386 of 391 people found the following review helpful
on May 5, 2008
For those who have read Kevin Phillips' American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21stCentury, many of the themes in the current work will sound familiar. In this book, as well as American Theocracy, he reminds us that previous empires such a 17th century Spain, 18th century Holland, and the late 19th and early 20th century Britain all succumbed to financialization as their global power reached its peak. He argues the the United States is now in a similar position. In the last 30 years financial services have grown from 11% of GDP to 21%, and manufacturing has declined from 25% to 13%. A reversal of roles that Phillips sees as very unhealthy.
This huge growth of the financial sector was not without adverse consequences: in the last 20 years public and private debt has quadrupeled to $43 trillion. How this came about has been expertly explained in another book called The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles Morris. There was easy money as the Federal Reserve was lending money at less than the rate of inflation. Money was risk-free for the lender since they collected fees up front and sold the securitized loans to investors. When this process was repeated millions of times, one ends up with hard-to-value securitized debt throughout the global economy. Then when housing prices start to decline and homeowners start to default on their mortgages on a grand scale, you have a global crisis of American capitalism. (Bear Stearns alone was estimated to be holding $46 billion worth of bad money.)
As in American Theocracy, Phillips writes that the oil industry is another component of the current crisis. In the US oil production peaked in the 1970s, on a global level it is peaking right about now. And with the ravenous appetite for oil from newly industrialized countries such as China and India, prices will continue to go up. The US still gets "cheap" oil relative to Europe since oil is priced in dollars, but that advantage may soon disappear. The weakening dollar is forcing OPEC countries to move to Euros and other currencies. And some oil producing countries such as Iran and Venezuela are moving to other currencies for reasons other than economic.
The author began his career as a Republican strategist, but he has long since disavowed them. Having a monetary policy of free money, a fiscal policy of tax cuts and increased spending, and an ideology of unregulated market fundamentalism, the Republicans have lost most of their credibiltiy. This does not mean Phillips has gone over to the Democratic side. He believes that Bill Clinton was instrumental in the financialization of the economy, and that currently Hillary and Obama are beholden to investment bankers and hedge fund managers. What used to be the vital center in Washington is now the "venal center."
The conclusion of this volume is very gloomy. Phillips believes that we are at a pivotal moment in American history when the economy has been hollowed out, we are saddled with trillions of dollars of debt, and our political leaders are dishonest, incompetent, and negligent. Given that all that may currently be the case, it may be instructive to further meditate on the empires of the past. Spain, Holland, and Britain all managed to survive and even thrive, hopefully the US will do the same.
106 of 112 people found the following review helpful
on April 19, 2008
Kevin Phillips dedicates his latest insightful work of political and economic history to his grandson. It's a fitting tribute since, by the author's reckoning, the aforementioned young man might be well into his forties, and the U.S. deeply into its post-imperial senescence, by the time the mischief explained in the pages of Bad Money is fully digested by the earth's economic system.
Instead of reflecting upon and compensating for the turn to an unprecedented expansion of finance capitalism that today supersedes manufacturing in this nation by at least six percent of GDP, Wall Street, our empire's "coliseum," chose instead to gamble upon the promulgation of an unregulated class of investments known as derivatives, the size and scope of which, particularly in terms of their capacity to hedge against risk, could only be guessed at. So much for the efficacy of market deregulation.
In a similar context, it was sadly hilarious to hear former Treasury Secretary Robert Rubin state recently that no one could have guessed the present debacle. Or, to recall that Hillary Clinton had proposed a blue ribbon committee, presumably to be chaired or co-chaired by Allan Greenspan, to address the situation.
Warren Buffett has been on record for denouncing derivatives as "weapons of financial mass destruction" since at least 2003. Even so, to paraphrase Pete Seeger, "the big fool(s)" at Citibank and Bear Stearns, "said to push on." Privatize the profits and socialize the losses.
At present, these so-called derivative financial "instruments" are embedded deeply in every sphere of global economic activity, from domestic pension funds to the portfolios of credulous investors throughout the world who believed in the transparency of the U.S. market system. Their ramifications add up to a disaster, aided and abetted at every modern-day turn by America's government, under both Democratic and Republican leadership.
