Imprisoned inside this book is a good book screaming to get out. Buried alive, like the Man in the Iron Mask, this Hidden Book offers worthwhile insights into, and criticism of, the crony capitalism that has choked the free market out of our finance system. But the Hidden Book has disappeared from view under the crushing weight of authorial ignorance and an idol of, or rather an entire marble temple erected to, Elizabeth Warren. So each time the author of Makers and Takers, Rana Foroohar, yet again prostrates herself yet again before her idol, I think I can hear a tinny shriek from the dungeon, as the Hidden Book realizes that its message will never, ever, fly free.
Oh, I had high hopes for this book. Like Diogenes, I have been looking for an honest book on this topic, holding my lamp high, without much luck. Finance is one area I know a lot about, and I am fully aware of the heinous corruption that characterizes the industry. I am also aware that politicians of both parties are cravenly beholden to the interests of the masters of finance, and that nearly all journalists lack the raw intelligence to understand finance or its corruption. Foroohar correctly identifies this latter point, but she incorrectly believes she does not suffer from that lack of intelligence herself. To be fair, she grasps somewhat more than the average journalist, but here, given the critical importance of the topic, that’s no better than being the world’s tallest midget. And so, I still haven’t found a book that approaches the corruptions of finance with both insight and understanding.
More than anything else, what characterizes this book is innumerable well-crafted statements that sound good—but that when you think about them, make no sense. Underneath the dross, the interminable references to the author’s own importance (shown mostly by her constant use of the first person and continually talking about how famous people let her interview them), and the flogging to death of bad metaphors (if I have to hear again about “financial methods of mass destruction,” especially those that also “pour gasoline on a crisis,” I’m going to join the Hidden Book in screaming), there are good points to be made, but I doubt very much if most readers will come away with anything of value.
Ignorance abounds. Foroohar seems unaware that there is any distinction between “small business” and “start-up” business; she uses the terms interchangeably. She says that “accountants, consultants and lawyers” get “between 30 and 80 percent of their income . . . not in cash but in incentive stock options and stock shares,” which would surprise all the accountants, consultant, and lawyers I know. She uses the term “bank” interchangeably for commercial banks and investment banks (and merchant banks), even though she seems dimly aware of the differences. In a book on flowers, imprecision about banks might not matter, but in a book on banks, it muddies a lot of analysis. She refers to “trickle-down” economics as if it were a technical term, rather than a content-free propaganda term. She confuses the incentive effects of stock and stock options (she would do well to read Steven Clifford’s The C.E.O. Pay Machine). Her complete list of “large and successful companies” that “in the past few years” have been targets of shareholder activists is “Dell, Yahoo [sic], Dow, JCPenney, GM, DuPont, Sears, and Hewlett-Packard.” To most people, “successful” doesn’t spring to mind, given that list. Foroohar seems to think “making” money is the same thing as revenue. She thinks Kodak’s decline was because it was forced to engage in short-term thinking. She says, out loud, that “the key goal of finance is to move liabilities (like labor costs and factories) off the balance sheet.” That’s not the key goal; making money is. And labor costs are not liabilities; they are expenses, and do not appear on the balance sheet. Plus, anyone who can move factories or other fixed assets off the balance sheet is pretty clever, though why a company would want to do that is opaque to me. The author finds it impossible to understand why “retained profits can’t be written off,” whatever that means. And so on, in amateurish style, throughout.
Leaving sheer ignorance aside, I think many of the book’s conceptual problems stem from Foroohar’s complete lack of understanding about small business. She’s a columnist for London’s Financial Times, and her stock-in-trade seems to be interviewing, and generally hobnobbing with, the elites of the journalism and finance world. I doubt if she is personally acquainted with a single person who owns and runs a small business, such as one with 250 employees. Foroohar talks all the time about “real business”—but has no idea what that is. Thus, she fails to make the key point that the zero-interest loans offered to big business, around which much of her analysis revolves, are not only not offered at all to small business, who must pay 5% or more, but that the owners of small businesses also have to personally guarantee any loan, so that they are personally ruined if things don’t go right. She fails to grasp how government regulation, as well as its filthy cousin, frivolous lawsuits, are a crushing burden to small business—and, even more importantly, how big business spends huge money to encourage more regulation, in order to harm small business. (In fact, commercial banks are among the worst offenders in this area.) Yes, she pays lip service to the need to loan to small businesses—but she doesn’t seem to understand how that actually works, and that it’s larger factors that dictate whether small business wants to accept loans, or would rather fold its tents and go home. It’s not as simple as “big banks prefer not to lend to small businesses.” Similarly, she nods to the overall desirability of encouraging entrepreneurs, yet seems to have no idea what exactly they are or how to please them.
