Michael Hirsh on Wall Street and the Roots of the Crisis

Michael Hirsh, until very recently of Newsweek, now at the National Journal, is doing a star turn in connection with his new book, Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street

I must confess I blurbed his book (I find it a bit weird that I am now considered a worthy endorser) and I would not have done so had I not enjoyed it. Hirsh’s book is likely to been seen as the definitive journalistic account of the crisis, much as Too Big to Fail is now the benchmark Wall Street report. But TBTF stuck with in-depth reporting of a narrow window of time, and portrayed Big Names We All Heard Of struggling to Save the System, without questioning in a serous way whether that was the right objective. Hirsh looks over a much longer historical period, gives a clear picture how people who should have known better were swept up in a prevailing ideology, and how those who opposed it were shunted aside. I thought I was pretty well informed as to who did what to whom when, and learned a great deal from Hirsh’s history.

Hirsh chats on Morning Joe:

Visit msnbc.com for breaking news, world news, and news about the economy

WordPress does not do well with a lot of embed code, so if you can’t view the video, try here.

PS I hate the need to keep up with my own book promotion (it’s a bit tacky but necessary), but a lot of readers have been so kind as to say nice things about ECONNED in comments. If you are one of those people, and have not done so yet, please trundle over to Amazon or whatever book review service you prefer and leave a short comment and rating there. Thanks!

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  1. attempter

    Does this book call them “our best minds” the way that Newsweek piece did the other day?

    Also, who’s going to write the mortgage/MERS etc. book? Maybe somebody who already did a good job with the “law and economics” ideology?

  2. craazyman

    yeah even in the video he calls them our “best mines”

    they exploded for sure, right under our society.

    seriously he calls them our “best minds” so he sees the outside of the problem but not the inside.

    they are not our best minds. anyone who believes that is lost in a profound way. they are narrow forms of quantitative intelligence, spiritually and holistically developmentally challenged, and in need of special education to be fully human. Einstein and a few of the big guns in physics were truly “best minds” in a real sense, but the run-of-the-mill math geek, no way.

    They are the equivalent of pack mules, towing the plough of capital across the field of labor, cutting it with the deep blade of so-called efficiency. An efficiency that kills, maims and destroys the very thing it’s most in need of to realize itself. How much will it be worth when there’s no one left to measure it except a few fools in a mansion somehwere.

    1. rd

      I am an engineer. Having a model is one thing. Believing the model represents something real is something else entirely and takes a tremendous amount of thinking and validation.

      Too much of what is going on in finance is equivalent to elaborate polynomial curve fitting where the equation ceases to be valid beyond the data set it was calibrated to because there are no fundamental rules and principles governing it.

      Many of the best minds, like Einstein and Bohr, were able tyo put their work into a bigger context. Unfortunately, I think many of the quants only discover context in their numerous “Oops, I guess that assumption wasn’t valid” moments.

      If my engineering analyses and designs functioned the way the “financial engineers” models and analyses have functioned, I would have had my Professional Engineering license stripped from me years ago and would have been sued several times over. It must be nice not to have to take responsibility for your work.

  3. Leviathan

    Maybe it’s the pairing with the incoherent McAuliffe but this clip left me cold. This appears to be the argument: over the last 30 years DC politicians and their lackeys, driven by single-minded free market ideology (and greed) turned over the keys to the country to Wall Street. Now Washington has to take them back to find an “Apollo project” to save the economy.

    Washington broke the economy. Let’s get Washington to build a new one??

    1. F. Beard

      What “free market economy”?! What part of government backed fractional reserve banking cartel in a government enforced monopoly money supply sounds like the free market?

      Round and round we go… Socialism, fascism, socialism, etc.

  4. El Snarko

    It may be an odd perspective but since finishing a masters in training and development the other year I have begun to view much of this as a proplem of organizational efficiency and cultural norms failing. Anyway…This video is quite good, but these guys are overpaid. I see no change until those jobs float to world levels..though I will be buying the book.

    The only counter weight to capital is government. That is why they bought it. Just because you can make money at something does not mean you should do it especially if you cant cleanup the negatives. Someone should examine two things: How much profit results from cost shifting or externalizing risk failures? The other, lol, is a personal favorite:How much profit accrues from uncompensated overtime??

