Mitt Romney's former partner at Bain Capital has written a
book that reveals much about how the super-rich think -- and it's not
pretty.
May 3, 2012 |
It's standard practice during the election campaign for
presidential candidates to publish an autobiographical account of their
rise to stardom or their philosophy of life and politics. However, in
keeping with his commitment to innovative business practices, it seems
that Mitt Romney has outsourced this task to Ed Conard, one of his
former partners at Bain Capital.
In fairness, it is not clear to what extent Romney shares the views of his former partner, but Conard surely understands that
his book
[Unintended Consequences: Why Everything You’ve Been Told About the
Economy Is Wrong] will get attention because of his proximity to the
presumptive Republican nominee. And, on the off chance that Conard does
think like the man who likes to be able to fire people, this book should
be taken seriously.
There is much in this book to infuriate those who don't get their
kicks from firing people. To start, Conard has a tale of the housing
bubble and the ensuing crash that places all the blame on government
efforts to promote homeownership.
Making this case requires serious abuse of the facts. In arguing that
the banks did not know that they were passing along fraudulent
mortgages, Conard asks why they would hold so many mortgages on their
own books if they knew they were trash. The obvious answer is that they
couldn't sell them. This was the whole point of the collaterized debt
obligations and later the second generation collaterized debt
obligations. The goal was to hide the garbage.
This was like a game of musical chairs. At some point the music stops
and someone is left holding the trash. It wasn't by choice that Lehman,
Citigroup, and the rest were still holding tens or hundreds of billions
of dollars of junk mortgages in 2008. They just couldn't find enough
suckers.
Conard is no more successful in trying to turn reality on its head
and make Fannie and Freddie the main promulgators of junk mortgages in
the peak years of the bubble. He cites
data that
show the exact opposite. The vast majority of the junk mortgages were
securitized by Citigroup, Morgan Stanley and the other investment banks.
Conard is either being dishonest with his readers here or has some serious cognitive problems.
Another novel feature of Conard's book is his contention that there
have been substantial gains in wages over the last three decades. The
fact that wages for most workers have barely outpaced inflation has been
well documented (see
here and here for example).
Conard does a neat two-step around this basic fact by showing
substantial wage gains for African American men and women and white men
and women.
There are some problems with his numbers, but the implication is that
as our labor force gets less white and more female we should expect
wages to fall. In other words, if the wage distribution was exactly the
same, but we replaced all the white men with African American women,
then Conard would be touting huge wage gains for the workforce. It's
great to see groups that have been the victims of discrimination making
progress (in reality, the gains
have not been much), but this does not substitute for economy-wide wage growth.
But the real meat of Conard's piece is the glorification of those who
have gotten incredibly rich, like him. Conard's celebration of the rich
and his airbrushing of what they did to get there is sufficiently out
of touch with reality to be scary.
Did Conard really miss the story of Fabrice Tourre (a.k.a. "Fabulous
Fab") the Goldman Sachs mortgage trader who put together collaterized
debt obligations that were designed to fail and then hawked them off on
unsuspecting clients? Does he not know about the flash traders who make
fortunes by designing sophisticated programs that allow them to
front-run major trades? (This means that they can detect major trades
and jump in ahead, thereby capturing some of the profit.)
How about the clever character who invented "dead peasant" insurance
policies? These are insurance policies that corporations buy on their
line workers, usually without their knowledge, making the company the
beneficiary. The purpose is to allow the company to time its earnings
and minimize its tax obligations.
The financial sector is chock full of people who have made great
fortunes on gimmicks that have no obvious social value but allow their
inventors to gain at the expense of others. And, the financial sector is
not the only place where the big money often comes from economic rents
rather than genuine innovations.
Does anyone who has ever used a Microsoft product think that Bill
Gates became the world's richest person because of the quality of the
software he produces? Microsoft gained its preeminence because of Bill
Gates' sharp elbows. Clearly Gates is a highly motivated and intelligent
person, but society did not benefit from his success at propelling his
inferior software to market dominance.
How much has the pharmaceutical industry profited from using its
political power to get Congress to give it ever longer and stronger
patent monopolies? We now spend almost $300 billion a year on
prescription drugs that would cost us around $30 billion in a free
market. The $270 billion a year difference is about five times the size
of the Bush tax cuts to wealthy.
There is no problem identifying other sectors of the economy where
the big bucks are gained through rent-seeking and manipulation of the
political process. (This is the topic of my free book,
The End of Loser Liberalism: Making Markets Progressive.) In fact, Conard and Romney's own industry provides an excellent example of using political power to promote private wealth.
One of the major ways that private equity companies make money is by
taking advantage of the tax deductibility of interest. Private equity
companies typically load the firms they buy with as much debt as
possible. This is because the interest payments on debt are tax
deductible and they don't really care if the company ends up going
bankrupt. They expect a substantial portion of their firms to go into
bankruptcy.
The result is that much of the profits pocketed by Conard and Romney
are simply the lower taxes due to the fact that interest payments are
tax deductible for corporations, whereas dividend payments are not. But
this is not their only gaming of the system.
Both Conard and Romney were in a position to pocket tens of millions
of dollars from the hedge fund managers' subsidy, also known as the
carried interest tax deduction. This tax break allows incredibly wealthy
people like Conard and Romney to pay only the 15 percent capital gains
tax on the bulk of their earnings. Essentially, the argument is that
because they are paid on a commission, like realtors and shoe sales
people, hedge and private equity fund managers should have their
earnings treated as capital gains. This argument has no obvious logic,
but the beneficiaries have enormous political power, which explains why
the special treatment of carried interest survives.
In short, Conard portrays a fantasy world. We are not fighting over
capitalism versus socialism. The battle is over the crony capitalism of
which both he and Romney have been major beneficiaries. We'll leave it
to his shrink to determine whether the problem is that Conard is deluded
or dishonest, but the rest of us should view this book as a serious
warning about the world view of his business partner.
Dean Baker is co-director of the
Center for Economic and Policy Research and author of the new book,
The End of Loser Liberalism?
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