“Liberal” Economists Cheered the New Democrats’ Deregulation of Finance

By William K. Black
April 11, 2016     Bloomington, MN

This is the second part of my series on how Hillary and Bill Clinton and Paul Krugman have pivoted in response to Bernie Sanders’ series of electoral wins and are racing hard right on finance and crime.  In my first column I wore my criminology “hat” to explain how Bill was disinterring outrageous (false and racist) positions that Hillary and he had once championed.  This was all the more bizarre because Hillary and Bill had recently repudiated those positions.  In the mid-1990s, Hillary and Bill sought to spread a “moral panic” about subhuman black “super predators” in order to secure passage of the crime bill that led to mass incarceration and then to maintain the 100-to-one disparity in sentencing for crack v. powder cocaine once it was known that the scientifically baseless sentencing disparity was leading to a dramatic rise in the incarceration of blacks and Latinos.  I also deplored Bill’s false claim that Black Lives Matter protesters were “defending” those who murdered black children.

In this second column I provide context essential to understanding Krugman’s race to the right on finance.  Readers are unlikely to understand how ultra-right wing the economic policies were of the Clinton administration.  Bill Clinton and Al Gore were two of the most powerful leaders of the “New Democrats” – a group of Democrats determined to move the party strongly to the right on economics, budget, national security, regulation, and crime.  The New Democrats’ policy apparatus was funded overwhelmingly by Wall Street but its ideological support came from economists who were “liberal” on some social issues.  The Clintons and Gore delivered for Wall Street by embracing the three “de’s” – deregulation, desupervision, and de facto decriminalization that encouraged and allowed twin bubble to rapidly expand.  The “dot com” bubble was the first bubble to burst.  The housing bubble burst in late 2006, leading to the financial crises of 2008 and the Great Recession that began in 2007.

I discuss two articles illustrating how ultra-right the “liberal” economists of the Clinton-era were in shilling for the pro-corporation policies championed by the New Democrats.  Both articles were published in Fortune in spring 1999 – roughly one year before the peak of dot com bubble.  In that era, the magazine was proudly pro plutocrat.  The tone of economist that authored the article was one of pandering to the plutocrats’ prejudices.

It is important to understand the intersection of the economic and political contexts in spring 1999 in the United States.  Clinton took the extraordinary step in 1996 of nominating Alan Greenspan to continue to run the Fed.  Greenspan was an Ayn Rand acolyte originally appointed to run the Fed by President Reagan.  Greenspan was infamous as a supporter of Charles Keating, the most notorious fraud of the savings and loan debacle.  All of Greenspan’s praise of Keating’s operations and predictions of success for Lincoln S&L proved catastrophically wrong.  Greenspan had long led an unholy war against Glass-Steagall, seeking to eviscerate through dozens of rule changes and interpretations designed to destroy its protections.  Greenspan was also hostile to using the Fed’s unique statutory authority under the Home Ownership and Equity Protection Act of 1994 (HOEPA) to prohibit all lenders, including what Krugman now stresses were “shadow” firms not normally subject to federal regulation that specialized in making predatory and fraudulent liar’s loans.  Greenspan refused to use HOEPA to stop the predatory and fraudulent lending even as it grew massively.  Greenspan’s successor Ben Bernanke (another Republican who would be appointed by President Obama to continue to run the Fed after the financial crisis made indisputable his regulatory failures) also refused to use HOEPA to protect the American people from these predatory and fraudulent loans.  He finally used the HOEPA authority to adopt a rule banning liar’s loans only in May 2008 – roughly a year since the secondary market had died and liar’s loans had virtually ceased.   Even then, he delayed the effective date of the rule until November 2009, lest he inconvenience any active fraudulent and predatory lender.

