“CAPITAL OFFENSE”: MICHAEL HIRSH BOOK

October 2, 2010 at 12:36 am | Posted in Books, Economics, Financial, Globalization, Philosophy, Research, USA | Leave a comment

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Capital Offense: How Washington‘s Wise Men Turned America‘s

Future Over to Wall Street

Michael Hirsh (Author)

Editorial Reviews

Michael Hirsh and Jonathan Alter: One-on-One

Jonathan Alter: Your book starts by tracing three decades of Washington history from the Reagan era on. Why is understanding that history so important?

Michael Hirsh: You can’t understand what happened on Wall Street without first understanding what happened in Washington. Things of this magnitude—the worst financial crash and economic downturn since the Great Depression—don’t just occur because of a subprime mortgage bubble and a bunch of crazy traders in New York. It is only comprehensible as story of an entire era, a zeitgeist that defined the post-Cold War period. That’s my story.

It began as the Reagan Revolution of 1981, which launched a deregulation movement that unmoored much of the economy from government oversight and antitrust laws, creating the wild age of finance with which we’ve all grown up. The failure was huge, systemic and bipartisan. The Clinton administration was as much to blame as the second Bush administration. For nearly 25 years, the facts on the ground seemed to bear out the idea that markets may overreach and go up and down, but they are always smarter than governments. The deregulatory ’80s were a boom time. The ’90s were better. The end of the Cold War turbo-charged the whole process. Free-market absolutism went from being a mocked, maverick ideology—something identified in the ’60s and ’70s with Barry Goldwater and William F. Buckley—to a kind of national secular religion. It seized control of the national agenda and shifted the axis of the entire economic debate sharply rightward, turning ordinary Republicans into small-government zealots and liberal Democrats into “Eisenhower Republicans” (that’s what Bill Clinton mockingly called himself.) It was only because of this environment – this all-conquering ideology– that Wall Street and its lobby got away with as much as it did. Remember, the instruments that became notorious after the subprime collapse—collaterized debt obligations or CDOs—didn’t come out of nowhere either. They were allowed to flourish and develop, grow ever more complex, for two decades. Despite regular market blowups – LTCM! Enron! – the only change that occurred was even more deregulation. CDOs were only the latest, “improved” version of a model long in the making, the process of turning dubious or bad assets into better-seeming securities while the adults on the playground—the regulators and central bankers–weren’t watching.

Alter: Larry Summers is the president’s chief economic advisor, yet you argue that his performance both before and since the beginning of the Obama administration make him the wrong choice for the job. Why?

Hirsh: Summers is a fascinating figure in this narrative. He is unquestionably one of the greatest economists of his generation, and he did some of the most path-breaking work on the fallacy of rational markets. After the 1987 stock market crash, for example, Summers wrote that it was impossible to believe any longer that prices moved in rational response to fundamentals. He even advocated a tax on financial transactions. Yet Summers later abandoned these positions in favor of Greenspan’s view that markets will take care of themselves. How could such a powerful intellect continue to believe and advocate this view, despite the plentiful accumulating evidence that the “efficient market hypothesis” did not hold up (including his own work)? Mainly because the near-religious attachment to free-market absolutism had become such a ruling principle that no single senior official in Washington dared to contradict—especially if he was politically ambitious. Not surprisingly, as vested as he was in creating the old system, Summers has taken a minimalist approach to changing it in the current administration, and he argued, for example, for a smaller stimulus than others did.

Alter: Why are people like Summers and Geithner—creatures of the old system—in charge while those who were most prescient and accurate, like Born or Stiglitz or Raghu Rajan, standing on the outside of Washington and looking in?

Hirsh: Barack Obama was slow in understanding just how deep and systemic the problem was. That’s one reason why it took him so long to see that Paul Volcker, for example, might have been right in calling for banks to be banned from proprietary trading. “He didn’t run for president to fix derivatives,” said Michael Greenberger, Brooksley Born’s former deputy at the CFTC. “When he brought in Summers, Geithner and Gensler he just thought he was getting the best of the best. I don’t think he understood that within the Democratic Party there was a great split over regulatory philosophy.”

