Michael Hirsh's "Capital Offense"

Michael Hirsh's "Capital Offense"
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There is a long and distinguished literature on what's known, in the sniffy French, as "la trahison des clerics" - the betrayal of the intellectuals. In "Capital Offense: How Washington's Wise Men Turned America's Future Over to Wall Street," former Newsweek, now National Journal writer Michael Hirsh makes his own contribution to that genre. "Capital Offense" has a broad, sometimes canvas-busting, scope: He examines the wise men, most of them buzzing in and around the great honey pot of Washington, who provided much of the intellectual architecture for what became the great financial crisis of 2008. The book features many characters and ideas, but if there is a single, unifying theme, it's the fallibility of economic thinking, and of ambitious economists and their fellow travelers, in creating the bubble, and the failure to anticipate its consequences.
For devotees of the crisis, and you wouldn't be reading this if you weren't, much of Hirsh's story is known. But Hirsh has generated some fresh reporting and, more importantly, he has constructed a narrative to try to make sense of it all. There are, inevitably, conflicts and confrontations - at the heart of the book Hirsh features the struggle between Larry Summers and Joe Stiglitz for both preeminence in academic economics and in policymaking - that inevitably morphs into a bad guy (Summers) vs. good guy (Stiglitz) stereotype. But despite that, and despite the fact that Hirsh is never shy about making his own opinions known, these portraits break from the caricatures that too-often substitute for analysis. Hirsh recognizes that these are complex personalities, driven by complex motivations, both good and bad. There is sadness to the ambition and drive of the eternally brilliant Summers; a modesty and realism to Milton Friedman; an endearing goofiness to Stiglitz (who for all his absentmindedness, notes Hirsh, seems to have a way with women). Hirsh gives us a sense about why these folks, to a person, were successful enough to influence events. Robert Rubin's quiet political surefootedness. Alan Greenspan's mastery of data. Stiglitz's ability to listen. Summers' ineradicable sense that the world was one long debating society. And then there is the technocratic Tim Geithner, less a disciple of Rubin and Summers in Hirsh's view than a man married to saving the status quo.

And at bottom, Hirsh is asking a question many others have tried to answer: How could these wise men, the best and the brightest, have failed to see this coming? How could economics have failed to predict the disaster? And given that failure, what are its components and how are they weighed against each other? Hubris, ignorance, greed, self-interest, ambition, self-satisfaction and probably the most insidious, pride all jostle with each other. If there's an omission here, it's that Hirsh does not really ever step back and ponder the limitations and uncertainties of all economic thinking, which renders prediction a fool's game (for a crisis book that handles that subject quite well, see Yves Smith, "Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism"). Stiglitz is lionized in part because his analysis turned out to be at least partly on target. Summers is condemned to the darkness of those who failed history's test: He supported a financial regime that broke down. But what Hirsh doesn't say is that, given the ambiguities and perplexities of predicting human economic behavior, the game could as easily have swung the other way - and did for a very long time. Summers' zest for arguing both sides of any economic issue may well be rooted in a profound realization: There are no (or very few) absolute truths in economics. Sophistry is always a temptation.

That said, where's the betrayal? That sense of betrayal begins when skepticism gives way to certainty, when possibilities congeal into formulaic ideology. From Friedman to Greenspan to Rubin to Summers, they all traded their doubts at one point or the other for a soaring confidence and a deep, nearly utopian belief. The way to the bountiful future involved market liberalization, free trade, deregulation, privatization, integration. A mighty finance sector bursting with innovation and complexity was a good, not a bad, thing. Size was important; speculation provided liquidity; the markets were self-correcting and self regulating. The Anglo-Saxon model, the Washington Consensus, had been proven far superior to other alternatives, whether the smoking ruins of Soviet communism or the Asian Model, with its crony capitalists. Free-market finance was the veritable engine of liberal internationalism. Finance trumped politics.