Through his incisive and perceptive use of charts and tables,and,in his exceptionally clear narrative, Phillips makes the case that our government lies to itself as well as us. Now, we are fifty trillion dollars in debt. Go figure. Better yet, read and be ironically comforted by the truths contained in this quietly patriotic book.
131 of 144 people found the following review helpful
"Bad Money" is about the insecurity of America's future given a debt-gorged financial sector, and vulnerability caused by expensive dependence on imported oil. The term refers not just to the depreciated dollar but also dangerous attitudes and flawed financial products.
Phillips points out that over the last 30 years, financial services have nearly doubled to a record 20% of GDP (and an even greater share of corporate profits - 54% in '04), while manufacturing's share has halved to 13% (10% of profits), greatly imperiling the economy. En route, Washington has provided government bailouts and/or liquidity when financial institutions or methodologies got themselves into trouble (eg. S&L crisis; Citibank forced into technical failure, but allowed to stay open; bailing out junk bond investors by lowering federal funds rate; etc.), encouraging bigger problems down the road.
The positive impact of borrowing has declined about 60-70% from the 1970s-80s when such monies would mostly be used for factory and highway construction, compared to today's increasingly likely use for increasing leverage for LBOs, M&A, and hedge funds. Meanwhile, the negative likelihood of families experiencing a 50% drop in income has increased dramatically from 1970 - resulting in a greater probability of default.
Cognizance of our problems has been somewhat covered up with revisions to the CPI (understating costs of home ownership) and unemployment measures (not counting those who gave up and quit looking). Thus, the 2-4%/year CPI increase 2005-2007 would have been 5-7%/year, and unemployment would have been 8%.
Early millennium results include the housing sector (including its "ATM effect") providing 40% of the nation's growth in GDP and employment (an unsustainable rate achieved through financial gamesmanship that set the stage for the current financial and construction crash), while imported petroleum outlays rose from $100 billion in '02 to $302 in '06.
Observing from a distance, OPEC has reduced its foreign-currency reserves held in dollars from 75% to 62.5%, and Iraq and Venezuela began selling oil in euros and yen (admittedly for political purposes, at least at first). Meanwhile, the U.S. has antagonized major oil producers (Iran, Russia, Venezuela), and effectively dismantled Iraq - raising the risk of nations being unwilling or unable to supply the U.S. as supplies grow tighter.
Declining oil supplies, rising demand, global warming, our recession, and global loss of confidence in American financial markets are all converging and demand strong political leadership. Phillips, however, is not optimistic that this will emerge based on strong financial sector support for the Democratic Party and political failures in other nations needing dramatic change.
Phillips makes numerous comparisons between the U.S. today and the Great Depression (Eg. Total indebtedness was three times the size of GDP in 2007, higher than the prior record set in the years of the Great Depression), as well as the declines of Rome, Holland, Spain, and Great Britain. Regardless, no predictions are made about how long or deep our current downturn will be (though his writing hints the more severe possibilities), and he gives little or no attention to the steady amassing of dollars in Asia and associated growing unemployment of Americans. Finally, readers must also keep in mind that throughout the book he refers to $70 oil - obviously outdated vs. today's nearly $120.
Interesting Side Issue: Phillips states that food represents about 14% of the U.S. CPI, vs. 33% and 46% for China and India, respectively. Doesn't auger well for biofuels continuing to take 28% of the U.S. corn crop.
28 of 28 people found the following review helpful
Kevin Phillips' latest book - Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism - is not an easy read and not an easy book to review. To properly review it would take more space than is practical in this format. What I truly want to do with this review, then, is to convince people how very important this book is and, as other reviewers have noted, how important it is for anyone willing to tackle its complex subject matter to read it _now_. It will truly change your perception of what is happening in the US economy and in the US political scene. And, also as other reviewers have noted, it is in the end quite depressing as to how bad our current situation and how bad our prospects for the immediate future are.