Alter: In your book women are generally the heroines and men are generally the villains. Moreover the women are generally punished for being heroines and the men are generally rewarded for being villains. How can that be?

There’s a lot to this idea, although some of the heroes of my story are also men, such as the economist Joseph Stiglitz and former Treasury Secretary Paul O’Neill. And occasionally a woman, like Wendy Gramm, must take some of the blame for the failed financial system. But it is true that women are often the gutsiest and most prescient figures in this saga. Women like Brooksley Born and Sheila Bair. Wall Street may be the most macho place on the planet. Brooksley Born, the former chairwoman of the Commodity Futures Trading Commission who warned of the dangers of over-the-counter derivatives a decade ago, was seen by her male colleagues in Washington as an interloper—or a “lightweight wacko,” as they called her at the Fed. The free-market fervor of this era was so dominant, and so admired were its male champions like Robert Rubin and Alan Greenspan, that it took a special kind of person to resist it. An individual of rare intellect, integrity and courage. Born was one of those unusual people. The thinking of the times was like a virus, and Born was one of those immune to it, to the idea that financial markets ought to be unregulated. And that had a lot to do with the sexism she had been battling her entire career. Fighting for derivatives regulation was, for her, just another way of breaking down the male monopoly.

Alter: You believe in capitalism and free markets, and yet you argue that many of your characters let the country down by failing to understand where rigorous supervision was necessary. Why didn’t they strike a better balance?

Hirsh: They let their faith in Wall Street betray them. During the free-market era, people forgot that financial markets behave differently than normal markets in goods and services. They are more prone to manias and panics; the ordinary rules of economics don’t apply. Financial markets simply have to be more regulated. In some ways no one is more culpable in this than Robert Rubin. Rubin was a good man. He always had a big heart and a gentle manner: He was a liberal Democrat who, as a young trader at Goldman Sachs, used to show up at New York community meetings on the inner-city poor. Later on he opposed Bill Clinton’s “workfare” reform — a much-criticized compromise with the GOP — as too harsh. But he could not bring himself to lay a restraining hand on his former colleagues from Wall Street.  Brooksley Born later told me she blamed Rubin more than Greenspan in the end. Because he knew better that markets were imperfect, yet he had neither the vision nor the courage to act. It was Rubin who had inspired his adoring underlings to compile ten principles—which they later presented to him in a frame—they called “the Rubin Doctrine of International Finance,” the first of which was, “the only certainty in life is that nothing is ever certain,” and the second of which was: “Markets are good, but they are not the solution to all problems.” In one of his last acts as Treasury secretary, Rubin presided over a report of the President’s Working Group on Financial Markets that hesitantly proposed, as a “potential additional step,” the “direct regulation of derivatives dealers.” Rubin himself would later insist that he’d always wanted leverage to be reduced too. But Rubin never did anything about these worries. The “potential additional step” was never taken.

Alter: I’m very intrigued by your portrayal of Milton Friedman as the father of the era in many ways. How relevant are the personal histories of these major economic figures in changing the fate of the country?

Hirsh: Extremely relevant. Friedman was the proud son of immigrants who romanticized the struggle of his mother as a young girl in a Lower East Side sweatshop in the late 1890s, when New York was crowded with European Jews. Friedman described it as a great place for an immigrant “to get started” because there was “no red tape.” Friedman himself had started out wanting to be an insurance actuary. He was tiny, bespectacled and balding. He would have looked more at home in an anonymous office cubicle somewhere– an obscure worker bee in the vast hive of American capitalism– than on the world stage. But that was just the point of his personal story. It embodied the American Dream that was the mainspring of all his economic thinking. He was the Nobody from Nowhere who on pure merit, left unencumbered by government meddling, becomes Somebody. Alan Greenspan was a nerdy “math junkie,” as he described himself, who was “groping for a frame of reference” until he met the libertarian writer Ayn Rand, as she herself later recalled. He was, in other words, something of an empty vessel, and Rand gave Greenspan his passion for the morality of capitalism. Joe Stiglitz developed an opposite passion—a deep skepticism about markets—while growing up in one of the grittiest industrial cities in America, Gary, Indiana. Observing the poverty and cyclical layoffs in the steel industry as a small boy, he began to ask questions about why markets didn’t work well. It was no accident that Stiglitz became in some ways the John Maynard Keynes of his era (Keynes himself was shaped by his searing experience of the Depression). Like Keynes, who was ignored when he warned after World War I that the draconian peace imposed on Germany would lead to disaster, Stiglitz stood almost alone against the “Washington Consensus” lorded over by Rubin, Greenspan and Summers.