  5. LeeAnne

    “…. Socialism, fascism, socialism, etc.” add Corporatocracy to the list.

    This HIrsch tale could have made a nice little article in the magazine section of the New York Times.

    Forget economic theory. Economic theory is the busy work of academe and related media outlets, journals and think tanks that serve the interests of the banking industry.

    The powers that be in academia put their imprimatur on economic ‘theory,’ select and indoctrinate its high priests to teach it, and with a host of media players grinding out arguments pro and con this and that, provide legitimacy sufficient for cover of real banker objectives, which is to control the disposition and annuity streams of pension fund assets and related financial services.

    By Reagan’s time, the baby boomer consumer demographic had been sliced and diced, showing exponential growth of pension fund investment assets clearly. Pension fund assets would become the nation’s store of wealth. The government was bound to control this store of wealth some way-some how.

    Wall Street got there first. And, not content with income streams from servicing and serving up the pension fund assets of individuals and leveraging it up to high stakes gambling levels, they spied another opportunity to consolidate capital and their winnings; the homes of individuals rendered by them bereft of their traditional legal protections, and the banks exempt from prosecution of their multiple ongoing fraudulent practices.

    Incorporation would protect the assets of financial services and banking corporate executives; while they, with banking players all over the western world, aggressively mobilized resources, money and politicians, to challenge and eliminate every law put in place in the aftermath of the 1929 financial and social disaster that had been created to protect consumers of financial services; primarily rules transparency rules in the creation and offerings of investment products.

    They succeeded -with the help of those economic theories for cover.

    Now corporations and the wealthiest individuals own and control the US government.

    To insure that this form of US government remains and grows -the corporatocracy- a corrupt US Supreme Court has RULED, just in time for the warm-up to the 2012 presidential elections, that as individuals with the human rights of free speech, corporations have the right to financially contribute to election campaigns in unlimited amounts of money.

    Can this be allowed to stand? The Supreme Court of the United States has lost its right to supremacy as arbiters of the rights of the free citizens of the United States.

  6. mfritter

    I’m just a humble IT guy with graduate studies in mathematical logic so forgive me if this seems dumb:

    In this context, tax policies are not discussed as part of the negative consequences of the Reagan revolution. If taxes on the high levels of earned income are essentially confiscatory then the incentives for taking risks (with or without other peoples’ money) are reduced. This would also reduce the pay differential between the professions and make working at Wall St somewhat less attractive.

    If tax policy favored long term investment based on real (and not cooked) returns and taxed short term gains, wouldn’t the economy as a whole benefit?

    1. anon

      I think it would. That’s why I am puzzled about why tax discussions now tend to be focused on marginal tax rates instead of more fundamental aspects of the tax system.

      BTW, I don’t think that the decrease in marginal tax rates was the primary problem with Reagan-era tax policies. Though I think marginal tax rates on top income earners fell too far – from 91% in 1964 to 28% in 1986 – the progressivity of federal income taxes actually rose during that period. You can’t just look at marginal rates; IMO marginal rates are one of the least important aspects of the tax system.

      I think that many of the changes made via ERTA (1981) were positive (e.g., accelerated depreciation which encouraged investment in equipment). I think broadening the tax base (one feature of Reagan-era tax policies) was also generally a good idea. The changes during the Reagan era tended to decrease the differences in tax treatment among different types of business and investment income (one type of “horizontal equity” if you care to research more), which is generally good but cuts against trying to encourage investments (via tax law) that you believe will promote jobs or economic growth.

      Unfortunately, the Tax Reform Act of 1986 (TRA’86) increased the effective tax rate (much more important than the marginal rate) on new investments. Overall, the changes to the composition of tax revenue was far more important than any rate changes. Reagan-era tax policies changed the composition of tax revenue: toward payrolls and new investments and away from capital gains on existing investments and higher earners. That, IMO, was far more important than changes to the marginal tax rates.