The Clinton administration had already shown its intense hostility to financial regulation at the SEC, working with Republicans to block key reform efforts by SEC Chair Arthur Levitt.  Beginning in 1998 and continuing in spring 1999 the administration successfully blocked the efforts of Brooksley Born to protect the global economy from coming problems involving financial derivatives – and later in 1999 passed an act that forbade any future regulator from providing such protection.  The Clinton administration was working with the most conservative Republicans in Congress to effectively repeal the Glass-Steagall Act. In 1999, Citigroup and Travelers Insurance agreed to the largest merger in financial history – in open defiance of the Glass-Steagall Act in order to successfully extort Congress to repeal the Act.  Robert Rubin, the former CEO of Goldman Sachs, the government leader in destroying Glass-Steagall, announced that he was stepping down as Clinton’s Treasury Secretary.  He promptly joined Citigroup.  By 1999, even before the effective statutory repeal of Glass-Steagall, the banks that were first to take advantage of Greenspan’s evisceration of Glass-Steagall and began to trade securities were already suffering severe losses.

“Liberal” economists were the critical supporters of the Clinton administration’s destruction of effective financial regulation.  Part of this effort was deregulation, but desupervision was its even more destructive handmaiden.  I have taken key excerpts from one of these economists to illustrate how far right wing they were.

The First Article

The author of the first article (April 26, 1999) chose a deliberately provocative title.  “Want Growth? Speak English THAT CERTAIN JE NE SAIS QUOI OF LES ANGLOPHONES.”  The article made the triumphal assertion that speaking English was a key to economic growth.  The economist ran through major English-speaking nations and declared them great successes.  Ireland had the highest growth rate.

There is Ireland, the recently dubbed “Celtic tiger,” growing at an amazing 8% rate for the past five years.

It should be clear that the economist was weak on bubbles.  He described the U.S. growth rate (largely a product of the dot com bubble) with the same term he used for Ireland (“amazing”).  Ireland’s property bubble would hyper-inflate (relative to its GDP) to twice the size of the U.S. residential real estate bubble.  The economist, however, saw massive growth when he observed (but did not recognize) disastrous bubbles.

The economist contrasted the great success of English-speaking nations with others.

Latin Americans who thought they had put their past behind them are watching with horror as financial crisis strikes once again.

The economist did not mention that “Latin Americans … thought they had put their past behind them” because U.S. economists had assured them that with their adoption of the mantra of English-speaking economists’ “Washington Consensus” of hard right economic policies their low-growth pasts were “behind them.”  Instead, right wing economics championed by English-speakers in the form of the Washington Consensus produced one “financial crisis” after another throughout Latin America.

Even as China was emerging as the growth champion (and before that growth became dependent on bubbles, the economist pronounced English as the explanation for the national differences in growth rates.

What do the countries that have managed to remain prosperous while the world suffers have in common? Well, the answer is plain to the naked eye–or make that the naked ear. Yes, the common denominator of the countries that have done best in this age of dashed expectations is that they are the countries where English is spoken.

The Economist’s Heroes: Alan Greenspan, Larry Summers, Margaret Thatcher & M. Friedman

The economist was only getting started with his Anglo-Saxon triumphalism.  He and his colleagues made several explanations for the supposed triumph.

First, there’s the Alan Greenspan theory–or is it the Larry Summers theory? Economic policy in English-speaking economies tends to be run by smart economists with one foot in the academic world, who therefore make better decisions than the doctrinaire mandarins who run ministries of finance. And in a world where the rules have suddenly changed, the story goes, clever men and women who went to MIT are better able to adapt than bureaucrats whose only expertise is in office politics.

A slight variant is the Margaret Thatcher theory. In the 1980s there was an ideological groundswell in the English-speaking world in favor of markets and against government intervention; perhaps the rest of the advanced world missed the tide because it couldn’t read Milton Friedman in the original.

One particular point that a friend made to me is that e-mail and the Internet put people who use nonalphabetic writing, like the Japanese, at a particular disadvantage.

