an unanticipated consequence of
Jack M. Balkin
Jack Balkin: jackbalkin at yahoo.com
Bruce Ackerman bruce.ackerman at yale.edu
Ian Ayres ian.ayres at yale.edu
Mary Dudziak mary.l.dudziak at emory.edu
Joey Fishkin joey.fishkin at gmail.com
Heather Gerken heather.gerken at yale.edu
Abbe Gluck abbe.gluck at yale.edu
Mark Graber mgraber at law.umaryland.edu
Stephen Griffin sgriffin at tulane.edu
Bernard Harcourt harcourt at uchicago.edu
Scott Horton shorto at law.columbia.edu
Andrew Koppelman akoppelman at law.northwestern.edu
Marty Lederman marty.lederman at comcast.net
Sanford Levinson slevinson at law.utexas.edu
David Luban david.luban at gmail.com
Gerard Magliocca gmaglioc at iupui.edu
Jason Mazzone mazzonej at illinois.edu
Linda McClain lmcclain at bu.edu
John Mikhail mikhail at law.georgetown.edu
Frank Pasquale pasquale.frank at gmail.com
Nate Persily npersily at gmail.com
Michael Stokes Paulsen michaelstokespaulsen at gmail.com
Deborah Pearlstein dpearlst at princeton.edu
Rick Pildes rick.pildes at nyu.edu
Alice Ristroph alice.ristroph at shu.edu
Neil Siegel siegel at law.duke.edu
Brian Tamanaha btamanaha at wulaw.wustl.edu
Mark Tushnet mtushnet at law.harvard.edu
Adam Winkler winkler at ucla.edu
In his review of Michael Perino's book Hellhound of Wall Street, Lawrence Cunningham observes that "Our predecessors were fortunate to have someone like Ferdinand Pecora to uncover top-secret financial shenanigans. No such person appears in our midst."
It's a tragic situation, especially because there are some real truth tellers out there---Yves Smith, Mike Konczal, Michael Greenberger, and many affiliates of the Roosevelt Institute come to mind. The difference between Pecora's time and ours is a fragmented and manipulated media that a) can barely follow a complex financial story for more than a few hours, and b) fastidiously counterbalances every account of a Wall Street misdeed with some "expert" assuring us that it's just business as usual in an industry that's way too complicated for ordinary people to understand.
Charles Ferguson's compelling film Inside Job steps in for a phantom mass media. Every citizen should be conversant with the narrative Ferguson weaves. Andrew Sheng, Chief Advisor to the China Banking Regulatory Commission, puts it in a nutshell: there was massive private gain in the US financial sector leading to massive public loss. Looking back, we might have all been better off if the finance tycoons profiled in the film had simply demanded hundreds of millions of dollars directly from the government back in 2000, and retired to Capri.
Instead, these deci- and centimillionaires helped build up the Rube Goldberg contraption of derivative deregulation, CDO's, and CDS's Ferguson describes. Fortunately, the film concisely explains that farrago in a way that will both educate the uninitiated and intrigue those who've read some books on the crisis. The film's real contribution lies in four arguments it makes. First, Ferguson shows just how loopy Wall Street pay has become. If you ever doubted that the compensation cart is in front of the capital allocation horse, you won't any more. In the film, Raghuran Rajan describes Larry Summers's infamous dismissal of Rajan's prescient 2005 description of perverse compensation incentives in the financial sector. We then hear how AIGFP's 400 employees earned $3.5 billion between 2000 and 2007, stonewalling accountants like Joseph St. Denis who could have blown the whistle on their casino. As one consumer advocate notes, for top bankers, any given compensation level was "never enough." Given that the Wall Street Journal recently reported that financiers now call $100 million a "unit," $1 million a "stick," and $1 billion a "yard," that mentality persists.