      Re: Reagan-era tax policy changes outside of marginal tax cuts: (from http://www.ustreas.gov/education/fact-sheets/taxes/ustax.shtml)
      “The Economic Recovery Tax Act of 1981, which enjoyed strong bi-partisan support in the Congress, represented a fundamental shift in the course of federal income tax policy. . . . The 1981 Act . . . featured a dramatic departure in the treatment of business outlays for plant and equipment, i.e. capital cost recovery, or tax depreciation. . . . The 1981 Act explicitly displaced the notion of economic depreciation, instituting instead the Accelerated Cost Recovery System which greatly reduced the disincentive facing business investment and ultimately prepared the way for the subsequent boom in capital formation. In addition to accelerated cost recovery, the 1981 Act also instituted a 10 percent Investment Tax Credit to spur additional capital formation. . . .

      Following the enactment of the 1981, 1982, and 1984 tax changes there was a growing sense that the income tax was in need of a more fundamental overhaul. The economic boom following the 1982 recession convinced many political leaders of both parties that lower marginal tax rates were essential to a strong economy. . . . Further, the debates during this period led to a general understanding of the distortions imposed on the economy, and the lost jobs and wages, arising from the many peculiarities in the definition of the tax base. A new and broadly held philosophy of tax policy developed that the income tax would be greatly improved by repealing these various special provisions and lowering tax rates further. . . .

      The culmination of this effort was the Tax Reform Act of 1986, which brought the top statutory tax rate down from 50 percent to 28 percent while the corporate tax rate was reduced from 50 percent to 35 percent. The number of tax brackets was reduced and the personal exemption and standard deduction amounts were increased and indexed for inflation, thereby relieving millions of taxpayers of any Federal income tax burden.

      “Seen in a broader picture, the 1986 tax act represented the penultimate installment of an extraordinary process of tax rate reductions. Over the 22 year period from 1964 to 1986 the top individual tax rate was reduced from 91 to 28 percent. However, because upper-income taxpayers increasingly chose to receive their income in taxable form, and because of the broadening of the tax base, the progressivity of the tax system actually rose during this period.

      The 1986 tax act also represented a temporary reversal in the evolution of the tax system. Though called an income tax, the Federal tax system had for many years actually been a hybrid income and consumption tax, with the balance shifting toward or away from a consumption tax with many of the major tax acts. The 1986 tax act shifted the balance once again toward the income tax. Of greatest importance in this regard was the return to references to economic depreciation in the formulation of the capital cost recovery system and the significant new restrictions on the use of Individual Retirement Accounts.”


      1. rd

        The US has one of the most complex tax systems in the world. Personally, I don’t think that the tax system itself and how it is structured is actually understood by anybody because it is such a Rube Goldberg machine. Even the Treasury Secretary couldn’t get it right on a fairly simple tax problem that my college-age daughter had on her tax form.

        In my daughter’s case, the different forms of compensation that she got that year only totaled up to about $6k but she had multiple forms to fill out because she was an “independednt contractor” for some of it, a regular wage earner for other money, as well as tax credits for tuition etc. Her final tax form submission was something like 20 pages which is insane. She should have been able to do her taxes on the back of a postcard.

        Similarly, our income is almost entirely salary driven, but by the time we are done with AMT and other various things, our tax submissions end up being fairly complex. Once again, we should be able to do our taxes virtually on the back of a postcard.

        I don’t believe that it is possible to have a rational discussion about marginal tax rates until we have a vastly simplified and coherent tax structure. At that point in time, we could rationally select appropriate marginal tax rates.

        1. anon

          I agree that the tax system is too complicated. However, most attempts to simplify it would be met with resistance from those who benefit from the current structure. E.g., it would be possible, at least theoretically, to treat all income the same (although there would still be many issues concerning the definition of income and rules concerning when it is proper to recognize it). However, taxpayers would probably howl if deductions for mortgage interest, charitable contributions, business expenses, IRAs/401(k)s, etc. or credits for child care, educational expenses, earned income, etc. were eliminated. (And businesses would howl if deductions or tax credits that benefited them were eliminated.)