In 1999, well after the collapse of its twin bubbles, Japan was the second-largest economy in the world and China was already growing at such a high rate and so persistently that it would soon become the second-largest economy.  If using a non-alphabetic language is a critical restraint on growth, then the Chinese and Japanese must be far better at economics than are English-speakers since they have prospered so greatly while carrying the equivalent of thirty pounds of non-alphabetic lead in their saddles.  But the economist missed the logical flaw in his friend’s speculation.

The economist’s speculation that English-speaking nations had much faster growth because they put exceptionally brilliant economists like Greenspan, Summers (both appointees of Bill Clinton), and the economist authoring the column in charge of economic policy is revealing and humorous.  It is hardly surprising that unsurpassable arrogance and Anglo-Saxon triumphalism became fellow travelers.  Similarly, it will surprise no one that an elite economist would champion the idea that the special brilliance of the author and a few of his fellow elite economists explained the unique success of the Anglo-Saxon nations.

While MIT economists, Greenspan, and Summers are so brilliant that they explain America’s high growth, regulators and government officials’ are fools “whose only expertise is in office politics.”  Fortunately, America places economic policy in the hands of Greenspan, Summers, and MIT economists and removes all authority from the inept bureaucrats.

But what was most wondrous from the self-described “liberal” economist was his ode to Margaret Thatcher and Milton Friedman as a likely explanation for (asserted) Anglo-Saxon superiority.

What the economists never even considered was that the relatively high U.S. growth rates they were considering in 1999 could be the product of the inflating dot com and real estate bubbles.

The Second Article

The second column by this economist appeared in Fortune on May 24, 1999 under the title “The Ascent of E-Man R.I.P.: THE MAN IN THE GRAY FLANNEL SUIT.”  The economist again sought a provocative opening.

I grew up in a planned economy. [T]hose who controlled the economy’s “commanding heights,” its key industries, were administrators rather than entrepreneurs, conformists who were valued less for their productivity than for their loyalty, whose career advancement depended on their political skill. For ordinary workers, the system had some benefits: It was hard to get ahead, but once you had a good job, your life was secure. Still, the economy was often appallingly inefficient and consistently unresponsive to consumer needs.

No, I am not an immigrant from Eastern Europe. I’m talking about the U.S. economy of the ’50s and ’60s, when General Motors was the very model of a modern major company.

In those days progressive thinkers like John Kenneth Galbraith used to ridicule economists who still believed what they had learned from Paul Samuelson’s textbook, which was that free markets could be counted on to match supply and demand. After all, business itself was clearly moving away from markets and toward planning.

By contrast, in today’s cutting-edge e-businesses (see Cover Stories), the company often owns–or rather, rents–little but brainpower.

The villain in the piece is Galbraith because he is a “progressive thinker.”  The CEOs of big corporations are the “man in the gray flannel suit” – too bland to be evil or even worthy of blame.  The old-style CEOs who built firms like GM are dismissed with the economist’s classic insult – as “business bureaucrats.”  The hero of the piece is the “entrepreneur.”  (The author channels Ayn Rand and the most anti-governmental economists.)  The ultimate hero for the author was the CEO of one of the “dot com” firm staffed with geniuses.

“Ordinary Workers”

Note the non-persons in his tale – the “ordinary workers.”  They rate only two sentences.  There is no sense that they are important to the economy or even the success of the firm.  Instead, there is the muted recognition that the old system that Galbraith described led to a career for “ordinary workers” in which “your life was secure.”  Implicitly, the author is acknowledging that this will become a thing of the past in the new economy that he gushes about.  Rendering the lives of hundreds of millions of ordinary workers (and their families) insecure is not important enough to warrant express discussion.  The economist treats their fates as simply inevitable in order to achieve the brave new world.

The Star Firms of the New Economy: Enron and Goldman Sachs

The article then turns to it real focus, examining the firm at the pinnacle of the economist’s entrepreneurial pantheon that exemplifies the brave new world.