What Hirsh doesn't do is to confuse errors of policy or theory with criminality. There is no smoking gun here, no indictable offenses that I can find. Although he begins with the famous defenestration of the Commodities Futures Trading Commission's Brooksley Born, who sought derivatives regulation, at the hands of Greenspan, Rubin and Summers, what he presents here is less dramatic declarations and more the steady construction of a shaky consensus, part free-market economics, part Wall Street reality, part Washington realpolitik. (After all, many of these folks, including Bill Clinton, were liberal Democrats, who needed convincing.) The fact was, for all the 20-20 hindsight, the ideas that supported the system were steadily confirmed by reality, with a few exceptions, throughout the '90s and into the new century. Of course, those "exceptions" were quite serious - in real life and intellectually -- notably the Asia crisis and the failure of Long-term Capital Management. But the very fact that we survived them, that contagion spread only so far, provided more fodder that the Washington Consensus was correct. There was, indeed, a bubble being born - both in the markets and in economics. Each step forward was a further descent into dogmatic orthodoxy. Debate was increasingly stilled; critics, like Stiglitz, were lampooned and ignored. Regulators were captured. The media was quiescent (Hirsh himself occasionally admits his own failures to see the future.) Shareholders were partying. The public was clueless. Those who questioned any of the underpinnings of the system, like economist Raghuram Rajan who warned of risk at Greenspan's Jackson Hole valedictory in 2005, were dismissed, sometimes politely, sometimes brutally (a job Summers seemed to revel in).

Well, we know how it turned out. An entire orthodoxy was upended the weekend Lehman Brothers failed. Economics, like Wall Street, was caught out by reality. But it's not as if the entire discipline, with its roots in Adam Smith and the physiocrats and its tradition of rational inquiry, has been debunked; rather it was the predictive aspect of the field, with its all-seeing, all-knowing markets and its powerful grip on policymaking, that has taken the most knocks. How can anyone who has suffered through 2008 ever trust an economic forecast again? Well, apparently a lot of folks. Economics and economists continue to busily predict and advise, often with the kind of bullying certitude Summers mastered (and Summers, of course, has himself been busy, not only as Barack Obama go-to economics adviser, but before that, as a much-cited columnist during the crisis in the Financial Times). The depth of the crisis and recession, in fact, has sent economists opining not only on technical questions but also on broader, political and social questions, like latter-day John Stuart Mills. Economics, and its sidekick prediction, apparently remains a drug we cannot live without.

The question that needs to be asked - and it's one that is larger than just this crisis - is whether error represents a larger betrayal, not just a mistake of the intellect, but a conflict, a sellout, a failure of moral rectitude, at its most extreme, a crime. Now there are clear tests for criminality, which are adjudicated in the courts; the rest are judgments, guesses, opinions. It is becoming clear that one of the great problems of economics evolving from an indeterminate, philosophically based inquiry to a discipline with pretension to a science and thus the raw material of policy, is that making the wrong call is more than just a mistake, it's a moral transgression. Economists then, like Greenspan or Summers, are thus strapped to the table and analyzed. Where does the flaw lie? What combination of weakness deep in their opaque hearts led them into the corruption of error? Hirsh is a sophisticated observer, sensitive to the inevitable crooked timbers of humanity. But many others are not as subtle. Journalism, punditry, even movie-making has, in its earnest attempts at analysis, labored to establish patterns and motivations and attempted to penetrate souls they can never truly enter. The analysis that wins is the one that accumulates the most votes, which may be the way retail politics and the box office works, but isn't exactly intellectually rigorous.

Hirsh does, I think, occasionally fall for the fallacy of hindsight, suggesting that these great minds should have seen this coming but did not, or chose not to look. But this is where we get to what's often presented, perhaps unfairly, as the treason of the intellectuals: a kind of willful blindness, for whatever reason, a retreat into dogma and faith for their own selfish reasons. This is where Stiglitz is so vital to this story; not because he was omniscient, but because he raised contrarian issues that were systematically ignored by policymakers. Perhaps these wise men were in the bag to Wall Street, as a thousand bloggers insist, or ripe with hubris. Or perhaps they truly believed. Like Dick Fuld, if they could see what was coming, why would they not have acted? Still, the charge of bad faith sticks to them because we have already decided they were smarter and more far seeing than the rest of us on a subject as foreign to the Average Joe as nuclear physics; in fact they've briefed us over the years (through a willing media) on the reality of their brilliance: the Committee to Save the World. If the best and the brightest, the Nobelists and the market geniuses, failed to see the future, what hope do the rest of us have? They told us it was safe. - Robert Teitelman

Robert Teitelman is editor in chief of The Deal.

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