Reading Phillips' books, I often get the feeling that I have walked
into a classroom where the professor is delivering his third lecture on
the subject and I must scramble to follow what he is saying. Bad Money is
no exception. I wish his editor(s) had pushed him to put in a few well
laid out examples that would endable the reader to properly understand
just what a CDO or an SIV actually consist of, how they function, how
they're handled in the marketplace and so on. Again, this is not an
That said, however, the points Phillips makes are well backed up in
economic analysis and facts, and in historical relevance, both of which
areas Phillips is intimately familiar with. He is sounding an alarm to
anyone willing to listen, and what he lays out in this book is very
disturbing to anyone who has noticed the growing chaos in our financial
markets, the rising insecurity of our economic situation, and the
seeming inability and unwillingness of our political leadership to deal
with these growing problems.
The preface, with its subtitle "The Political Economics of Deception",
starts with these paragraphs that lay out in startling clarity the
central concern of the book:
"The most worrisome thing about the vulnerability of the U.S economy
circa 2008 is the extent of official understatement and misstatement --
the preference for minimizing how many problems there are and how
interconnected they are... Whether the U.S. government and the
Republican and Democratic parties can remedy the debt and oil-related
transformations of the last two or three decades is dubious enough. Far
more worrisome is the possibility that neither Washington nor Wall
Street is willing to confront the deeper problem -- the ascendancy of
finance in national policymaking (as well as in the gross domestic
product), and the complicity of politicians who really don't want to
talk about it."
One important point Phillips makes is one people can instinctively
relate to: the debasement of government statistics. People know from
their daily lives that the economy is not good, that prices of almost
everything are on the rise, that jobs are harder to come by, and that
overall, things just aren't as good as they once were. But at the same
time, the government keeps insisting that unemployment and inflation
are low and that the economy is growing, citing figures that people
can't reconcile with what they're experiencing every day. The reason is
because the numbers have been cooked to support the government's claims
and no longer represent any meaningful measure of the things they are
supposed to relate to. And the numbers they can't cook, they suppress.
"Beginning in March 2006, the new Fed chairman, Ben Bernanke, ordered
that the government cease publishing data on changes in the broadest
measurement of the U.S. money supply, the so-called M3. It was
expanding at a 10-12 percent annual rate in 2006; outsiders calculated
that as of August 2007, that growth had accelerated to a high-powered
14 percent.... Continued publication of M3 reports would have undercut
the assertion of Bernanke... that the inflationary expectations of the
public had been safely 'anchored' at a low level by the tame core
CPI... For 2007, the U.S. M3 numbers show runaway inflation in the
annual range of 14 percent."
Another point Phillips makes in the book is that our growing financial
problems are compounded by our energy and political problems:
"the prior eminence of the United states in global petroleum matters
has left not only an outdated infrasturcture but a spectrum of
disabilities, unwarranted smugness, vested interests, and booby traps.
These range from currency vulnerabilities and lack of a serious
national energy strategy to apparent policy inertia in Washgton, where
many officeholders seem unable to understand how much has changed for
the United States over the last decade."
Other warnings include the rise of oil consumption by countries like
China and India and the extent to which oil-producing countries are
already re-directing their output towards those markets.
"In the wake of the unpopular U.S. invasion of Iraq, the Saudis showed
their displeasure... continuing to reduce oil sales to the United
States... after peaking at the equivalent of 1.7 million barrels per
day in 2002, Saudi sales to the United States fell to 1.1 million
barrels per day in May 2004... China soon jumped ahead of the United
States in oil exports from the Saudi kingdom... the demand for oil in
China alone will, before long, equal the entire production of Saudi
Arabia... China stands to be the world's largest oil market of the
2030's, possibly replacing the United States in that capacity by 2025."
Phillips also touches on why the political leadership seems both unable
and unwilling to deal with the array of problems the country is facing
and shows how this same deadly political inertia has afflicted other
great powers in history, citing examples from the Spanish, Dutch and
British economic empires that preceded our American economic empire.
The comparisons are fascinating and disturbing at the same time.