Alter: What does your book tell us about the economy of today? What do we need to do to recover?

Hirsh:We need to go a lot farther than President Obama has. The book explains how Obama missed a golden opportunity to remake Wall Street, the American economy, and the global economy. Obama was seen by many as the second coming of Franklin Delano Roosevelt. After the 2008 election, Time magazine actually Photo shopped Obama’s face onto FDR’s in the famous Depression-era shot of Roosevelt grinning in his car, his cigarette holder tilted jauntily upward. But instead of “the New New Deal,” as Time called it, Obama faithfully channeled Larry Summers and Tim Geithner and their conservative approach to stimulus and reform. The president distracted himself with less pressing issues like health care and nuclear disarmament. He even flew to Oslo to get Chicago picked for the Olympics (he failed). Early on Obama’s Summers and Geithner argued down Christina Romer, the new chairwoman of the Council of Economic Advisors, when her office suggested that the initial fiscal stimulus be as high as $1.2 trillion. They didn’t want to pile onto the deficit, or at least they didn’t want to face the political consequences of such an increase in government spending. With the recession still darkening the outlook, Summers and Geithner also didn’t want to tamper too much with what they still saw as the economy’s engine room, Wall Street. The president “explicitly decided not to break up all big financial institutions,” another top economic advisor, Austan Goolsbee, told me. Heeding the advice of Summers and Geithner, Obama decided that the cause of the crisis “wasn’t primarily about size.” As a result, little faith was restored in the system—an essential ingredient to full recovery. Not enough jobs were created. Now Obama’s economic team is disintegrating and he’s paying for his lack of dramatic action. More and more it looks like Obama will face grim growth and unemployment numbers going into 2012 — much less the 2010 election. Distracting himself with health care and other issues, Obama may have politically maneuvered himself out of the only major remedy that could bring unemployment down and growth up enough to assure his reelection: another giant fiscal stimulus.

Product Description

Why every president from Reagan through Obama has put Wall Street before Main Street

Over the last few decades, Washington’s firmly held belief that if you make investors happy, a booming economy will follow has caused an economic crisis in Asia, hardship in Latin America, and now a severe recession in America and Europe. How did the best and brightest of our time allow this to happen? Why have these disasters done nothing to change the free-market mantra of the Washington faithful? The answer has nothing to do with lobbyists and everything to do with ideology.

In Capital Offense, veteran Newsweek reporter Michael Hirsh gives us a colorful narrative history of the era he calls the Age of Capital, telling the story through the eyes of its key players, from Ronald Reagan and Milton Friedman through Larry Summers and Timothy Geithner.
Based on the solid research and skilled reporting of Newsweek Senior Editor Michael Hirsh
Takes you inside high-level, closed-door conversations of top White House advisers and administration officials such as Alan Greenspan, Robert Rubin, Paul O’Neill, and others
Illuminates key figures and lively interpersonal clashes, including the conflict between Larry Summers and Nobel Prize-winning economist Joe Stiglitz
Offers crucial insights on why President Obama took so long to work on the economy—and why he may not be going far enough
Catalogs the missteps of three decades of fiscal, regulatory, and financial recklessness, including the dismantling of the Glass-Steagall Act, the S&L debacle, Enron, and the subprime mortgage meltdown
As we struggle to emerge from the financial crisis, one thing seems certain: Wall Street’s continued dominance of the global economy. Propelled into the lead by a generation of Washington policy-makers, Wall Street will continue to stay ahead of them.

