on October 4, 2009
Except for the title, which should be "Mismanaged by the Markets," University of Michigan business professor Gerald Davis's book is as compact and clear a description of how we screwed up a fine economy as you will find.
It is presented in the form of a quick history of the changes in American business over the past century or so, and while I think it leaves out some important stuff, it does hit the high points.
One thing it leaves out is that until the 1920s, about two-fifths of American households were primary producers (farmers, mostly) or almost totally and directly dependent on primary producers (country stores, millers). These people represented a good deal less than two-fifths of wealth, but they were not greatly dependent on big city banks. They were dependent on wider markets and suffered when prices crashed in 1922, but if there had been a run on National City Bank, they would hardly have noticed.
Bankers were important, but their role was circumscribed. There could not have been a national housing bubble in the '20s, because mortgage lending was local, as was much banking. There was no FDIC, although some states, like Nebraska, had state bank deposit insurance (which, in the case of Nebraska, went bust in '28, without setting off any wider tremors). As Davis recognizes, banking was about to become even more circumscribed in the middle years of the century.
The dominant firms of the American economy, the giant manufacturers, were so profitable that they didn't need Wall Street or banks for any fundamental task: They found the capital they needed for expansion and renewal in their retained earnings. (Davis, keeping his eye on the target, does not mention that one of the biggest, Ford, twice nearly went broke and both times bulled its way through without giving up control to bankers or bondholders. Even if Ford was hardly typical of American management style, the fact that it could ignore bankers in a crisis confirms Davis's conception.)
As manufacturing waned as a proportion of the overall economy, finance took over. I think Davis puts this too late. The turning point can be exactly dated, to 1953, when General Motors went to the bond market for the first time and when its replaced its chief, who until then was always a production man, with an accountant.
This still might not have affected Joe Sixpack, but the worshippers of market dynamics wanted to persuade people who were too small to operate in financial markets to directly tie all their assets to market trading. Davis calls this the portfolio society. Its high (or low, depending on your point of view) point came when George Bush tried to bully Americans into transferring all their mobile wealth into the hands of Wall Street traders.
Even though Bush failed in his attempt to force Main Street to go to Wall Street, the American householder, seduced by the innovation of convenient home equity loans (you could, literally, treat them as checking accounts), transferred even his immobile wealth into the hands of Wall Street traders. If Main Street wouldn't go to Wall Street, Wall Street figured out how to come to Main Street. In the '20s, shoeshine boys played the stock market and, notoriously, Joseph Kennedy liquidated his securities when his taxi driver started giving him stock tips; but back on the farm, nobody was buying Radio on margin and hoping to see it break $1,000. By 2007, everybody was a playah.
The theory of market orientation as the sole and only good form of economic organization assumes participants (and especially those with asymmetrical power) are at least conventionally honest in the sense that you could invite them into tea and not have to count the spoons afterward. That was the unspoken foundation behind the Bush proposal.
In fact, of course, that assumption is unjustifiable. Davis has plenty of examples dating back to the Roaring Twenties and he makes use of many of them. Despite the fact that anybody who opened his eyes could see that the financial markets never had operated as the efficient market theorists had theorized, there was a well-greased publicity organization set up to persuade people not to believe their own eyes.
Davis calls this a faith-based economic system.
He is one of many observers to have noticed that the switchover from a production economy to a finance economy coincided with a generation of workers who, for the first time in American history, could not expect their children to enjoy better material terms of existence than they had; and, for the majority of workers, not even the ability to maintain their own position.
It was said that shipping productive jobs overseas would free American workers to do new, yet undreamed of tasks that would pay better. The theorists of this view failed to care that there were millions of Americans who were in no position to take these new jobs, even if they were offered (which, for the most part, they were not).
The only really basic economic statement ever made was spoken by a social worker, Harry Hopkins, who said, "People don't eat in the long run. They eat every day."
The prophets of finance never concerned themselves about that. In the new economy "workers were all temps."
It might have worked even so, if the financial manipulators had been honest and if they had understood the risks they were creating. With trivial exceptions, they were neither. "Wall Street came to Main Street like a tornado in a trailer park." Square dealing -- to the extent it was ever common -- was replaced by "cynical pragmatism."
Now all the fine theories have been exposed -- again -- as mistaken, but the fine theorists are not budging.
Despite the fact that the era of mixed capitalism inspired by the New Deal was the richest and most stable in history, the finance- and market-oriented theorists and practitioners worked hard and successfully to dismantle it.
"Managed by the Markets" is not some mere Progressive or left-liberal polemic against Wall Street manipulators. Because it is based in an accurate historical review of the stepwise process by which financial considerations replaced virtually every other concept of economic or social good, Davis' book delivers a believable verdict on a sort of mass delusion, akin psychologically and spiritually to the Children's Crusade of the Middle Ages or the witch mania of the 17th century.