Anyway, Makers and Takers is organized in ten chapters, in each of which Foroohar in turn trains her (squirt gun) fire on a different area of the finance industry. Threaded through every chapter, though, are a few key points, varied somewhat from time to time, embodied within Foroohar’s all-purpose epithet, “financialization.” One is factual, summarized as “finance represents about 7 percent of our economy but takes around 25 percent of all corporate profits, while creating only 4 percent of all jobs.” In other words: finance is a “taker.” Another is normative: that finance is “meant” to serve “real business,” but instead is now a parasite upon and a hindrance to real business (i.e., “makers”—though the author never defines that term, and most definitely is not channeling Ayn Rand). The third is basically political: this parasitism of finance is the main cause of the miserable performance of the economy under Obama, not the heavy hand of government or Americans’ lack of confidence in the future. For Foorohar, the administrative state and Democrats are never to blame for anything, and with a few exceptions where they were misled by others, they are always heroes. In every case, if it is not shadowy figures of finance who are to blame for an economic problem, it is Republicans, either collectively or in the form of evil Reagan.
My difficulty, though, in reviewing this book is that despite its gross flaws I agree with its most basic point, that finance as currently constituted is a blight upon the land. It is true that “The power of these large, oligopolistic interests is remaking our unique brand of American capitalism into a crony capitalism more suited to a third-world autocracy than a supposedly free-market democracy.” Yes, finance wastes the talents of our best and brightest. Yes, “We have a rentier economy in which a small group of vested interests take the cream off the top, to the detriment of overall growth.” Yes, Wall Street’s treatment of jobholders as disposable is corrosive and pernicious, and has spread across the land. No doubt giant corporations take all the benefits of being in the United States and then dodge the taxman by stashing assets abroad, and, more broadly, they generate intellectual property using this country’s resources and use it to benefit foreigners (as Richard Baldwin documents in The Great Convergence). Yes, the lobbying power, visible and invisible, of finance means the gutting of laws and regulations, and the “revolving door” effect exacerbates this problem. But Foroohar’s fleshing out and execution of her attack on finance are so incompetent that the book harms rather than advances an appreciation of the problems.
My own interest in the corruption of finance springs from my movement away from pseudo-free market conservatism to something more approaching Teddy Roosevelt. In fact, I am conceiving a new-found appreciation for TR, especially in the days of fresh malefaction by the corporatist giants of technology. He was certainly on to something in his desire to crush the corrupt alliance of big business and politics, which even in his day had knock-on effects on society at large. I have many friends who work in finance, and friends whose academic work revolves around finance. I am not sure what most of them would say about my own attacks on the finance industry or the tech giants; many would fall back on the eternal verities of efficient markets and the need for liquidity. But that some of something is good does not make more better. Human nature is to take any system and distort it for personal gain, and we are far, far down that path with the modern finance industry.
Makers and Takers begins with the history of finance, in a chapter titled “The Fall of Finance.” I picture Lucifer hurtling from Heaven, but the actual text is much more boring, and the reader is not reminded of Milton. Foroohar narrates the Great Depression, Glass-Steagall, Regulation Q (which limited the maximum interest rates commercial banks could offer) and the rise of financial derivatives. We then skip the 1970s, except with a reference to problems outside the US. Jimmy Carter is only mentioned for ending Regulation Q; 1970s inflation is only mentioned in passing and weirdly ascribed to “all the complex [financial] deal making at the global level.” Stagflation is mentioned not at all. Then evil Reagan came, creating domestic inflation (yes, this book really says that, on p. 52), and evil Reagan pushed deregulation and less saving, strengthening the finance industry, whose raison d’être is creating debt to trap people in its web. (Foroohar seems to think that debt is like smallpox—always bad; and debt of all types, even the simplest, is “financialization.”)