The retreat of business bureaucracy in the face of the market was brought home to me recently when I joined the advisory board at Enron–a company formed in the ’80s by the merger of two pipeline operators. In the old days energy companies tried to be as vertically integrated as possible: to own the hydrocarbons in the ground, the gas pump, and everything in between. And Enron does own gas fields, pipelines, and utilities. But it is not, and does not try to be, vertically integrated: It buys and sells gas both at the wellhead and the destination, leases pipeline (and electrical-transmission) capacity both to and from other companies, buys and sells electricity, and in general acts more like a broker and market maker than a traditional corporation. It’s sort of like the difference between your father’s bank, which took money from its regular depositors and lent it out to its regular customers, and Goldman Sachs. Sure enough, the company’s pride and joy is a room filled with hundreds of casually dressed men and women staring at computer screens and barking into telephones, where cubic feet and megawatts are traded and packaged as if they were financial derivatives. (Instead of CNBC, though, the television screens on the floor show the Weather Channel.) The whole scene looks as if it had been constructed to illustrate the end of the corporation as we knew it.

The author’s gold standard of expertise is Goldman Sachs.  The greatest compliment he can pay Enron’s leaders is that their firm is so superior to its competitors that it is the Goldman Sachs of energy.  Enron paid the author $50,000 annually for what he would later describe as “an advisory panel that had no function that I was aware of.”  Right, who would say no to trading on his (self-described) reputation for brilliance as an MIT economist to get $50,000 from Enron for performing “no function?”

The Ideological Shift Leading to the “Liberal” Push for Deregulation

The economist then explained what made possible this brave new world that he wrote to champion – deregulation.  He explained that deregulation was driven by “a change in ideology.”  He explained to his readers that “Adam Smith” was right.  The problem – the bloated, bureaucratic corporation – was caused by the government interfering with the markets through regulation.  With deregulation, Enron was leading the way and “making freewheeling markets possible.”

But probably the biggest force has been a change in ideology, the shift to pro-market policies. It’s not that government has vanished from the marketplace. It’s still a good guess that in a completely unregulated phone market, long-distance companies would buy up local-access companies and deny their customers the right to connect to rivals, and that the evil empire–or at least monopoly capitalism–would rise again. However, what we have instead in a growing number of markets–phones, gas, electricity today, probably computer operating systems and high-speed Net access tomorrow–is a combination of deregulation that lets new competitors enter and “common carrier” regulation that prevents middlemen from playing favorites, making freewheeling markets possible.

Who would have thunk it? The millennial economy turns out to look more like Adam Smith’s vision–or better yet, that of the Victorian economist Alfred Marshall–than the corporatist future predicted by generations of corporate pundits. Get those old textbooks out of the attic: they’re more relevant than ever.

The economist who authored the April and May 1999 columns is, of course Paul Krugman.  The Enron energy trading operation he gushed about was a leading center of Enron’s frauds, particularly those that caused the California energy crisis.  Goldman just admitted to what the United States found to have been massive fraud.  Enron was indeed the Goldman of the energy industry just as Goldman was the Enron of finance.  The reader can now see Krugman’s actual views when he found it profitable to pander openly to the plutocrats defrauding the public and rigging the system against the consumer and the worker.  The reader can also see why he is so dismissive of criticism of Hillary taking enormous speaking sums from Goldman for performing “no [real] function.”

Krugman’s prediction that we were seeing the death of market power by huge firms proved as accurate as his claim that Enron and Goldman were the gold standards of their industries.  He is one of exemplars we use in the book we are writing that explains that economics is the only field in which one can be awarded a Nobel for proving wrong in predictive ability.


7 Responses to “Liberal” Economists Cheered the New Democrats’ Deregulation of Finance

  1. James Cooley

    We know those petards worked, Too bad the engineer wasn’t hoist with them, but perhaps it is not too late to attach him to the results.

