Authors: Charles Ferguson
And yet, anyone graduating from business school, law school, or anyplace else anytime in the last two decades certainly noticed that finance was the quickest, surest way to get rich. This
diverted a considerable number of the most intelligent, most ambitious, best-educated people from productive work into quasi-criminal activities that have damaged, not improved, our economic
welfare. And while the financial bubble was the largest and worst of these activities, it was far from the only one.
Something similar now holds for economics and other academic
disciplines relevant to politics and regulation (law, political science, and public policy). Which economists,
finance professors, and industrial economists have made the most money, obtained the most senior positions, become the most famous, testified in Congress most frequently? Larry Summers, Glenn
Hubbard, Laura Tyson, Frederic Mishkin, Martin Feldstein, Alan Greenspan, Hal Scott, Richard Schmalensee, Jerry Hausman . . .
Given this parade, put yourself in the shoes, once again, of someone young and honest, particularly someone who wants to do research on, say, the financial crisis. As we noted above, you would
face a sobering tableau. Who would supervise your PhD thesis, judge your grant applications, consider whether to give you permanent tenure at an American university, referee the articles you submit
to journals? Answer: people who make millions of dollars defending the financial sector. In contrast, who is going to pay
you
hundreds of thousands of dollars per year to sit on their board
of directors, testify to the US Congress on their behalf, advocate their interests in antitrust cases, appear for them before regulators? Nobody, is the answer.
As for politics, lobbying, and government policy—enough already said. At present, these are not professions that attract and reward the honest and selfless.
This is dangerous. A nation that allows predatory, value-destroying behaviour to become systematically more profitable than honest, productive work risks a great deal. All societies depend
heavily on idealism and trust, including the willingness of ordinary citizens to behave honestly and to make sacrifices. While many citizens do not yet realize how unfair their society has become,
that condition will not last indefinitely. Unfortunately it will probably last long enough that the current generation of predators will die wealthy and comfortable. But most of us would not enjoy
living in a society dominated by cynicism and dishonesty.
CHAPTER 10
W
E ALL HAVE OUR
own list of the reforms that are most needed. Here, very briefly, is mine. These are very easy things to
write down, and very hard things to accomplish in the current economic and political climate.
• Bring the financial sector under control. This, in turn, has many elements, most of which have been widely discussed. We need to reform, and tightly regulate,
compensation structures at the individual, corporate, and industry levels; break up the largest banks; greatly strengthen the power and political independence of regulation and white-collar
criminal law enforcement; tax financial transactions; tax financial sector income fairly; and close legal loopholes for activities such as “innovations” designed for tax avoidance
or for betting against one’s own securities. The natural result of proper re-regulation of the financial sector will be to reduce its size, concentration, and political power. This will
have many benefits, ranging from increasing the supply of talented people for more productive activities to reducing pressures for political corruption.
• Control the impact of money on politics. Easier said than done, especially in the US, but this is very important. Lobbying and political contributions should be
heavily taxed; government and regulator salaries should be raised sharply, in return for strict prohibitions on revolving-door behaviour; and some form of public campaign financing for
political campaigns should be made mandatory.
• Reform the tax system, both individual and corporate, so as to raise revenues, increase fairness, and mitigate against the formation of hereditary and financial
oligarchies. Extremely high estate taxes are one important element of this, as is the fair taxation of very high financial sector incomes.
• Greatly strengthen antitrust policy and the regulation of corporate governance. Antitrust policy and analysis have fallen victim to corruption in two ways: first, the
corruption of US government policy through campaign finance, lobbying, and revolving-door hiring; and second, the corruption of the economics discipline that supplies the economic analysis, and
the personnel, behind antitrust decisions. In the areas of industrial organization, regulation, corporate governance, and antitrust theory, the economics discipline doesn’t just need
reform; it needs a five-organ transplant and a yearlong stay at a reeducation camp. More generally, America needs to figure out how to keep large, mature industries from going the way of
General Motors, U.S. Steel, AT&T, Microsoft, or for that matter Citigroup and Merrill Lynch, either by deep reforms in corporate governance, by breaking up large and stagnant companies, or
by creating other mechanisms for new entry in mature industries.
• Improving educational opportunity and quality is fundamental. A country cannot compete economically, elect wise leaders, or call itself a fair society if it has a 25
percent school dropout rate,
or if only the wealthy can attend good schools. Here, there is a fairness issue that not even a bank CEO can openly deny. If there is one
thing that nearly everyone can agree on, it is that all children deserve a fair chance. If a child is born in a poor area, or to drug-addicted parents,
it isn’t the baby’s
fault
. And yet the ways we handle school funding, child nutrition, foster care, and child poverty remain shameful, especially in the US, and if anything threaten to become more so. Beyond
this, a well-educated population yields a far happier, more prosperous society. As it stands, we are wasting a startlingly high fraction of our people, in ways that are painful and very
expensive.
• Create a truly universally accessible, high-speed broadband Internet infrastructure,both wireline and wireless. Broadband deployment should be viewed in much the same
terms that a government deploys a national road system. If anything, broadband deployment is more important than transport, as a way to decrease foreign energy dependence, ensure security, and
reduce global warming.
What the future holds
THERE IS A
wide range of possible futures before us. One of them is simply more of the same, both economically and politically. In this case, we will be
ruled by an ever more powerful oligarchy—roughly the top 1 percent—and will continue to function quite well for a sizeable minority—roughly the top 10 percent—while becoming
increasingly harsh for the majority of the population. Elite education will continue to supply people for high technology, financial services, and for the senior management of global companies
whose markets and labour forces will be far from the US and UK. Most other people will just survive, and a very large, poor, angry underclass will form. One might call this a Brazilian
outcome—although actually Brazil has been moving towards greater equality and opportunity, not less.