Again, in looking at what I have written, I know that I have barely
scratched the surface of all there is in this book that merits being
read. All I can do is urge anyone who wants to understand why the
economy seems to be in such bad shape, why the government figures seem
to be so contradictory with what is happening, and why our political
leaders seem neither willing nor able to deal with the problems, this
is the best book you can possibly read and the time to read it is
_now_, before the election, so you can see through the utterly
meaningless drivel that politicians are putting out instead of talking about the very real problems we're facing, about what our options - however painful - are, and about what the consequences to us as as nation are if we continue to do nothing.
71 of 78 people found the following review helpful
on May 15, 2008
The brilliantly unclothed emperor has long been a popular tale: it's lesson is, of course, that delusions (while affording some key players progress) do not always compensate for reality (ultimately leading to the believers downfall on the realization of nakedness).
That tale may have to be altered if one reads this work. It profiles the triumph of financial services over manufacturing, the 2007 mortgage melt down (before the 2008 fiasco), the `Consumer Price Index' (subverted to assure retirees receive minor adjustments by absenting traditional components), the lack of monetary circulation reporting, peak oil production, and several other aspects of the current economy.
Though shorter (and less worthy) than the author's recent books (American Theocracy, American Dynasty, Wealth and Democracy), this work worth reading. If the reader believes inflation is about 3% (as the BLS CPI publishes) and does not want to brave facts and statistics that may prove otherwise, they should not read this book.
27 of 29 people found the following review helpful
on April 29, 2008
Phillip's book is similar to several other books currently available that show how the deregulation,especially of the banking and financial services sector, and privatization polices,started by Carter in 1978 and continued by all American Presidents since then ,has converted the United States of America into a speculator type economy where financial sector firms seek to extract a profit by the manipulation of balance and income statements .The goal is to make a return without any actual production of goods or services.
There are two minor shortcomings in the book.First,Keynes's chapter 12 in the General Theory(1936)explained exactly how the USA had been converted into a speculator economy during the 1920's.There is no mention of Keynes's contribution anywhere in the book.Second,Adam Smith was perhaps THE major proponent in history of a heavily regulated banking and financial services sector.Smith warned against allowing banks to make any loans available to projectors(Keynes's speculators and rentiers),prodigals ,and imprudent risk takers.Smith warned of the very serious consequences that would probably result if such loans were made-the aggregate savings of the nation would be"... wasted and destroyed..."[Smith,1776,Wealth of Nations,pp.339-340,Modern Library (Cannan) edition].Smith,contrary to Phillips, was not a believer in laissez fairy land.Smith was, in fact, the last of the Scholastic philosophers.He improved Scholastic thought and brought it up to date through the 18th century .The warnings of Smith and Keynes concerning the dangers of allowing speculators to run economic policy have been ignored.I have deducted 1/2 of a star from my rating because Phillips has ignored these warnings also. Nevertheless,I recommend this book .
21 of 22 people found the following review helpful
on May 24, 2008
This is a scholarly, intellectually courageous and very timely expose of the rise and fall of America's twenty-five year experiment with unfettered laizze faire capitalism, and it's destruction of the U.S. economy, the U.S. dollar, and the U.S. standard of living.
He shows how Greenspan, the Bushs, and the Clintons, essentially turned America into a nation of debters.
For example, Phillips shows how Greenspan and company quietly and unilaterally lowered social security benefits by replacing the original Consumers Price Index or CPI which measures inflation with a completely bogus index that understates the tue inflation rate by half or more. This not only reduced the COLAs to which retirees are entitled to by law, but also reduced the pay checks of tens of millions of working people, while making it appear that the Fed was sucessfully controlling inflation while inflation was in fact completely out of control. Wait till the social security and AARP learn how they have been cheated out of their full and rightful benefits.
Phillips discusses in depth and in detail the creation of the housing bubble in which the Fed and banks actually orchestrated the defrauding of millions of Americans who now own houses that are worth less each month than they owe on them. He presents a range of possibible outcomes, non of them good, and all of them already overtaken by actual events, i.e. the continued collapse of house prices with no end in sight. (See [...] for daily updates of the housing bust.)
He documents how the Fed under Greenspan repeatedly rescued the rich and powerful, using the tax money of the middle-class, which enabled the rich to become even more rich while impoverishing the middle class.