  2. It seems to me that Krugman no more deserves the Big Prize than Obama did. Krugman did not change his stripes it seems. That fact should stop all his pretense at being progressive. Thanks, Bill, and I look forward to the book.

  3. Pingback: Bill Black: “Liberal” Economists Cheered the New Democrats’ Deregulation of Finance | naked capitalism

  4. Bill, your eponymous right-wing economist doesn’t even understand how banking works. When he writes that your father’s bank took deposits and lent them out, his ignorance is palpable. Comparing a retail bank to a casino bank is extraordinarily ignorant. How did this prize cretin ever get a Swedish Bank prize? No, don’t tell me, your article explains how.

  5. William Berkson

    The old Krugman columns are surprisingly sympathetic to laissez faire, but they do not justify your title. Nowhere in what you quote does Krugman praise deregulation of the financial industry. On regulation of industry he says “a combination of deregulation that lets new competitors enter and “common carrier” regulation that prevents middlemen from playing favorites, making freewheeling markets possible.” This is a belief in government the right government regulation making private markets work. That is way different from the Republican policy. Further, you do not examine how and why Krugman changed, leaving us to think that he has some kind of thoughtless pro-big bank bias. He did criticize the coming bubble in 2004-2005, following Dean Baker, so implying that because he missed the dot-com bubble he missed the financial one is wrong. I sorry to say that this is a weak column on Krugman. On Bill Clinton, by contrast, you are on firm grounds.

  6. The post is indeed a bit unfair as being described «old Krugman columns» is fairer as well as «how and why Krugman changedß is too.

    P Krugman, while still being obviously a supporter of what his admirer B deLong calls the “Rubin wing” of the Democratic party, has changed a lot his opinions in the past 15-20 years, and he has stated explicitly that this has happened because of events disillusioning him about his previous “mainastream” convinctions.

  7. urban legend

    It’s just a diatribe against Krugman, hauling out his past mis-steps with only a weak connection to the theme that he is a “right wing” economist. All for the sin of believing a self-proclaimed socialist who will get destroyed by Republican advertising if he is nominated is not as electable as another Democratic candidate whose destruction has been attempted with limited success for over 20 years. If you don’t think Sanders is going to be annihilated by attacks on the taxes needed for the single payer plan or free college, not to speak of a history that can be constructed of apparent sympathy for Fidel Castro, the Sandinistas and the Soviet Union, you don’t game plan very well. All these obstacles theoretically could be overcome with sustained educational effort with millions of dollars behind it for several years — like the taxes vs insurance premiums trade-off — but not in a campaign lasting three months. Maybe Bernie’s supporters are right that they can overcome all the obstacles in the general election, but they have produced no game plan for doing so. One should have the right to expect that a belief to the contrary would be at least accepted as one formed in good faith. Not so, it seems. Either you’re with us or you’re against us.

    Krugman sometimes does some dumb things, like his reflexive endorsement in the name of pro-Clintonism of the anti-Gerald Friedman diatribe put out without analysis of the subject matter by other members of the big-name economists club. But it’s hard to see him as “right wing.” And who cares what he said 25 years ago? Are we supposed to assume that it was obvious before starting with the Enron appointment that it had no functions?

    Professor Black already dismantled the attack on Friedman quite effectively, as did James K. Galbraith. Piling on is unseemly.

    And by the way: how big was the Clinton majority in the 1992 and 1996 elections that would have allowed him to take the country on a 180-degree turn from where it had been for the previous 12 years of Republican dominance? Oh, yes, he never got a majority, so it might have been a reasonable conclusion that careful maneuvering between historical Democratic ideals and the power structure in place was necessary. How big was the Democratic majority in Congress after Clinton raised the tax rate on the wealthy by over 50% and tried but failed to introduce a universal health insurance plan? There is such a thing as historical context, but who wants that when it might stifle a satisfying rant?