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Capital Offense: How Washington's Wise Men Turned America's Future Over to Wall Street 1st Edition
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Michael Hirsh and Jonathan Alter: One-on-OneJonathan 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.
From Publishers Weekly
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Top Customer Reviews
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 as seamless as reading a novel.Read more ›
Hirsh covers the past twenty years in well-researched detail that highlights the key players, the leading beliefs and the major stories that bring us around to today. Some of the characters are familiar, some are not, but they all weave together to create a story that is both interesting to read and startlingly eye-opening. I found myself at times outrage, others saddened and often frustrated, but that is how I can always tell that a story is good - it rings true, it is well documented and it is engaging. I took several weeks to pour through this book so that I could fact-check and cross-reference and I found this book to be, for the most part, incredibly accurate and free of the party-line pandering. Hirsh hands out blame without being accusatory to Republicans and Democrats alike. He paints no one person as the ultimate villain and he evenhandedly deals with some of the worst offenses (maybe sometimes TOO evenhandedly).
Overall I would tell anyone that they must read this book. It is imperative that we understand what happened and what is happening if we are to ever fix it, and Hirsh gives us the knowledge nececssary to make it happen.
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.
Hirsch creates a breezy surprisingly enjoyable reading experience for a neophyte like myself who wouldn't claim to understand every element of our complex economy but who has enough common sense to recognize if you leave money out without any supervision, someone will steal it. 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.Read more ›
The other conclusion I drew, in addition to the tragedy of "free maket, deregulatory" argument in vogue since the Reagan administration, is the tragedy that we've never really given liberal or progressive economic ideas a real try. This was especially true of the Clinton and Obama years and certainly accelerated by each Republican adminstration before and between them. The fact that people like Joe Stiglitz, Paul Krugman, and Robert Reich have never been taken seriously by the top policy makers, that they can't get a fair hearing to have their ideas implemented, is perhaps the greatest lost opportunity. Hirsch makes a compelling argument that in order for government finance policy to work, we have to pay attention to all parts of the intellectual spectrum and neither shun nor unconditionally embrace one side or the other.
This is a good fact-filled, connect-the-dots, and relevant overview of why and how, we as a nation, have been badly represented in finance and economy. The situation, unfortunately for us all, continues. A good companion to Matt Taibbi's book. Hirsch gives you the rational facts and Taibbi adds the visceral outrage. And outrage there should be that the Obama administration is complicit in maintaining much of the status quo. Perhaps more than outrage.
Most Recent Customer Reviews
I expected an economics book to drone on and for it to be over my head. Surprisingly, not only was this book relevant, but it was so well written that I really enjoyed it. Mr. Read morePublished 9 months ago by Orchid
Michael Hirsh readably chronicles how the banks, especially under the leadership of people like Citibank's Robert Rubin wrecked the economy and got away with our money. Read morePublished on July 11, 2013 by Herblady22
Wall Street and Washington are tied together. So goes Washington D.C. so goes Wall Street. This book ties together what seems the direct relationship between the the two. Read morePublished on April 12, 2013 by Stephanie Manley
While there have been many books written about the immediate events that brought about the recent economic crash that we are still striving to recover from, economic correspondent... Read morePublished on February 5, 2013 by Mitchell R. Alegre
This book plays on a theme that is similar to the book Winner Take All Politics. Both sides are yielding to the wealthy who use their money to control both sides so that the only... Read morePublished on June 21, 2012 by William S Jamison
Hirsh's book has only one flaw I can see: He seems to think that Messrs. Bernanke and Geithner are actually working in good faith to solve the "crisis. Read morePublished on April 29, 2012 by William C. Lloyd
Wendy Gramm, while head of the Commodity Futures Trading Commission (CFTC), allowed trading OTC derivatives without oversight. Read morePublished on January 20, 2012 by Loyd Eskildson
This book does a great job of highlighting how the county has arrived at the position we find ourselves in at this moment. Read morePublished on November 28, 2011 by Dr. Jones
Michael Hirsh tries to make the case that America's future was voluntarily turned over to Wall Street by the politicians in Washington. It is not convincing. Read morePublished on November 17, 2011 by Judah Levi