Second, Inside Job dissects the Obama Administration's string of failures in dealing with Wall Street. When other world leaders organized to demand compensation reform fundamental to real change (including Christine Lagard and five other European finance ministers), our Treasury Department and Fed did nothing. In Ferguson's telling, Summers, Geithner, and Bernanke either overtly cheerled (or politely tolerated) the excesses that led up to the crisis. Ferguson traces an unbroken line of Wall Street solicitude from Reagan to Clinton to Bush to the current administration. I'm hoping that the Dodd-Frank Act will be energetically enforced, but optimism is not an easy option after Ferguson's film, which describes in detail Wall Street's lobbying clout.
Third, the film explains why a President as visionary and smart as Obama could not think beyond the incrementalism of an economic team rife with Goldman Sachs alums and fail-upward regulators. It portrays an academic environment festering with direct and indirect conflicts of interests. Economists and B-school professors appear content to churn out papers and reports without revealing the full web of financial ties affecting their thinking. Cognitive capture has rarely been conveyed so concisely.
When Ferguson grills Harvard Econ Dep't chair John Campbell on the cozy relationship between academe and the finance sector, Campbell shrugs it off. Ferguson then asks Campbell what the difference is between an economist who, say, champions a deregulatory policy while failing to disclose payments from a party interested in the policy, and a doctor who promotes a drug while failing to disclose he is paid for doing so. The response (or lack thereof) is priceless. Harvard luminary Martin Feldstein also proudly claims to have "no regrets" for his long time service on the AIG board. And Columbia Business School Dean Glenn Hubbard imperiously declaims "this is not a deposition" when asked to reveal the companies he consults for which are not listed on his resume. Ferguson goes on to describe a multi-billion dollar industry of "academics for hire." In his review of the film, Dean Baker concludes that "the economics profession . . .richly deserves the abuse" Ferguson delivers.
Finally, Ferguson connects the reckless growth of the finance sector to its actual consequences for the real economy. He quotes a Chinese official wondering how on earth, in the US, "financial engineers" are regularly paid 4 to a hundred times as much as real engineers. The latter build bridges, the official notes, while the former build mere dreams---or nightmares, as the case may be. It was no surprise to me to hear recently that one of our leading manufacturers of rare earth magnets has shipped production off to China, as our miraculous market delivered a factory up to its highest and best use:
Just how far U.S. manufacturing has waned is apparent at a factory in Valparaiso, Indiana, where dogs skitter across a bare concrete shop floor, their nails clicking. This brick plant on Elm Street once made 80 percent of the rare-earth magnets in laser-guided U.S. smart bombs, according to U.S. Senator Evan Bayh, a Democrat from Indiana. In 2003, the plant’s owner shifted work to China, costing 230 jobs.
Now the plant houses Coco’s Canine Cabana, a doggy day care the current tenants started to supplement sagging income from their machine shop.
Ferguson states that US wealth inequality is higher than in any other industrialized country, and he describes how the struggling middle class has had to work and borrow ever more to get by as productivity gains are monopolized by an ever-narrower elite. For the first time in history, he states, average Americans are less wealthy, and have less education, than their parents. He leaves little doubt that we can expect further decline for a country whose economic future is largely determined by a finance sector with no vision beyond enriching itself.
Ferguson does not give any easy "answers," and his closing shot of the Statue of Liberty feels more elegiac than hopeful. Nevertheless, at the end of this documentary, we have a much better sense of where the answers to our economic problems will not be found. I won't be eager to hear any more editorializing from hedge fund managers who worry about a looming, Medicare-driven sovereign debt crisis while failing to even entertain the thought of a Tobin tax or higher taxes for the top 0.1% of earners. I'll be looking beyond the core of the economics profession for a compelling account of a fair and just society.
When it comes to finance, progressives should also realize they have few friends in the current administration. They should treat whatever rulemakings it proposes with the same level of scrutiny as they would have given Bush, Clinton, or Reagan-era regulation. Ferguson may not make up for the deficiencies of our FCIC, CNN, and Fox. But I have little doubt that Ferdinand Pecora would approve of the film he has crafted.