Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else

by Chrystia Freeland

  On December 8, 2011, two days after Barack Obama made income inequality the theme of a speech in Osawatomie, Kansas, Ed Yardeni, an economist and investment adviser, devoted his influential daily post to a 1 percent fantasy of extraterrestrial immigration: “We may need an escape plan if Europe blows up and if President Barack Obama spends the next eleven months campaigning rather than presiding. Just in the nick of time, NASA yesterday announced that its Kepler space telescope has found a new planet, Kepler-22b. It is the most Earth-like yet. . . . Those of us who favor fiscal discipline, small governments and low taxes might consider moving there and starting over.”

  Meanwhile, a few modern-day plutocrats are actually trying to build a real Galt’s Gulch here on earth. This is the project of the Seasteading Institute, which is hoping to construct man-made islands in the international waters of the ocean, beyond the legal reach of any national government. These oases, where the rich would be free to prosper unrestrained by the grasping of the 99 percent, are the brainchild of Milton Friedman’s grandson and are being funded in part by Silicon Valley billionaire and libertarian Peter Thiel.

  Not all plutocrats want to escape to a Seastead. Paul Martin and Ernesto Zedillo are members in good standing of the global elite. Martin is a former Canadian prime minister, finance minister, deficit hawk, and, in his life before politics, a multimillionaire businessman. Zedillo is a former Mexican president, holds a doctorate in economics, directs Yale University’s Center for the Study of Globalization, and serves on the boards of the blue chips Procter & Gamble and Alcoa. Yet when I interviewed the two of them in a wide-ranging public conversation in Waterloo, Canada, they sounded an awful lot like the kids camped out in Zuccotti Park.

  “I have yet to talk to anybody who doesn’t say that they aren’t reflecting a disquiet that they themselves feel,” Martin said. “I think really the powerful thing is that Occupy Wall Street has hit a chord that really is touching the middle class—the middle class in Canada, the middle class in the United States, the middle class right around the world—and I think that makes it actually very, very powerful.”

  Zedillo thought OWS should widen its sights: “I could argue as an economist it’s not only about Wall Street. They should have an Occupy G20.”

  Martin and Zedillo would be welcome at any corporate dining room on Wall Street, or at any financier’s dinner party on the Upper East Side, but it was striking how strongly their views of Occupy Wall Street differed from the conventional wisdom among American business elites, especially financiers.

  That dissonance was not lost on Martin. He started out diplomatically—“I think that most people have basically given them [the protesters] a fair amount of credit”—but then couldn’t resist, adding, “I don’t want to pick on U.S. bankers, but the reaction, the one that really got me, was the banker who basically said, ‘You know, these are just a bunch of welfare bums. What we’ve got to do is cut welfare.’ A New York banker saying we’ve got to cut welfare is staggering to me. Why doesn’t he just look in the mirror? I think that actually what’s happened is that the inability of some people to defend their position has become so manifest that it’s actually added to the power of Occupy Wall Street.”

  Some plutocrats are worried about the eventual political consequences of the intellectual divide between their class and everyone else. Mohamed El-Erian, the Pimco CEO, is a model member of the super-elite. But he is also a man whose father grew up in rural Egypt, and he has studied nations where the gaps between the rich and the poor have had violent resolutions. “For successful people to say the nasty end of the income distribution doesn’t apply to me is shortsighted,” he told me. “I don’t know how you opt out of the world economy, but some people think we should try to do that. And in some unequal societies, confiscation can become a policy tool.”

  El-Erian told me that in June 2010. In the fall of 2011, after the launch of the Occupy Wall Street movement, he went further. “No nation can tolerate for long excessive shifts in income and wealth inequalities as they tear at the fabric of society,” he wrote to me in an e-mail. “Think of this simple analogy—that of an increasingly fancy house in a poor and deteriorating neighborhood. The well-being of the house cannot be divorced from that of the neighborhood as a whole.”

  El-Erian worried that his fellow plutocrats weren’t paying enough attention to the foreclosures down the block, though: “Some elites live astonishingly sheltered lives.”