This outcome reflects not only America’s current power arrangements but also, in part, the dark side of the Internet revolution. Although the Internet is
overwhelmingly, and in so many ways, a force for good, for openness, and for the elimination of artificial barriers to knowledge and communication, it is also a powerful tool of managerial control.
It is now possible to manage a gigantic global corporation from almost anywhere. As a result, the management of US-headquartered firms may find it surprisingly easy to adapt to a world in which
neither their employees nor their customers are primarily American.
In this case, American elites will remain extremely wealthy, and their political power could last a long time. But while such an outcome could last a couple of decades, there are several reasons
to doubt that it will ultimately be sustainable. First, the financial sector will probably continue to produce bubbles and crises, and eventually their economic and political consequences will
become impossible to ignore. Second, at some point the world will not allow the US to continue borrowing unsustainably. Twenty years from now, China and India will have global currencies. And
third, Americans are a rowdy lot, and they’re not likely to put up with such a society forever.
However, the processes described above will not be reversed easily. And the general record of nations in decline suggests that internal reform occurs only under two conditions. The first is a
very long period of growing frustration that finally boils over—as we saw in the Arab world. The second is a major crisis—as in the Great Depression. In 2008 many thought that the
financial crisis might be enough, and that Barack Obama might seize his historical moment. Not so, as it turned out. Will it take another, even worse crisis?
Alas, as of this writing (early 2012), it appears possible that the Eurozone debt crisis could eventually provide us with one. Many of the same analysts who warned in vain about the mortgage
bubble—Simon Johnson, Nouriel Roubini, and Charles Morris among them—are now warning that the unemployment and sovereign debt problems of Greece, Portugal, Ireland, Italy, and Spain are
unsustainable and will likely trigger another crisis.
Europe remains dangerously fragmented, both politically and economically, with the EU seemingly incapable of coherent action. Both the American and European economies
remain weak, with high unemployment and low growth despite continued deficit spending. And the tools used to contain the crisis of 2008—zero interest rates, buckets of money for the financial
system—are no longer as useful or available.
In this environment, instability may begin to enter politics and voter behaviour as well as the economy. The question now is what will happen if popular frustration and desperation continue to
grow, given that the current party system does not allow for fundamental internal reform. Will the political and economic system simply fester, or will a movement arise to force real progress? The
answers to these questions are presently unknowable. There are both hopeful and alarming signals.
On the one hand, the fact that Michele Bachmann, Rick Perry, Ron Paul, Herman Cain, Newt Gingrich, and Sarah Palin could become major political figures, much less be taken seriously as
candidates for president of the US, is worrisome. So is the fact that major portions of American society seem not yet to understand the importance of education to their own, and the world’s,
future prosperity. And for now, the influence of corporate money on both major American political parties seems completely intact. Those signs lead to pessimism.
On the other hand, the appearance of the Occupy movement suggests that people are beginning to awaken. Other hopeful signs include investor Warren Buffett’s public rebuke of his
billionaire colleagues, and Starbucks CEO Howard Schultz’s pledge to halt all political campaign contributions until the US government addresses the nation’s fiscal problems. But the
current problems developed over several decades, and they won’t be solved instantly.
In the meantime, we can do a number of things, both politically and personally. We can take to the streets; support Occupy and likeminded organizations; run for office ourselves; and support
candidates who do seem to care. At the personal level, we can save money; place
our savings in locally owned banks and credit unions; invest prudently and ethically; and,
above all, ensure the education of our children.
Since this book is being published in a US presidential election year, I will close by saying that while President Obama has failed his country in major ways, he is the least of the available
evils. So, yes, I will vote for him. But the very next day, I will be thinking about how to replace him and the entire system that produced him and his government.
How this can be accomplished is not yet clear. Earlier, I listed three available avenues: an insurgency within an existing political party; a true, strong third party; and a nonpartisan social
movement. Any would face tough obstacles, and perhaps some combination of all three will be required. We might get lucky and one day find that Americans have elected a president who turns out to be
deeply committed to fixing the current problems in the political and economic system and who is willing to take a lot of heat. Time will tell. I hope that somewhere there is a courageous young
leader in the making, someone who can persuade us all to rise up and throw the rascals out.
ACKNOWLEDGEMENTS
There are so many people to thank. Many of them I can’t name, for obvious reasons. And I’m sure I’m forgetting some—apologies in
advance. First, Charlie Morris, for so much research and work and thinking and help and conversation. Everyone at Crown/Random House, especially Tina Constable, Mauro DiPreta, and Amanda
Patten—you’ve been totally great, first and foremost for deciding to publish and support this book, which was a very gutsy thing to do. Thanks to everyone who talked to me, gave me
information, corrected my misimpressions, guided me, and debated me, from Larry Diamond to Josh Cohen to Ralph Gomory and many others. And for sure, thanks to everyone who helped me make the film
Inside Job
—especially but not solely Audrey Marrs, Chad Beck, Adam Bolt, Alex Heffes, Kalyanee Mam, Will Cox, Matt Damon, my former assistant Anna Moot Levin, my current assistant
Stacy Roy, Michael Barker, Tom Bernard, Diane Buck, Dylan Leiner, Christina Weiss Lurie, and John Sloss; everyone who appeared in the film; everyone who watched it; and the people at the Cannes,
Telluride, Toronto, and New York film festivals who screened it. My book agent Max Brockman, my film agent Jeremy Barber, my film managers John Sloss and Dana O’Keefe, my wonderful lawyer
Jackie Eckhouse, and bookkeeper Robin Cutter. Everyone in the film industry who has been so generous to me—which is to say, quite a few people.