Nothing happened under George H.W. Bush, who is totally absent from this lengthy history. Then Clinton, misled by evil advisors, mostly Republicans, deregulated more, causing financial crises all over the world, from Asia to Brazil, which crises apparently had no other cause. After that, banks cooperated to enable bad behavior such as Enron. Then came the 2008 financial crisis, also caused by the banks, the aftereffects of which the doughty Obama was unable to solve, despite the sound advice of awesome Elizabeth Warren, because of his unwilling and unknowing “cognitive capture” by Republican finance types. (Nowhere does Foroohar acknowledge that most of the masters of finance are, in fact, aggressive partisans of the Democratic Party, from George Soros to Tom Steyer.) And here we are today.
“Simplistic” is too nice a word for this canned history, which for all practical purposes ignores the real core of the structural problem, the largely hidden intertwining among the elites in government and finance, and their combined willingness to harm larger society for their personal benefit. In fact, we are never told what exactly Foroohar’s objection is to finance. Too much debt? Too much opacity? There is much talk about the “real economy”—but that is never defined. There is much talk about “financialization,” which seems, at different points, to mean the issuance of debt, securitization, or inadequate government regulation (although, other than Glass-Steagall and the CPFB, the author offers almost no specifics as to what government regulation is desirable, except, of course, anything Elizabeth Warren may propose at any point in the future). But none of this is ever tied together in any coherent way.
The next chapter continues a historical frame by narrating “The Fall of Business,” by which Foroohar means that business used to be public spirited and now it’s not. The original sin was when courts recognized that stockholders, rather than some ill-defined broader stakeholder group, were the people for whose primary benefit a corporation must be managed. From this flowed the evils of Taylorism, short-term thinking, bean counting, Robert McNamara, the Ford Pinto, and GM ignition switches. All these evils were merely facets of Foroohar’s bugbear, financialization, and were the result of big business no longer wanting to make great products, but instead (gasp!), wanting to make money. How, exactly, this relates to finance is not shown, other than that money is involved.
Slogging on, the reader next learns that business schools teach mostly finance, not “business.” Leaving aside that, like leadership or ethics, but more so, it’s impossible to teach “business,” and that Foroohar doesn’t herself know anything at all about, or apparently have a single iota of experience in, running a business, it’s not clear what her complaint is here. At actual business schools, most of the time even entrepreneurship is taught by professional academics, which is idiocy. After all, especially at business schools, those who do, do; those who can’t, teach. (I always wanted to shoot myself, listening to professional academics teaching “strategy” like they had any idea what they were talking about, and that was before I ran my own business.) To the extent business schools add any value at all, demanding that business schools teach more “business,” rather than teaching building blocks (including finance) is an ignorant and irrelevant way to approach the problem that finance has corrupted our power structures. MBA students study finance for the same reason Willie Sutton robbed banks—because that’s where the money is. And they “study” mostly to make contacts. Yes, MBA students don’t add much to society, as shown by their rarity in Silicon Valley or the productive segments of working businesses. But MBA programs are a second order issue to the real problem—that most finance as an industry is itself of little social value, and big social cost.
More confused than ever, and not sure what the point of the book is so far, even though we’re nearly halfway through, the reader learns that “shareholder activism,” as practiced by men such as Carl Icahn, is bad, very bad—mostly because the pressure brought to bear on corporate managers by such people causes managers to act in ways that fail to benefit both the other stockholders and a broader group of stakeholders, especially by encouraging stock repurchases, a particular focus of the author’s ire. Such pressure allegedly prevents companies from reinvesting for the long-term and engaging in “moonshot” projects. There is an element of truth to this, but it is also true that companies that hoard cash almost always spend it in ways that destroy value and accomplish little, and giving it back to the shareholders makes much more sense (though as Foroohar discusses later, tax strategies often prevent doing this directly—hence borrowing for stock repurchases). Next Jack Welch gets (justifiably) hammered, both for being grossly overrated in general and for turning GE from a company that makes things into one that focused on getting money from financial chicanery, directly and indirectly. Fair enough—but the existence of GE Capital is really a different problem than the existence of Goldman Sachs, and Foroohar doesn’t seem to understand that offering debt for consumer purchases is not the same thing as what Goldman does.
