keep showing up at my dinner parties even though the food is always the same. Athena Sofia, for being herself. My mother, for being a secret weapon of research. The Mercer lobby staff, for the best office anyone could ever want. Craft and Giorgione, for all those very late dinners after a long day attacking the book. Everyone at Chez Panisse and Oliveto, too, for letting me show up really late but still feeding me so wonderfully when I was working in California.
I just wish that my thesis advisor, Carl Kaysen, could have lived to see the film and the book. The hard stuff about economists would have troubled him, but overall, I think he would have been pleased. Going to Carl’s funeral was one of the toughest things I’ve ever done. I hope his widow, Ruth, and daughter, Zanny, will think that I’ve done him (or rather the education he gave me) justice by writing this.
Finally, my ridiculously patient and competent and effective assistant, Stacy Roy, who has endured my midnight phone calls, Sunday morning e-mails, crises, disorganization, overcommitment, and eccentricity—thank you, Stacy, for making everything possible. (And you—yes, YOU, whoever you are right now reading this, don’t you dare hire her.)
Thank you all for making this possible. As grim as much of this book is, it was actually very enjoyable to write it, because I learned so much and had such good company all along the way.
NOTES
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CHAPTER 1 Where We Are Now
1. Except as indicated, all US economic data in this book are from the most recent official sources (i.e., as of 3Q 2011, if available).
2. William T. Vollman, “Homeless in Sacramento,” Harper’s Magazine, March 2011.
3. U.S. Census Bureau,
“Income, Poverty, and Health Insurance Coverage in the United States: 2010,” September 2011; Congressional Budget Office, “Trends in the Distribution of Household Income Between 1979 and 2007,” October 2011, http://www.fns.usda.gov/pd/SNAPsummary.htm.
4. OECD StatExtracts: Labour Force Statistics, http://stats.oecd.org/index .aspx?queryid=251.
5. Emmanuel Saez and Thomas Piketty, “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics, 118(1) 2003, 1–39 (tables and figures updated to 2008 in Excel format, July 2010, http://elsa.berkeley.edu/~saez/); G. William Domboff, “Wealth Income and Power,” Department of Sociology, UC Santa Cruz, November 2011, http://www2.ucsc.edu/whorulesamerica/power/wealth.html.
6. Julia B. Isaacs, “Intergenerational Comparisons of Economic Mobility,” in Julia B. Isaacs et al., Getting Ahead or Losing Ground: Economic Mobility in America, 37–46, Brookings Economic Mobility Project, February 2008; Patrick M. Callan, “International Comparisons Highlight Educational Gaps Between Young and Older Americans,” Measuring Up 2006: The National Report Card on Higher Education, http://measuringup.highereducation.org/commentary/introduction.cfm.
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