April 16, 2008
Kevin Phillips' new book, "Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism," would be sobering enough if it were the first we'd ever heard from him. When you take into account how often he's been right in the past, this 14th volume in his continuing commentary on the American condition becomes positively alarming.
As a senior strategist for Richard Nixon in 1968, Phillips correctly forecast the coming conservative realignment that ultimately would propel Ronald Reagan into the White House. As a principal architect of the Republicans' "Southern strategy," he correctly foresaw a shift of influence to the "Sunbelt" and to the "new right" -- two phrases he coined. He also envisioned what we call the red state-blue state divide and accurately predicted its geography. Twenty-five years ago, the Wall Street Journal heralded Phillips as "the leading conservative electoral analyst," but since then, he's become disenchanted with the GOP's embrace of evangelical pieties and what he calls dynastic politics and "market triumphalism." Still, he hasn't crossed the aisle and, in "Bad Money," he has a great deal to say about the Democrats' -- particularly the Clinton Democrats' -- complicity in the developing global economic crisis.
In part, this latest book is meant as a rhetorical shot across the bow of the current presidential campaign, which Phillips convincingly argues is failing to address the causes and implications of our current distress. There's plenty of that to go around: The economic expansion that has occurred during the Bush administration was the first in U.S. history to exclude the middle class. Previous booms had left the poor behind, but this one was the first to benefit only the rich. Median family income is still less than it was in 1999, which makes this the longest slump ever measured in that key indicator of middle class well-being. The Clinton boom was no great shakes for the great middle either: Since 1983, according to a recent survey by the nonpartisan Pew Research Center, "the median net worth of upper-income families more than doubled, while the median net worth of middle-income families grew by just 29%."
In this context, "Bad Money" reads as kind of an electoral cri de coeur: It's the economy, stupid.
Yet, for a variety of reasons, including the Clintons' close and quite obviously mutually beneficial relationship with Wall Street, Phillips doesn't hold out much hope that either party is willing to address the roots of the crisis. The GOP's faith in markets is absolute, and the religious right's blind embrace of capitalism has eliminated populist dissent from the party's internal debate. The Democrats, meanwhile, are irreparably compromised by contributions from the Wall Street bankers and hedge fund managers, who are at the center of the current global meltdown.
Phillips locates that malaise in two structural factors: Over the last three decades, financial services have expanded from 11% of America's gross domestic product to a record 21%, while manufacturing has declined from 25% to 13%. The author rejects the notion that this shift simply reflects a healthy adaptation to a "post-industrial" economy. Instead, he argues that the emergence of hedge funds and ever-more exotic bundles of financial derivatives amounts to a "financialization" of the American economy that has facilitated a ruinous expansion of private, as well as public, debt. Failed energy policies -- or rather, the avoidance of any policy -- have made the United States vulnerable to what may be the coming peak in oil production, thereby further weakening the dollar, which is essentially backed by the global petroleum economy.
"My summation," Phillips writes, "is that American financial capitalism, at a pivotal period in the nation's history, cavalierly ventured a multiple gamble: first, financializing a hitherto more diversified U.S. economy; second, using massive quantities of debt and leverage to do so; third, following up a stock market bubble with an even larger housing and mortgage credit bubble; fourth, roughly quadrupling U.S. credit-market debt between 1987 and 2007, a scale of excess that historically unwinds; and fifth, consummating these events with a mixed fireworks of dishonesty, incompetence and quantitative negligence."
Phillips' strongest point as a political commentator always has been that he really understands the political and economic histories of the United States and Western Europe, which adds force to his musing on whether America now finds itself on the cusp of the sort of financially induced decline through which Bourbon Spain, the Dutch Republic and imperial Britain once passed.
The fact that much of "Bad Money" feels ripped from this morning's headlines adds to the book's sense of urgent relevance. It also gives stretches of Phillips' argument a rather rushed, uncharacteristically first-draft quality. Derivative finance and the dynamics of hedge fund operation are complex matters in any case, and a bit more of the author's time might have produced more of the lucid economic explanation for which he's rightly known. One also misses more of the real world, "insider" financial and political anecdotes more liberally sprinkled throughout many of his earlier books.
Still, "Bad Money" isn't entirely lacking in those. Who knew, for example, that former KGB agent Vladimir Putin earned the Russian equivalent of a doctorate from a prestigious St. Petersburg mining institute and that the dissertation he defended there dealt with the exploitation of natural resources as an engine of national development? As Phillips glancingly but provocatively suggests, knowing that tells us something instructive about Putin's transformation of Russia into a global oil titan, as well as about his aspirations for further development of a polar oil field with resources that may exceed Saudi Arabia's. (Phillips hasn't lost his talent for phrase making, and "kommissar kapitalism" seems a particularly apt description of Putin's Russia.)
Because he knows the territory in a deep and reflective way, Phillips has a keen eye for the relevant historical quotation. America's recent economic folly, for example, is neatly summarized in a remark that the British colonial secretary, Joseph Chamberlain, made in 1904 to a smug group of his country's financiers: "Granted that you are the clearinghouse of the world, [but] are you entirely beyond anxiety as to the permanence of your great position? . . . Banking is not the creator of our prosperity but is the creation of it. It is not the cause of our wealth, but it is the consequence of our wealth."