Phillips discusses the trillion dollar student loan industry, unique to the U.S. No other country requires its students to mortgage their futures to get advanced education and in fact neither did we until very recently. I would have appreciated a more in depth and detailed discussion of the student loan racket, such as provided by Marty Nemko, the author of COOL CAREERS FOR DUMMIES who says the problem with the student loan program is that the colleges and their lobbyists manipulate legislators into increasing govt-funded financial aid, which merely allows the colleges to raise their prices more i.e.the taxpayers are lining the colleges' pockets while providing the student borrowers with a TERRIBLE education.
Nevertheless, this is a must read book.
16 of 16 people found the following review helpful
on September 6, 2008
Kevin Phillips, you have done it again. I don't know why you morphed from a Republican strategist into a harsh critic of right-wing, robber barons' assault on the welfare state and its dream of economic justice. But you hit the nail on the head time-and-time-again: entrenched interest groups, the collapse of real political debate, the transition from productive to financial capital, the politics of oil, the protection of Wall Street by the Fed. giving rise to meltdowns rather than tamable booms and preventable busts, the shift of wealth from those who labor or save to those who speculate, financial gambling in the form of derivatives and other synthetic securities which reward their inventors and defraud both latecomers and the public at large, the embrace of moral hazard which is a subsidy for those too big to fail and happen to be friends and peers of the government officials who are supposed to regulate them. I know someone who hustled subprime mortgages for speculators by knowing how to work the computer programs lenders use to assess mortgage risk; his clients had absolutely no equity. There was so much money to hustle, lenders were not interested in due diligence. They chopped the loans into little pieces, packaged them to disguise risk and sold them as equities. I am not sure the broker is not in jail. He was small potatoes. How about the Mertons, Greenspans, Bernankes and legions of Ph.D.s from MIT who claimed they were diversifying risk only to discover when things went wrong they were gambling on air and there was no liquidity? A fixed roulette wheel does not help when too many people learn how it is loaded. See Bookstaber's excellent A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. As Phillips points out, a good deal of finance in the US is a giant subsidized Ponzi scheme. Only in a world of greed and class oppression would labor be taxed more than return on capital.
It is a pretty shabby picture but unfortunately 90% of the voting public has little ability or interest in understanding it. No wonder, as Phillips points out, Obama's backers will swallow his hedge fund contributors without noticing what their presence in his camp means. Although Joe Biden may bring a white bread image to the Democratic ticket, he also brings the bipartisanship which makes it impossible to honestly name, if not solve, both foreign policy problems and the increasingly skewed distribution of wealth in the US. If I were to talk to my middle/upper-middle class friends about how much we all benefit from the set up as it is, they would either not listen or regard me as attacking them.
Kevin, you have the courage to tell it like it is. But is anyone listening?
Besides the fact that the book is a bit repetitive and, having listened to it as a book on tape, the narrator is overly dramatic making each nugget of corruption sound like an apocalypse, I find some of the overarching historical comparisons a bit of a stretch. The declines of Rome, Spain, the Dutch Confederation, and finally Britain are interesting background, and some aspects are reminiscent of what is happening to
America now, but each had its own very individual causes. Metropolitan Spain, the master of a great empire, was always a debtor. That is how it fought its wars. New World silver and gold just made it possible to fight nastier wars of the counter reformation. Indebtedness was not some declining empire phenomena. Italian and German bankers were paying for the conquest of Granada years before Columbus sailed. Similarly depopulation and decline don't really fit either England or Spain. Spain had plenty of poor from denuded Andalusia to get rid of and opportunity lay abroad. Besides wool for the Low Lands, wine and olives, Spain had little industry and needed less when the geld started pouring in. And, at the height of the industrial revolution, England was exporting it street ruffians and poor to Australia. There was no place for them at home even though industry needed surplus labor to keep wages down. It had all the displaced, barefoot Irish it needed. England only really bankrupted itself in WWII. Where its decline began is hard to say. It may have been initiated way before coupon clipping and remittance men of Edwardian England became subjects of literature. How about sometime between the Crimean and Boer wars? An interesting take on Britain is in Correlli Barnett's reactionary book Collapse of British Power (History/20th Century History). He sees the decline as a function of free trade, public schools' crippling of ruling-class moral fiber, post WWI pacifism, and the greater cost of defending the empire and Commonwealth in comparison to its military return especially during WWII. As for the Dutch Republics, I guess I need to find a good economic history of them. From I had thought their small population and increasing cost of shipping made them hopelessly outflanked by their larger English neighbors. The Dutch had prospered by early textile manufacture, shipping cheaper (paying their sailors less in the Baltic trade) and stealing weaker Portugal's overseas entrepots. ( See Charles Boxer, The Dutch Seaborne Empire 1600-1800 and John Keay The Spice Route: A History (California Studies in Food and Culture).) In the end the Dutch Republics were outcompeted and outfought by England.