Other chapters meander on, criticizing speculation in the commodities markets (why this is relevant I’m not sure, other than apparently it drives up commodity costs), in which Goldman Sachs is the chief villain (which I’m sure is true). I think the point is that speculation is not real and can therefore not create value, and that the emphasis on it chokes resources from “real business.” In another chapter, we are told that private equity firms own and rent too many houses, bought out of foreclosure after 2008. Why this is bad is not explained, other than the new owners are not susceptible to pressure from left-wing “community organizers” and the local regulators they have captured, and supposedly the income streams from rents have been securitized into instruments that are assumed to be inherently toxic, again for unexplained reasons. Apparently encouraging empty, rotting homes is better. I wholeheartedly agree that the private equity industry should be hobbled, including by taxing carried interest as ordinary income. But all the focus in this book with respect to private equity firms is on irrelevant matters through an ignorant lens.
Then we are treated to a long screed on “The End of Retirement.” The main complaint here seems to be that defined benefit pension plans have disappeared and 401(k) plans are too discretionary, and too often invested in funds that charge fees for returns lower than that of index funds. Like a blind squirrel who still manages to find nuts, Foroohar is again correct that managed mutual funds can never beat index funds, overall—but she doesn’t seem to realize that’s strong evidence for the truth of the efficient capital markets hypothesis, which she rejects out of hand (without, apparently, even remotely understanding it). Also, Detroit went bankrupt, not because it had decades of stupid, corrupt, Democratic governance resulting in crumbling infrastructure, huge defined-benefit pensions to government employees, and a vanishing tax base, but because tricksy finance types forced them to sign a bad financing deal in 2006. No doubt the finance types were tricksy—I, for example, know from writing underwriting agreements just how “heads I win, tails you lose” all finance agreements are. But that doesn’t mean Detroit didn’t cause its own problems.
And, predictably, the solutions Foroohar offers are trite. A Hippocratic Oath for those in finance. More federal government regulation of every area, from consumer debt to commodities, though of what type and to what precise end is not specified—apparently government regulation is like chocolate, automatically good and delicious. More federal taxes, which might make sense as a method to break the masters of finance, but here just seem beneficial because they would fund increased government, an independent good. Foroohar also demands an increase in top marginal tax rates, out of “basic fairness”—that is, increased taxes on “makers,” which seems to undercut the entire point of her book, that makers, presumably what she means by “real business,” should be encouraged and rewarded. Other proposed solutions aren’t awful, but aren’t really that helpful—bringing back Glass-Steagall, increasing bank capital requirements, and similar technical changes. These are balanced by gross stupidity—such as calls to “build a new growth model,” “using a new moonshot goal for economic growth.” Sounds good. What is it? “A national green stimulus program.” Yay! Problem solved!
What we really need is not regulation, but Congressional action to break up large finance entities and aggressively discourage future rent-seeking, capture and revolving door activity. Chase Bank should be shattered into pieces. Anyone who has ever worked at Goldman Sachs, even as an intern or secretary, should be instantly fired from any position in the federal government and barred from ever working in government again. All private equity income, from any source, should be taxed as ordinary income. But we do not need more silly organizations like the CPFB. It is an abomination and if it were to have any real impact, it would be captured and emasculated by the masters of finance, just like all the other regulators. We need less navel gazing and more direct action to break the power of the oligarchs. We need will and leadership, not more nattering by the ignorant. If you want to think more about the finance industry and our society, don’t read this book. Instead, read a 2015 paper by Chicago Booth professor Luigi Zingales (a hero of mine, and author of A Capitalism for the People), entitled “Does Finance Benefit Business?” The writings of Zingales are a much better place to start than this mostly worthless book.