Product Details:

· Hardcover: 352 pages

· Publisher: Wiley 1 edition

· September 14 2010

· Language: English

· ISBN-10: 0470520671

· ISBN-13: 978-0470520673

The best books about the financial crisis share three characteristics: thorough research, stylish writing and a unique slant. The story is too big and complicated for a straightforward history, at least until we have a few decades of perspective. In The Big Short, Michael Lewis focuses on a few offbeat portfolio managers, Justin Fox in The Myth of the Rational Markets goes deep into intellectual history and interviews many of the people who invented the theories. The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It by Scott Patterson worked from the equations out. Glenn Yago and Franklin Allen’s Financing the Future traces the story from prehistory into the future and emphasizes the positive side of financial innovation as much as the negative side.

Capital Offense joins this select group. It’s a pleasure to read, the writing is smooth and clear with occasional touches of poetry (“a vast demimonde of massage parlors and escort services honeycombs mid- to lower Manhattan”) to savor. The extensive interviews with the major movers and shakers during the crisis are interwoven with the skill of a documentary filmmaker, letting the participants tell the story in their own words, yet providing the framework so it’s a seamless as reading a novel. It differs from other accounts from reporting exclusively from the perspective of Washington. When other accounts go there, as in Hank Paulson’s On the Brink or Simon Johnson’s 13 Bankers, it is as tourists reporting an exotic foreign locale. Michael Hirsh writes like an experienced insider.

The book is the best popular account we have of the destructive power of the crony capitalist financial-regulatory complex. The one glaring flaw is that the author consistently describes this as free market capitalism.

Ironically, he even quotes Raghuram Rajan and Luigi Zingales (Saving Capitalism from the Capitalists) as saying free market capitalism’s enemy are hypocrites “extolling the virtues of competitive markets with every breath while trying to extinguish them with every action.” The simple fact is that every major regulated financial institution in the world either failed or would have failed without massive and unprecedented government bailout, a bailout which exceeded the financial capacity of some governments, and severely strained the rest. It was the bond salesmen and investment bankers, working with lawyers, lobbyists and regulators, who created the monster, not to mention the pieces like Fannie and Freddie created directly by politicians. Unregulated institutions, like hedge funds, mostly did fine and when they didn’t, they quietly liquidated and returned remaining funds to their investors, without asking for bailouts or imperiling anyone else. How promoting the same regulators and giving them more powers over the same cronies who needed bailouts, while extending regulations to the entities that caused no harm, is going to make things better is something you have to live in Washington to understand.

Hirsh refers repeatedly to lobbyists for free markets. People who want free markets incorporate offshore, they don’t pay lobbyists. Lobbyists claim they want “deregulation” (or if it’s more popular at the moment, “regulation”) but it always comes down to the same thing. More freedom for their employers to do what they want and reams of cumbersome regulation to quash competitors with fresh ideas or lower prices. Sure the big banks could do more things with less capital in 2005 than 1995, but there were more pages of regulation, stricter rules, more expensive compliance, greater restrictions on competition, more guaranteed profit for politically-favored institutions and more rules for small and independent companies. And, of course, more regulators with more powers.

On several occasions Capital Offense tries to be even-handed by showing the good done, say by venture capitalists, to offset some of the harm from big bank failures. But venture capitalists didn’t need bailouts, and they didn’t hire armies of lobbyists to lock in profits and lock out competitors. Venture capitalists are part of the free market, crony capitalists have no taste for the innovation and risk required for successful venture investing.

The book even blames the Great Depression on “laissez faire thinking”. But it was a worldwide phenomenon, hitting communist, socialist, absolutist and medieval economies as well as capitalist. Or “Americans’ insatiable spending habits” are blamed for siphoning savings from the rest of the world. In fact it was mostly Chinese and oil producer government restrictions on allowing their own citizens to save or invest export profits that pushed the savings out. American consumers were willing to borrow a portion of it, but nowhere near enough to satisfy demand. That’s precisely the reason people created complicated structures to make long-term risky assets, like subprime mortgages and leveraged loans, look like the short-term low risk assets foreign investors wanted. If American consumers had really been insatiable, and willing to supply short-term credit card debt, there would have been no securitization crisis (there might have been a different crisis, but generally overspending resolves itself painfully and smoothly).