          Your daughter would not have needed to fill out 20 pages if, e.g., she didn’t get a tax credit for tuition or if independent contractors didn’t have deductions for things like health insurance, retirement plans, and work-related expenses. The deductions for independent contractors, which are more generous than for employees, probably didn’t help your daughter. However, many independent contractors use them and would be unhappy if they were eliminated even though taking those deductions entails more paperwork and more tax forms. Your daughter could have foregone the tuition tax credit if she thought that filling out the additional form(s) was (were) too onerous but most taxpayers prefer to minimize their taxes instead of simplifying them.

          (It seems like there should be simplified tax forms for people like your daughter who make below a certain threshold. However, in order to allow such an exception, the tax code itself – or the regs thereunder – would have to become more complicated. That’s probably a good tradeoff but it illustates that increasing the simplicity of one component often increases the complexity of another so making the overall system simpler is not easy.)

          Simple tax rules would make it impossible to do things like encourage investment in new business, new equipment, R&D, domestic business (vs. offshoring), education, or retirement savings. While there is merit in a simple system, there are problems too. Every deduction, credit, or unequal tax treatment of various types of income (e.g., capital gains vs. ordinary income, medical or retirement benefits for employees vs. ordinary income) creates complexity. Tax law could be simplified but simplifying it would not be easy or necessarily beneficial. There are real trade-offs between simplicity and fairness.

          The AMT is unnecessarily complicated. It was part of TRA ’86 and was one of the trade-offs for lowering the marginal tax rate. (It broaded the tax base on “higher income” earners in return for lower rates.)

          While Geither’s failure to correctly file his taxes illustates the complexity of the tax system, expecting the Secretary of the Treasury to understand taxes is like expecting the president to understand military strategy and tactics because he’s the commander-in-chief. The Assistant Secretary for Tax Policy (and those who work under him/her), along with the IRS and the Joint Committee on Taxation in Congress (comprised of members of the Ways and Means Committee and the Senate Finance Committe) are the experts on tax policy, not the Sec. of the Treasury.

          1. mfritter

            Thanks annon (or annons) and rd. This was illuminating. The complexity of the tax system and the apparent impossibility of making simple assertions about it is an interesting problem both philosophically and politically.

            What a great blog this is.

  7. Progressive Ed

    Yves, thanks for highlighting a new macro book for discussion on your website.
    It’s rather odd the author doesn’t have much to say about the asset bubble that was the foundation of the crash. All the other crap (CDS, MBS, little or no regulation of the derivatives markets) just added fuel to the fire, IMHO (see R. Duncan’s The Dollar Crisis for both an historically oriented and present-oriented discussion of the global problem of recurring asset bubbles since the fall of Bretton Woods).
    P.S. If he wasn’t an anti-market guy, he would not be appearing on MSNBC.

  8. ECON

    At a distance from USA and aware that Wall St exported the tragedy around the world in creating the bubble, I look to the near future in USA riven with extremism socially, culturally, politically and economically to lapse into a rolling wave of crises that effectively create the first dysfunctional state in 21st century.

  9. Anonymous


    A great quote from the message board at Peakoil.com:

    “Someplace, deep in their wealthy, and I think patriotic American minds, they have to realize that we have to come together as a nation to get some of this stuff fixed. It is not fun being wealthy in a guarded compound in the middle of a vast impoverished free for all, nor is it fun not being wealthy there either.”

  10. Bob

    Yeah, create a huge “Apollo” project, that will get the economy going again. Sure, confiscate by force money from the private sector (which is where all the tax money the government has came from) and put it into a make-work program.

    Let’s help the economy by taking money from the economy and putting it where we, us all-knowing politicians, think it should go. And, of course, we will take a large percentage to fund the bureaucracy that grows around it. Yeah, that will help the economy.

  11. Justicia

    How come “nobody noticed” that wages were stagnant, our industrial base was being exported and the middle class was living on credit cards? Are these guys kidding!!

    Maybe “nobody noticed” because business ‘reporters’ acted like a media cheerleading squad for the Free Marketeers. These TV pundits and talking heads either ignored or ridiculed the economists, trade unions, environmentalists, et al, who dared to question globalization, de-regulation, and the efficiency of markets.

    These are the same guys who promoted the delusion that cheap goods from China would make us all happy as we filled our carts at Wal-Mart and maxed out our credit cards and home equity lines.

    All of the evidence was there for anyone who cared to look at the data. But faith-based economics prevailed over evidence-based analysis.