Despite the shortcoming in Phillips' comparative history, his clarion call of decline is well taken. I like to think of Fulbright's "arrogance of power." We are headed for a fall, but maybe not the apocalypse Phillips trumpets. Our increased productivity from the US lead in computers has a lot to do with the wealth generated since the late 1980's. That is production, not finance. It just was, and still is, being lopsidedly distributed leading to private splendor (fed much by finance) and public squalor. The consequences of Lyndon Johnson's guns and butter and the 70's oil boycott stopped middle/lower-middle class growth and Reagan reached into their pockets and gave their subsidence to the upper/middle and upper classes along with a giant share of the new productivity. More people should read Phillips' books. But then it is not in many peoples', who know better and vote, interest to advocate for his implied solutions. It might preclude million dollar houses, jet-setting and three Volvos in the drive way . And as for the lower classes who might really profit from his criticism, they are too busy paying their subprime mortgages, watching television, playing video games or shopping at Wal-Mart. So we have a world of unnecessary conflicts and economic injustice. Remember Tolstoy's description of the Russian nobility ignoring Napoleon's advance on Moscow. Rather than Götterdämmerung, we have the twilight of our empire which is OK because of all the harm to which our arrogance has led. Our successors, the Chinese, don't give any sign they will dominate the world any more fairly.
Charlie Fisher author of Dismantling Discontent: Buddha's Way Through Darwin's World
26 of 29 people found the following review helpful
on May 12, 2008
Kevin Phillips is a national treasure, and, surely by temperament and style, both on the page and in person, is the antidote to the Reagan/Bush era, an era many claim is now at its end. I say that because Mr. Phillips projects a formal, slightly grumpy aura, tempered by a wicked sense of low key humor, which I find refreshing after the Gipper and Crawford Ranch scene. We don't get too much of a biography of him, but I like to imagine him as an old New Englander, hard to fool, the type of teacher that we hope our students will still encounter in their studies. For agree with him or not, you have to take Mr. Phillips seriously. After all, Phillips, 67, a prolific author, has traveled through a good range of our political spectrum, from the right side in 1969 with The Emerging Republican Majority, to his American Theocracy in 2006, and now Bad Money, in 2008, which places him just to the left of center, although he might dispute that and claim that it's the center that has migrated so far to the right since 1980, not him. He is now a registered Independent voter.
The deep frame of Bad Money is the warning that utopian illusions can emerge (and have) in America from the right side of the political spectrum as well as the left, which is where most of our 20th century political dialogue had preferred to locate the threats. Phillips has previously described his 1960's views of the excesses of the left of that era. Now he is horrified at some of his own progeny on the Right and what they have wrought, especially in the realm of the American economy. He lays it out directly in the Preface entitled The Political Economics of Deception: "The most worrisome thing about the vulnerability of the US economy circa 2008 is the extent of official understatement and misstatement - the preference for minimizing how many problems there are and how interconnected they are."
Like all exercises in self-examination, this is a difficult undertaking about a nation which emerged towards the end of its "American Century" as the world's only superpower, and one which has seen itself as a "City Upon a Hill" and has to carry the additional burden of "American Exceptionalism,' which tends to get in the way a bit of a searching national dialogue - especially in a presidential election year, and even one in which large majorities poll that we have gotten seriously "off track." Phillips details just how far we have gotten off track, picking up and expanding upon the final section of American Theocracy, called "Borrowed Prosperity." It seems he wasn't going to write another book for the 2008 election - but the deepening financial crisis of 2007 and a head-in-the-sand attitude by officialdom led him to do it. And I'm glad he did.
