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UFPPC ( Digging Deeper XLVII 2008, 7:00 p.m.

May 5,

Kevin Phillips, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism (New York: Viking, 2008). Epigraphs: “Bad money drives out good money, but good money cannot drive out bad money” (Gresham’s Law); “In a global free market, there is a variation of Gresham’s Law: bad capitalism tends to drive out good” (vi). Preface: The Political Economics of Deception. Official denial of U.S. economic vulnerability “most worrisome” (vii). Thanks to “securitization,” the financial services sector became the largest sector of the U.S. economy in the 1990s (viii-ix). Peak oil has made oil a strategic albatross for the U.S. (ix-x). This book inspired by “the economic eruptions of August 2007” (xi). This book analyzes a crisis, but “makes no prediction” (xi). Radical religion was beaten back in the Nov 2006 elections, but the nation’s economic predicament “simply got worse” (xi-xii). Politics and history (xii-xiii). This book assumes the role of the President’s Working Group on Financial Markets” as a “hand of financial mercantilism” favoring the rise of the U.S. financial sector since the late 1980s (xiv). Ch. 1: Introduction: The Panic of August. Tone: portentous. Decline of real estate values confirmed in spring and summer of 2007 (2-4). Thesis of book: “[F]ar-reaching economic and political events and consequences began to unfold” in August 2007, when stock indices peaked, “regarding U.S. housing prices, credit-bubble risk, the instability of so many financial innovations never crisis-tested, the ever-more-apparent inadequacy of global oil production, the related vulnerability of the dollar, and, behind it all, the false assurance of American ‘imperial’ hubris” (4). U.S. debt industry (4-7). $11 trillion in public debt and $37 trillion in private debt were outstanding in 2007 (4-5). Overview of the mortgage crisis (7-14). Oil, a key to American strength, had become a weakness by 2007 (14-16). Peak Oil seemed to be arriving (16-18). New power centers abroad were emerging (18-19). “To institutionalize the dominance of minimally regulated finance at this stage of U.S. history is a bad idea” (20, emphasis in original; 2023). The historical record (Britain, Spain, Rome, the Dutch) indicates that the U.S. faces economic, moral, and patriotic decline (24-26). The situation and the path ahead: “This book does not predict” (26-28). Ch. 2: Finance: The New Real Economy? Dominance of the economy by the financial services sector (29-32). Preconditions of its rise (33-36). Unreliability of historical data (36-38). The 1980s were “the launching pad of a decisive [though unplanned] financial sector takeover of the U.S. economy,” helped by the S&L, Citibank, and junk bond bailouts of the late 1980s and early 1990s, and confirmed in the Clinton years (39; 38-46). Partial bursting of debt and credit bubbles, 2000-2002 (4647). With the public showing little concern in the implications, the Bush administration “[p]our[ed] $11 trillion into housing and the financial sector” to help the economy after 9/11 (48-54). A form of “financial-assets mercantilism” or “financial mercantilism” emerged in the period 1987-2007, with the President’s Working Group on Financial Markets developing into what has been nicknamed the Plunge Protection Team, using the Fed and the Treasury “to safeguard the financial sector (54-61). Neo-mercantilism or “worship of assets”

now characterizes the U.S. economy (6168). Ch. 3: Bullnomics: Its Favoritism and Fictions. [Term referring to the exaltation of financial markets.] Characteristics of “U.S. capitalist heyday booms” (69-73). With the erroneous “Efficient Market Hypothesis” promoted by Milton Friedman’s economic theories, conservatives embraced “market worship” (73-76). This led to deregulation and a heyday for speculators and financial innovations like derivatives (77-80). “Ever-changing” Consumer Price Index statistics are “debased” (80-89). Religious manifestations like the prosperity gospel and The Secret can be viewed as “a logical outgrowth of an angst-threaded economic consumerism, powered by incessant ‘be all you want to be’ advertising and funded by home equity withdrawals and credit card debt, in which a relatively small population at the top reveled in a large and rising percentage of the nation’s income and wealth” (91; 89-95). Ch. 4: Securitization: The Insecurity of It All. Securitization, involving “mortgage-backed securities (MBSs), followed by asset-backed securities (ABSs). The latter includes within its half dozen subcategories two products frequently or always tied to housing— collateralized debt obligations (CDOs) and home-equity loan (HELs),” increased tenfold from 1995 to 2003 (97). Risk has been displaced to the middle classes as fixed costs (mortgage payments, child care, health insurance, car, taxes) rise (98-100). Greed explains indifference to the uncertainty of how securitization would stand up in a major liquidity crisis (101-07). Lack of regulation due to incomprehension or belief in the magic of markets (107-12). Upon the evolution of housing prices in the period 2007-2012 depends the fate of banks and the U.S. financial system (112-19).