    The FT printed this very fitting piece of analysis today. Nothing new here — except a critical perspective.


    Summers’ exit opens door for new ideas
    By Edward Luce
    Published: September 22 2010

    Yet many of Mr Summers’ very same admirers have also become his detractors. Put simply, they see him as the face of a paradigm that has outlived its usefulness – the view that globalisation is an unmixed blessing for the US economy, and that America’s disappearing manufacturing jobs will be replaced by high-value jobs in the service sector. Things do not appear to be working out that way.

    Take Applied Materials, a big US manufacturing company, which earlier this year shifted its chief technology officer and research and development operations to China. The company said it needed its R&D to be close to the source of its manufacturing operations and to its biggest future market. This is the opposite of what is supposed to happen. America was meant to keep the high-end jobs at home, while China would get all the low-value added production.

    But in practice researchers benefit from proximity to the production processes, which require constant trial and error. A cursory look at the US’s trade deficit illustrates the trend. Far from importing low cost manufactured goods, the US is buying high-tech stuff from such countries as China and Brazil, including aircraft engines, computers, turbines and heavy duty trucks. And it is exporting growing volumes of low-tech stuff, including pulp and paper, oil seeds and other commodities. People who lose their jobs in the US are on average moving to jobs that pay roughly a fifth less than their previous jobs. Others are having difficulty finding any jobs at all.

    That trend has only been accelerated by the Great Recession. According to Manufacturing and Technology News, the number of US workers displaced by US trade policy rose by 59 per cent in 2009 over 2008, thus qualifying for special benefits from the US Department of Labor. The same publication reports that the US now accounts for less than 5 per cent of global solar panel production despite the fact that it invented the technology in the 1980s.l

  12. Paul Tioxon

    America as a failed state? Too big to fail organizations operate on a global platform of international rules that seem to provide a new type of sovereignty that cannot be curtailed by the nation state that they grew from. The free world order is the basis for the social order. There were nation states that were clients of the USA and now the USA is under pressure of its imperial over reach and it’s ideology. The neo-classical economists were fabrications of the Cold War,commensurate with the fabricated pretexts for VietNam, the non-existent attacks in the Gulf of Tonkin. The need to provide a countervailing scientific basis to attract neutral, emerging and less developed countries into the free world camp was the role for Economics. It is not by coincidence that the academic field was to reflect in the warm glow of the Nobel Prizes for Peace, Science and Literature. It is not really a Nobel category but is a prize awarded in the in the memory on Nobel starting in 1968 conferring upon it a fellow traveler in the excellence of the scientific progress of Western Civilization. The material progress of the West was undeniable and what distinguished it was science. The Soviet Union trumpeted this fact, that it would offer the keys to material progress and we needed to have something scientific to sell as well. Long after the Berlin Wall has disappeared along with the Communist threat, we still persist in an inauthentic and unscientific ruse masquerading as a guiding ideology. It is dead, but everyone seems to pretend that it is not, and we still need to defend ourselves against creeping socialism, left wing European institutions and the like. Is the Democratic Party really to the left of the King of Spain, the Queen of England, the Emperor of Japan, the other half a dozen or so monarchies of Europe and the really left wing outfit, the Holy See headed up by the Pope? While the intellectual history of economics is clearly a journey to hard science respectability through mathematical modeling imitating physics, it is simply destroying us by being used by apparently ignorant politicians. It is no longer a case of blind ambition but blind policy with consequences that are well known and others that are unintended. It is not sustainable or political allowable to go along knowing what we know to be fundamentally wrong with destructive economic ruination all around us. Economics must be stripped of its political protection as the established ideology for the sake of survival. It must be reestablished as a source of valid political policy choices based on valid social science.

  13. mfritter

    Since my first post met with such interesting replies, I’ll venture another.

    Obviously government spending can create wealth. Consider the internet, which came from DARPA. Or consider the court system which enforces the laws that are necessary for the creation of business and the formation of capital. Or the police forces which protect both.

    Reliable, honest government is the prerequisite for the existence the industrial market system.

    Consider Kant’s bird of reason, which flies so well in the air of experience that it imagines it would fly even better in a vacuum.

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