No one embodies the dangers of crony capitalism more than Robert Rubin. I was reminded of this when reading a provocative new book called A Capitalism for the People: Recapturing The Lost Genius of American Prosperity by an economist named Luigi Zingales. It’s an excellent read, a populist screed that will resonate with Occupy Wall Street, the Tea Party and anyone who worries that corporate power is deployed in Washington to benefit the well-to-do at the expense of most everyone else.
Rubin’s story illustrates the trouble with the unholy alliance of big business, big government and wealthy elites that rule today’s Washington. Few who travel the Amtrak corridor have a more elite pedigree: An Eagle Scout, Robin’s resume includes a Harvard B.A., a Yale Law degree, a brief stint as a Wall Street lawyer, a top job at Goldman Sachs, seven years in Washington as an economic advisor and Treasury Secretary to President Clinton, followed by a triumphant return to Wall Street, as a director and chair of the executive committee at Citigroup.
As Zingales tells the story, Rubin during his years in Washington was a leading advocate for financial bailouts, beginning in 1994 when the collapse of the peso jeopardized Mexico’s ability to repay big lenders including Goldman and Citi. Mexico avoided default but, as Zingales writes, “this move eliminated fear among lenders, and fear is an essential element in financial markets: it disciplines financial decisions.” To function properly, market capitalism needs to be about losses as well as gains, a lesson any investment banker should understand. But Rubin went on to support IMF bailouts for Thailand, South Korea, Indonesia and Brazil, each of which shielded US lenders from losses–emboldening them to take future risks as they came to believe, correctly, that governments would not permit them to take heavy losses. Here were the beginnings of “too big to fail.”
Zingales has a nice analogy about bailouts, comparing them to grandparents who spoil their grandkids when they parents want to discipline them:
Grandparents have an incentive to spoil their grandchildren, since they benefit from the grandchildren’s gratitude and from the momentary peace–but they are unlikely to suffer the long-term consequences of the kids’ bad behavior (partly because they aren’t around as much, and partly because they die sooner). In much the same way, policy makers are happy to bail out firms and countries because they benefit from the momentary improvement in the economy and from the gratitude of saved business–but they’re unlikely to suffer the long-term consequences because they will be out of office by the time the perverse results occur.
Meantime, Rubin opposed other efforts to rein in the banks. Along with Alan Greenspan and Larry Summers, Rubin beat back efforts by Brooksley Born, the head of the Commodity Futures Trading Commission, to regulate the over-the-counter derivatives, including the credit default swaps that later contributed to the 2008 financial crisis. Rubin and Summers also argued successfully for the repeal of the Glass-Steagal rules that for the most part prohibited banks that held government-insured deposits from engaging in risky and speculative investments.
His work done, Rubin exited the government for Citigroup from which he earned $126 million during the 2000s. During the 2008 financial crisis, Citi was favored with a $25 billion infusion of equity under TARP, $20 billion of equity from the Treasury and another $306 billion more in government guarantees of its so-called toxic assets. Citi never sleeps, the slogan goes, but its directors, including Rubin, evidently did, as the Wall Street Journal noted. Or at least he slept until the time came to seek a rescue from Washington.
In another land–one where the press was more aggressive, and power brokers like Rubin were held accountable for the damage they help to cause–this set of actions might send a man into hiding, or at least retirement. Not so here–he remains a respected voice in Washington and a Harvard trustee. Indeed, Rubin has now earned honorary degrees from Harvard, Yale, Penn and Columbia, fully half of the schools in the Ivy League. (Why Princeton, Dartmouth, Brown and Cornell have passed him over, so far, is anybody’s guess.)
I write this not to single out Rubin, who quite probably believed he was doing the right thing, as did his successors at Treasury, Hank Paulson (who I wrote about in 2008 and came to respect back) and Timothy Geithner. But, as Zingales argues, many of us who believe that capitalism and robust markets and competition can be powerful forces for good have become complacent about the dangers of well-meaning but corrupt elites who have rigged the system for their own benefit — with corporate bailouts, vast expenditures on lobbying (a staggering $3.3 billion in 2011), regulations that protect entrenched interests, tax policy that favors the rich, the ever popular “public-private partnerships” that transfer wealth from public coffers to private owners and an ever-expanding array of market-distorting subsidies for farmers, manufacturers, automakers, oil and coal companies and, yes, the wind and solar power industries, too. [click to continue...]