He is a patriot in the best sense of the term...not pugnaciously posing as the Patton of market fundamentalism/nationalism, like Larry Kudlow on CNBC, but rather as the prophetic author of Staying on Top: The Business Case for a National Industrial Strategy (1984). That title tells you a lot about what has gone wrong as the FIRE sector (Finance, Insurance, Real Estate) has displaced manufacturing as the leading node of our economy. If it was on a sound footing, we might not be singing the blues, and worse, today. But it's not. Instead, what has emerged is called the "shadow banking system," or the "financial Wild West," or a "liquidity factory," much of it "over the counter" and off the bank's books, unregulated or casually regulated at best. The mortgage crisis, then, was no mere random walk of fate: "Lenders needed to woo high risk borrowers for the good commercial reason that there weren't enough low-risk borrowers to meet the volume demanded by the big commercial banks, investment firms, and other packagers, all pursuing the lucrative fees." So much for the old term "conservative as a banker," now surely one of the great oxymorons of the English language.
While much of the conservative establishment, and a good portion of the Democratic Party as well have wanted us all to obsess over the national debt and federal deficit - public debt - Phillips points out that it is really the frightening growth of private debt - personal and institutional - that is the real problem, having grown from $11 trillion to $48 trillion between 1987-2007. Phillips comments that "`Risky' doesn't begin to describe this new focus in the American economy. Bingeing on debt is reckless, and financialization has a long record of being an unhealthy late stage in the trajectory of previous leading world economic powers." The disturbing thought that "American Exceptionalism" might be subject to the same deep historical forces at work for Spain, the Dutch and the British Empire is necessary but tricky ground to navigate - try calling that notion in to Rush Limbaugh on some slow afternoon at the Credit Default Swap trading desk.
Phillips believes that both parties have testified for this sector as the very essence of the market at work, treating it, in reality, as the key American "mercantilist" sector in the globalization race - one to be bailed out officially or otherwise, whenever it gets into trouble, which is often and expensive, although the market fundamentalists cannot bear to hear it described this way. Here's the vintage Phillips' prose to give you the picture, heading into 2008: "These are not circumstances in which a nation should put faith in an overgrown and overextended financial sector, with its bankrupt mortgage lenders, hotshot hedge funds, and reckless megabanks, several of which (fined years back for colluding with a scheming Enron) wouldn't know a civic obligation from a parking ticket."
The burdens of civic obligation, however, don't fall just on the financial instrument "factories," which are variously described as reckless, malfeasant, dishonest, incompetent and negligent, to give the range of Phillips' wrath. Civic burdens also fall on the citizens' shoulders, a refreshing notion in an election year where families are invariably described as "hard working." He pointedly contrasts the level of economic literacy during the 1890's agrarian Populist Revolt of the south and west, when "periodicals like the National Economist had a hundred thousand subscribers...Compared to early-twenty-first-century torpor and lack of financial debate, the nineteenth-century agrarian civic engagement had an almost Fourth of July quality." Despite all the alarming ingredients being tossed into what would become a witches-brew of financial trouble between 1987-2008, he says these regions of former Populist discontent have been "anesthetized...The principle ethers at work were evangelical, fundamentalist and Pentecostal Christianity, infused with preoccupation with terrorism, evil and Islam that greatly strengthened after September 11." Also noted is the rise of the "Prosperity Gospel" (the religious cousin of the more secular "miracle of the market") among many of the most prolific new churches and its kinship to the religious/prosperity fervor of the Roaring Twenties - and we all know what followed after that.
