Bad Money (2008), by Kevin Phillips


(I wrote this piece before many of the best books on the Great Recession–such as those by Dorgan, Lewis, and McLean and Nocera–had been published; and before Oliver Stone’s sequel to his movie, Wall Street, had come out. Phillips was remarkably prescient and, I believe, largely ignored.)

The maverick political and economic writer, Kevin Phillips, has written Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. Phillips is sometimes called an “ex-Republican” (which, I’m guessing, he doesn’t like any better than a one-time Catholic likes to be called an “ex-Catholic”) but that characterization is misleading for this prophetic book.

Phillips opens with a disheartening truth: “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.”

In one long sentence, his take is: America since approximately the end of World War Two made sense economically and politically until the past twenty years, when we’ve rapidly become “financialized” (meaning the financial sector with its increasingly computer-based, paper-pushing profiteering, starring a comparatively small wealth-obsessed elite whose dramatis personae include hedge fund managers, investment bankers, lenders, traders and speculators, has superseded the manufacturing sector), resulting in explosive and monumentally risky debt in our Republic (the vast majority of it not public but private), risky conduct carried out by financial buccaneers on Wall Street through shadowy and largely unmonitored/unregulated Ponzi-like speculation embodied in opaque cons of free lunches worked on over-matched investment managers of pension funds, endowments, and other large pools of investment money (notably overrated exotic securitized bundles of subprime mortgages such as CDO’s, SIV’s, etc. together with frantic commodities speculation), all this chicanery unfettered in (to mix metaphors) a new Wild West of Finance which among several evils is turning the Main Street American Dream of Home Ownership into a nightmare, not to mention aiding and abetting the energy price spike and global food crises, and this dire process of blatant greed not only less and less regulated but aided and abetted by politicians encouraged by campaign contributions and careless because the calamities of that greed are ever-bailable-out in its inevitable avaricious excess-fed frenzied crises by the dissembling financial powers that be (and who rather desperately seized and preyed on things like equity in the American home market following the dot-com bust in 2000-02 [i.e., leading to the eventual “subprime mortgage crisis”]), VIZ., Republicans, Democrats, the Federal Reserve, various committees of economic and political Wise Men and Gray Eminences from Presidential Panels to prominent academic and marketplace economists and other thinkers who buy into the Efficient Market Hypothesis (EMH) and, during those times when the EMH loses some sway, statistically fudge the real Consumer Price Index, Inflation and the other vital economic signs, using truly voodoo economics like something called “hedonics” which is (I’m not kidding) a sort of intuitive pseudoscience used by people wearing ties and power suits “to measure increased pleasure in purchases as a factor of the Consumer Price Index,” all this mendacity summing to a punishing decline.

They don’t like this version over at the American Enterprise Institute and, I’m sure, Ben Bernanke doesn’t like Phillips calling him “Helicopter Ben” (after the anecdote that Ben once said aloud in a conference room that if needed in a bailout, money could be dropped on Wall Street from helicopters).

It’s a grim book, but it has a few other rueful laughs in it here and there. For example, there’s the new economic measurement to compensate for the tendencies of today’s economic powers that be when they make public representations of the State of Things. It was formulated by a renegade economist and is called TOAD: Total Of All Distortions. That’s distortions in the GDP. Here, “GDP” refers to Gross Distorted Procedures.

Of course, Phillips has no doubt settled into a literary niche as a “maverick.” To editorial staffs at publishers, that mainly means learning how to be a certain bookish kind of hedge manager. Specifically, it’s the art of hedging alarmism. The sky is falling. (I’m not sure it’ll happen right away, though.)

Yet, it seems, currently in the media there is hardly ever anyone–economists, news readers, political candidates, pundits, et al.–talking in even a misleadingly comprehensive way about Phillips’s “financialization of America” and the associated issues such as whether there is or is not Peak Oil, whether Haitians are literally eating dirt because of commodities-futures buying frenzies, etc. Phillips cites a case in which Hank Paulson, making the national media rounds recently to offer Public Reassurance, mumbled on each venue that the subprime mess is the result merely of some questionable lending practices. You know, those damned eager-beaver mortgage “originators” and lenders. We just need to make a few phone calls. (Wow. Calling Mencken. Or better, where’s Twain when we need him?) Well, you presume that the network, cable and newspaper people who meet all day, starting early in the AM, to decide what are to be the “stories” for the day, must think that most Americans don’t know, care about or are able to have explained to them, what is “financialization” and its dynamic and key devices: high-risk leveraged debt, “securitization,” hidden liability and so on. I guess some of their sponsors, and parts of the media conglomerates to which they belong, want them to see their audience that way too. And too, I don’t want to presume here that the Media Think People are smart enough or interested enough really to understand the dynamics of financial crises.

Maybe, though, there’s yet hope. What about this? Hollywood could redeem itself for movies such as Zombie Strippers and One Missed Call. Hollywood can reach people. Sometimes movies can explain complex things dramatically. (Poor Phillips doesn’t have much drama in Bad Money.)

How about an update of Oliver Stone’s Wall Street? I mean, that was almost 20 years ago. We need some more help now! And Lamont Cranston’s dead!

So: Gordon Gekko is now a hedge fund manager. He’s out of prison and has written a bestseller called, Greed Is Better Than Good! That awful nerd evil genius who spotted ailing manufacturing companies for raider Gekko way, way back there in the late 80’s is now a programmer who graduated magna cum laude from MIT and got an MBA from Sloan; he has terrific quantitative models for futures buying which predict food shortages in the Third World. Bud Fox (the Charlie Sheen character) could be any number of young sinners of today: a hack journalist who falsely exaggerates energy risks (e.g., Zapata’s grandson is [Oh God!] plotting to bomb Pemex facilities Sometime Real Soon); or a seller of SIV’s and CDO’s to gullible provincial bank officials in Germany; or a one-time used car salesman who devises an invincibly opaque risky-mortgage packaging scheme; or a lawyer specializing in parachutes for hedge fund managers when they jump from the plane before the autopilot malfunctions.

The Blue Star Airline employees are now a group of young couples making below $45,000 a year. Many of them live in Minneapolis in a grungy apartment building. The apartment manager is a fatherly old guy named Carl Fox. He’s Bud’s estranged father, just as in the original film. The young couples are all trying to save for a home. Carl has agreed to put all their money in his bank account. He’s really honest and that way the young couples won’t give in and waste their money on iPods. B-u-u-u-t. Gekko’s brother-in-law, Rip, a local mortgage lender in Minneapolis, heartily sells the young people ARMs. Carl warns them, but it’s no use. Rip doesn’t go out of his way to tell the young couples the scary facts about the ARMs until they come to the office to sign the papers. Then, Take it or leave it! Sign here or back to those apartments. A few days later, Gekko and Bud take the lender to dinner in Manhattan. Bud is now dating a blonde mannequin. He sets up the Minneapolis mortgage guy with the mannequin who usually stands next to Bud’s mannequin.

They all go to the Hamptons and crash a Jay Gatsby party. Helicopter Ben flies in his helicopter, landing on the 10-acre back lawn. Gekko introduces Bud to the economist who invented hedonics. The hedonics guy gets drunk and falls into the piranha tank of the owner of the manse, Mark Leverage. Guests look on and laugh as he is ripped to pieces.

Then comes comeuppance. Carl Fox drives his Dodge Ram into the Leverage mansion, scattering guests and smashing glitz.

Bud now has a saving conversion: he sees the evil men do, himself included. He throws both Gekko and Leverage into the piranha tank. As the police lead him away, Bud says he’s willing to pay the price for his vigilante justice.

Well, it needs work.

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