The Convulsion of Capitalism

The Conference Board Review^® Article

By Richard J. Whalen

Bad Money

Reckless Finance, Failed Politics and the Global Crisis of American Capitalism

By Kevin Phillips

Viking, $25.95

As urgently timely as today's headlines, Kevin Phillips's latest book vividly explains the converging crises that threaten American capitalism and will shape 2008 voting — though the book "is not about elections," insists the author, who was once Richard Nixon's private elections analyst. "It is about the insecurity of America's future as the leading world economic power, given a debt-gorged and negligent financial sector, and the vulnerability caused by the nation's expensive dependence on imported oil."

The sudden heart attack suffered by the credit markets last August, which caused the high-profile emergence of the housing and mortgage-foreclosure crises, persuaded Phillips that the U.S. political economy was changing for the worse — faster and more deeply than even he had imagined. So he returned to his keyboard, derived his book's title from Sir Thomas Gresham's sixteenth-century law that "bad money drives out good," and applied the law to America's rapidly unraveling debt-driven mercantilist capitalism.

Bad Money is a very good and useful book about a complicated subject, written in clear, workman-like English and enlivened by easy-to-understand figures, charts, and graphs depicting the looting of America in the past quarter-century. Phillips clarifies the process by focusing on the central role of debt. Using massive amounts of private debt and leverage, while achieving global reach and extraordinary profitability, the twenty-first-century robber barons enriched themselves through "a mercantilist joint venture with U.S. government authority, strategic direction, funding support, and periodic Federal Reserve or U.S. Treasury bailouts of overextended private institutions."

My only minor complaint about the book is that it is too short — only seven chapters — and it omits discussion of the abject failure of the regulatory oversight apparatus imposed by the New Deal during the last convulsion of capitalism, the Great Depression of the 1930s. This would have provided a lens through which to examine the new regulations we are inventing.

And about these new regulations: What should they look like to deal with our current problems? Can realistic regulation possibly revive our failing system? Phillips says no: The entrenched bipartisan financial interests forbid it.

Phillips calls overdue attention to the never-secret-but-consistently-overlooked President's Working Group on Financial Markets, built around the treasury secretary and the chairman of the Federal Reserve Board. The Working Group was created in October 1987, after the stock-market crash, as Fed Chairman Alan Greenspan began his almost nineteen–year tenure. Revitalized in 2006 under Treasury Secretary Hank Paulson, the Working Group, sometimes familiarly known as the "Plunge Protection Team" (PPT), serves as "a more or less invisible hand of financial mercantilism (that) favored (and helped to explain) the rise of the U.S. financial sector over the last two decades." When panic struck the financial markets, the PPT bought futures, options, and other derivatives to turn the tide. Anyone inspired by Phillips's exposition can file a Freedom of Information Act to request for access to these records.

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