The Road From Ruin: How To Revive Capitalism and Put America Back on Top, by Matthew Bishop and Michael Green, is a valuable book, but perhaps not quite in the way its authors intend. Rather than reading it as a prescription of policies to follow, look at it as an example of the conventional wisdom held and expressed by a certain set of Davos-attending, European types.
It is replete with a straw man: "Overly simplistic" market "fundamentalists" who "believe the market can do no wrong," with "their characterization of private markets as good and government as bad." Who is it that's being overly simplistic here, the so-called market fundamentalists or the authors describing them?
Conclusions are all too often stated rather than argued: "then U.S. treasury secretary Hank Paulson's biggest blunder was to let Lehman Brothers go under in a mistaken attempt to discourage moral hazard"; "splitting up the banking sector into separate investment and retail banks, imposing arbitrary caps on interest rates, and tightly regulating the stock market hobbled the U.S. economy for nearly half a century."
The acknowledgements indicate that the book had an "editor," but a reader might otherwise be left with the impression that editing was absent. How else to explain a three page stretch in which we are first told, "The most pressing financial challenge is for the dollar to relinquish its role as the world's reserve currency" and then told that "climate change" is "the most pressing global economic challenge of all." They can't both be the most pressing challenges, can they?
A similar glaring contradiction appears in the book's conclusion, in which the authors warn that unless "world leaders take steps" to reduce inequality, "the global economy will remain inherently unstable and prone to crises." Just two pages later, the idea that the boom-and-bust business cycle can be abolished is denounced as "utopian twaddle that goes against human nature." Are the authors there confessing to having peddled utopian twaddle just two pages earlier?
Yet a third contradiction is the book's subtitle, with its reference to how to "Put America Back on Top." The book's text makes clear the authors consider any such desire to be quaint; they call instead for "leaders to rise above their traditional nationalistic agendas – especially the leaders of America." The United States, they write, "must learn to play as 'the first among equals' rather than the undisputed hegemon."
The government's treatment of Fannie Mae, Freddie Mac and Bear Stearns is described as a bailout or a "rescue" rather than an ambush or a seizure. The authors fault Mr. Paulson for his "timidity," which will come as quite a surprise to the ambushed Fannie Mae or AIG shareholders.
Richard Gephardt is described incorrectly as a "former Democratic senator."
The authors call for a "new, improved capitalism" to replace "the discredited old capitalism."
"The time has come for business leaders to stop offering up as an excuse Milton Friedman's famous argument that 'the social responsibility of business is to maximize its profits,'" Mr. Bishop and Mr. Green write, sounding much like HSBC Chairman Stephen Green, whose book was reviewed here earlier.
"Many companies are missing out on substantial long-term profit opportunities because they are too focused on short-term profits and not enough on figuring out how to help society make progress," the authors write. Two pages later, they offer as examples of such far-sighted concern for societal progress Citigroup's pledge of "$50 billion to invest in green initiatives over ten years, including $31 billion for clean technologies," and a similar $20 billion commitment from Bank of America. Citi and Bank of America shareholders, who have suffered, would probably settle for having the green in their pockets, or at least some profits with which the shareholders could then go pursue their own visions of societal progress without having to distract the executives they had hired to run their banks.
These flaws are all the more disappointing because the authors show flashes of intelligence, independent thinking, and even brilliance. They make the useful point, for example, that "It is far from clear whether the more tightly regulated parts of the financial sector, such as banks, did any better than those which were lightly regulated, such as hedge funds."
They also reject the idea of restoring the Glass-Steagall division between commercial and investment banking: "There is no evidence whatsoever that the mixing of commercial and investment banking was a significant cause of the financial collapse of 2008. Both Bear Stearns and Lehman Brothers, the first casualties of the crisis, were classic investment banks with no commercial banking operations. And AIG was not a bank at all."
My favorite part of the book was the account of the reaction when, in 2002, The Economist, where Mr. Bishop is the U.S. business editor, published an article suggesting that AIG stock was overvalued and that "any cracks in the confidence that AIG knows what it is doing in derivatives would be highly damaging."
The authors recount what happened next: AIG responded "by demanding that a research company cited in the article issue a public retraction of its comments about AIG, or face getting driven out of business; getting a former British government minister to protest to the editor in chief of the magazine; and demanding a meeting, at which top executives of the firm, flown by private jet from New York to London, called for the journalist who wrote the story to be fired." When the Economist's editor did not back down, AIG pulled its $1 million a year in advertising from the magazine.
Disclosure: This article was based on a review copy of the book provided by the publisher.