American consumers scratching their heads in the spring of 2008 over the glaring contrast between the rising prices they face in everyday life and the more soothing reports of the official Consumer Price Index would do well to chew a bit more on that savory title from the Preface - The Political Economics of Deception. The reader is rewarded with a tour of the origins of fiddling with the CPI constituent parts and definitions - and of the possible motives, focused on keeping Social Security and labor COLA clauses down. We learn about one critic - and the critics are growing in number - John Williams, whose work at ShadowStats.com leads to the conclusion that if 1990 CPI methodology were used today, "the government would have been reporting 5 to 7 percent inflation between 2005 and 2007...instead of...2 to 4 percent." It would be enough to have brought the economy close to recession - that's the magnitude hinted at with the difference in these numbers. We also learn that in March 2006, the Federal Reserve dropped "M3," perhaps our best indicator of the overall money supply, and one that would better measure what was going on in those secretive liquidity factories, with the notation from our author that "for 2007, M3 numbers show runaway inflation in the annual range of 14%." No wonder so many of Milton Friedman's remaining disciples are fuming.
And that brings us to Phillips' treatment of the "Plunge Protection Team's" alleged intervention into the futures' indexes to stabilize the stock market at times of extreme turmoil. (A cautionary note here: any consideration of the resemblance between this line of inquiry and the plot line of "The Wizard of Oz", where Dorothy learns that behind the curtain is... hereby formally deferred to a later time...). It was founded in 1988 by Reagan's presidential proclamation as the President's Working Group on Financial Markets. He's doubtful we'll ever get official recognition if indeed these actions happened, due to the lawsuits such a confession might trigger. And, after all, a tactic like this can be financial death to those shorting the market - and also acknowledgment that things are worse than they seem and the "free market" far more dependent on government intervention than market utopians would ever be comfortable with. Phillips disclaims that "I have no personal firsthand knowledge and am not interested in becoming a conspiracy investigator." But he does look closely at the possibility that the team more broadly represents a commitment to a sector too important to fail, worthy of the grandest stretches in existing policy instruments - witness the ground covered by Fed. Chairman Bernanke in the rescue efforts of March 2008. He notes, glumly, that our manufacturing sector received no such considerations of magnitude or imagination during the decades of its long deathwatch.
This review will close with a call to pay close attention to a worry Phillips broaches in Chapter 5, "Peak Oil." This call comes in May, 2008 with oil prices hovering near $125 a barrel, prices which are mesmerizing a nation still stuck on overseas sources. Please consider Phillips' long track record of accurately anticipating our troubles, and listen carefully to the background drumbeat of many not too subtle administration voices pointing to the evil Iran has in store for us and others in the Middle East. It's a time to ponder Phillips' warning: "Political imperatives being what they are, the temptation of conservative civilian leaders in the United States to pursue oil-related military action against targets like Iran is easy to understand...The tinder is almost perfect for a war or military strike rooted in the frustration of a great power in decline."
There is no surer way to usher in the specter of 1929-1933 than to head down this oil strewn path, with all due respect to the powers, real or imagined, of the Plunge Protection Team. By clearly naming the threat, let us all hope we can head it off.
William R. Neil
May 12, 2008
13 of 14 people found the following review helpful
on August 13, 2008
I read this book after hearing the author, Kevin Phillips, give a radio presentation to the Cambridge Forum. Phillips was familiar to me as a spokesman for conservative perspectives over a span of decades, a perspective that I never shared. Thus, I was a bit skeptical when I first heard his presentation on this topic. However, I was quickly impressed by his careful, scholarly analysis, and have come to agree that he is exactly right. Phillips' central point is that the United States has abrogated its leadership position in the world by virtue of having stopped being a nation that produces goods and services of real value and becoming a nation who's primary business is the manipulation of financial markets and debt. He cites earlier examples of the Maritime Dutch republic of the 1700s, Great Britain around the time of WWI, and even Rome. The sobering point is that once a nation has gone this route, the course is irretrievable. He finds lots of blame for this situation, and it is not all deposited on any single political party...there is plenty to go around! He discusses our biggest product, Credit Debt, the root causes of the rise in oil prices, and the impact of right-wing evangelicals on the administration's feeble approach to dealing with our major challenges. This is not a feel-good book, but it is an important contribution to helping Americans understand our current situation. HIGHLY RECOMMENDED