One last example of the confusion between free markets and cronies is the account of Silver Thursday in 1980. The major Wall Street dealers were all short silver and losing institution-threatening amounts fo money. Since dealers control the exchanges, they did what exchanges have done since the Paris Sugar Bourse in 1905, they decided to bankrupt their customers rather than themselves (this is a fact overlooked by people who want to move all trading on to exchanges, there are perils of both over the counter markets and public markets). They passed “Sugar Rule 7” forbidding anyone but a short from buying sugar, doubling the margin requirement on the long holders and eliminating it for themselves. Their friends in the Commodity Futures Trading Commission reinvented the rules to claim the largest long holders, the Hunt brothers, were engaged in an illegal corner. This was nonsense (although the Hunt brothers did violate another rule, they controlled 6.5% of their broker Bache and did not disclose that fact as required; but this had nothing to do with the silver market). Here we have a case as obvious as an old Soviet show trial of the crony capitalists using political muscle to crush the free market, but Hirsh sides with the victors, calling it “a clear-cut case of manipulation, which was illegal.”

None of this detracts from the book, as long as you substitute “crony capitalism” every time you see “free market capitalism” and “financial-regulatory complex” every time you see “Wall Street.”

Ever wonder how America got into the fine economic mess it’s in? “Capital Offense: How Washington‘s Wise Men Turned America‘s Future Over to Wall Street” tells you right in the title. Somehow Washington has confused what’s good for Wall Street as what’s good for the national economy.

Author Michael Hirsh takes us to the root of the problem going back to the fall of the USSR, the charismatic economic guru Milton Friedman and a political climate where both parties dismantled the organizations that policed Wall Street (making the same mistake that occurred just prior to the Great Depression)going as far back as the Reagan Administration. The absurd idea that any company will police itself and that it is in a company’s best interest to be honest and produce good products without flaws is at the heart of the deregulation of Wall Street allowing the creation of products that increasingly became so complex that it took people with advanced degrees in mathematics to understand them.

While we had economic gurus like Greenspan and Friedman pushing for less and less regulation, we saw more and more money being put on the table. Hirsh’s book makes one aware of enough of the foolishness in Washington from lobbyists lining the pocket’s of those in Washington to folks like Rubin discounting alarms raised by Born because of their sex or simply because THEY didn’t come up with it themselves. Ego drives the economy and it also can drive us to disaster.

Hirsh’s book gives us the history of how America thrived under Keyesian policies, continuing to thrive under Friedman’s philosphy until lobbyists and the government proceeded to dismantle the departments that policed Wall Street. As the products became increasingly complex where Wall Street often didn’t understand them and higher risks were taken, America’s economy began to fall apart culminating in the collapse of major banking/investing institutions. Often full disclosure as to how high risk the investments were might not be disclosed (which, for example, caused the investments of an entire city in Ohio to be worth nothing) putting cities, states and investors at risk for major losses.

For example when Brooksley Born the chairwoman of the Commodity Futures and Trading Commission became alarmed by the size and lack of regulation (as well as understanding) of the derivatives market and the big Wall Street firms involved in marketing these to investors, she went to Bob Rubin. She was also concerned that Congress was going to be passing more resolutions “freeing” the Wall Street giants allowing them to play fast and loose with trading derivatives. She found herself attacked by Bob Rubin (and sexism reared its ugly head as part of this attack because she was a “woman” trying to prevent disaster in a “man’s market”)and found his and other departments in the back pocket of Wall Street (or departments run by former Wall Street CEO’s)trying an end run behind her back to prevent her from doing anything from preventing the looming economic disaster she warned her colleagues and superiors about.

It’s easy in retrospect for those who prevented Born from doing her job and protecting our national economy to claim they didn’t see the disaster coming but the irony is that they were TOLD by someone they discounted without looking into her evidence. They chose to remain ignorant and blindly led the U.S. economy into the worst meltdown in decades by refusing to remove the blinders that industry cheerfully provided them with.

Capital Offense:

How Washington‘s Wise Men Turned America‘s Future Over to Wall Street

Michael Hirsh (Author)

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