Ch. 5: Peak Oil: A Potential Pivot of the 2010s. The U.S. invasion of Iraq was probably inspired by what has happened: a crisis of supply and upward oil price pressure (120-22). The evolution of oil is undermining U.S. power (122-23). Review of how U.S. dependence on oil evolved from a strength to a liability (124-27). Peak oil, “given a new respectability by events between 2005 and 2008”; the July 2007 U.S. National Petroleum Council report entitled Facing the Hard Truths about Energy (128; 127-31). Oil geopolitics and the prospect of conflict (131-39). The vulnerability of the dollar, which faces multiple challenges, now in decline (13950). Reviewing his warnings in American Theocracy, Phillips finds that only the threat of radical religion has abated; peak oil, the rise of state oil companies, the weak dollar, and climate change remain as formidable dangers (151-52). It is possible that oil peaked in May 2005 at 74,298 barrels/day (152-53). Ch. 6: The Politics of Evasion: Debt, Finance, and Oil. A rare situation in modern U.S. history: both the president and Congress are deeply unpopular (15455). Washington is dominated by entrenched interest groups, and political parties have run out of creativity (15558). Dynastization is emerging, undermining our democratic republic (158-62). Despite its unpopularity and with a glance back at the political failures of other empires, Phillips advocates “an agenda to manage and minimize a trajectory of U.S. global decline” (162; 162- 69). The financial sector dominates U.S. politics and government (169-74). Faced with peak oil, American politics shows little sign of being prepared (17478). Ch. 7: The Global Crisis of American Capitalism. As in the introduction, Phillips adopts a portentous tone. He remarks ironically on post-1989 market

triumphalism (179-81). “Asia as a whole ought to dominate the global economy by 2030” (182). Asia as a “six-pack”: the Greater Persian Gulf, the former Soviet Union, the Indian subcontinent, China, Southeast Asia, and Northeast Asia (182). The history of financial markets in 2007 suggests the riskiness of the American “financialization gambit” (183-91). Advocates “some fairly sophisticated fusion of energy realism and climate consciousness” but doubts that a dumbed-down U.S. can achieve it (197; 191-97). “The crisis is no longer in the future, but upon us. The debacle started in August” (198). American capitalism stands in a line that can be traced to Britain, before that to the Dutch Republic, and before that to Spain (19899). It “seems possible” that the housing and credit crisis of 2007-2010 will be the global crisis of American capitalism that “signals the Great Transferal to Asia” (200; 200-01). The petrodollar system [Phillips uses the term only once (p. 143) but embraces the idea several times; cf. pp. x & 202] seems to be unraveling (202-03). American capitalism has placed its bets on financial mercantilism (203-05). Phillips inveighs again against speculative finance and reliance on mathematical modeling (205-07). Prospects of American decline (208). The

fall from preeminence may be “somewhat moderated” for Americans by favorable geography and demography (209). “And further abandoning the hubris of military and financial imperialism would also help because both postures represent drags on the American future” (209; this is the book’s last sentence). Appendix: Global Public Opinion and the Loss of Respect for the United States, 2003-7. Overview of nine surveys demonstrating skeptical or hostile opinions of the United States abroad. Notes. Index. 9 pp. [About the Author. Kevin Phillips was born on Nov. 30, 1940, and is a graduate of the Bronx High School of Science, Colgate University, the University of Edinburgh, and Harvard Law School. He was a strategist for the 1968 Nixon campaign, and wrote The Emerging Republican Majority in 1969. He is claims to have coined the terms “Sun Belt” and “New Right.” He lives in Goshen, Connecticut.]