  THE CENTER CANNOT HOLD

  Mark Carney is not most people’s idea of a radical. In Ottawa, where he has lived for the past eight years, the trim forty-seven-year-old is known as an uxorious husband and hands-on dad to his four daughters. The Canadian capital is hardly a party town, but even there he has a reputation as a homebody for whom an exciting night out is a school concert. At Harvard, he played hockey (he is Canadian, after all), but he never rose beyond backup goalie. He spent more time in the library than on ice, earning a magna in economics. At Oxford, where he got his PhD, this son of a high school principal and a schoolteacher is remembered by his classmates for his studiousness: Carney always sat in the front row at lectures many of the other students didn’t even bother to attend. From there, he went to Goldman Sachs, spending thirteen years at the firm’s offices in London and New York and Toronto. When Carney decided to go home, his first job was as a highly competent but self-effacing civil servant in the Bank of Canada before joining the finance ministry in 2004. And today, as governor of the Bank of Canada, he devotes most of his time to pondering such wonkish matters as how to measure global liquidity and the need for countercyclical regulation.

  But in the fall of 2011, Carney became a protagonist in a central battle between the plutocracy and the rest of us—a crucial fight over the regulatory power of the state. The showdown took place on a Friday afternoon in September in Washington, D.C. It was the weekend of the biannual meeting of the IMF and World Bank, a gathering of the world’s central bankers and finance ministers that takes place in the U.S. capital every fall and spring. The meetings have been on the calendar since these Bretton Woods institutions were first formed, and gradually a number of private sector conclaves have come to be held on their fringes.

  In 2011, one of those fringe meetings was organized by the Financial Services Forum, a bankers’ association. Its chairman, Goldman Sachs chief Lloyd Blankfein, invited Carney to address the group of about thirty bankers. They were particularly interested to talk to the Canadian not only because of his strong performance in the financial crisis—Canada was the only G7 country that didn’t need to bail out its banks—but also because Carney was tipped to become the next head of the Financial Stability Board, a body of international regulators that comes closest to being the world’s banking boss. The FSB’s big job at the moment is refining and implementing new international bank capital rules. These regulations, known as Basel III, have taken on particular importance because a lack of capital in many U.S. and European banks was a central cause of the 2008 financial meltdown.

  Meetings of bankers are generally pretty dry affairs, and relatively large international gatherings of this sort, whose participants don’t know one another well, are usually even more decorous. But this particular conversation soon heated up.

  Jamie Dimon, CEO of JPMorgan Chase, told Carney he thought the proposed Basel III rules were “cockamamie nonsense.” In fact, the bank chief said, the rules ran counter to the national interest. “I have called it anti-American,” Dimon said, according to one participant. “The only reason I am calling it anti-American is because I am American. I also think it’s anti-European.”

  Another participant remembered Dimon’s remarks slightly differently. In his recollection, Dimon insisted that Carney’s view was “anti-American,” a phrase Dimon had floated in a newspaper interview a few weeks earlier and which, he allegedly told the Washington group, had resonated with a lot of people, “so I’m going to keep on using it.” At a time when multinationals, including JPMorgan, which earns
around a quarter of its revenue outside North America, are increasingly global concerns, explicitly determined to go wherever the money is, it is noteworthy, to put it kindly, to hear a bank boss depict himself as a beleaguered national champion.

  At first, Carney responded calmly: “I hear what you are saying. I don’t think it will surprise you that I am taking a different view. These are reasonable responses to the financial crisis.”

  As Dimon’s tirade continued, his fellow bankers nervously tried to lower the temperature. Rick Waugh, the CEO of Scotiabank and a Canadian who has had his own disagreements with Carney, tried to intervene in their increasingly heated exchange.

  But Dimon was unstoppable and soon Carney got mad. Visibly angry, the Canadian central banker abruptly left the room.

  The other bankers, including Blankfein and Josef Ackermann, then the CEO of Deutsche Bank, looked uncomfortable, though it was Dimon’s tone, not his message, that concerned them. Ackermann tried to smooth things over by saying that Carney had left because of a tight schedule. (This was untrue: Carney was late for a press conference.)

  After the meeting Blankfein sent Carney—remember, he is a Goldman alumnus—an e-mail to patch things up. Dimon, who stands by the substance of his remarks, realized the tone and forum had been inappropriate, and phoned Carney on Saturday to apologize. He didn’t reach him. Dimon called again when Carney was back home in Ottawa on Monday. This time they spoke and, according to a JPMorgan executive, Dimon said he was sorry. “Jamie knew he messed up,” the executive said. “It wasn’t the right place and it wasn’t the right tone.” He told the Canadian he had the utmost respect for him and thought the world of him.

  By then, though, the battle had been joined. The day before the Dimon apology, a Sunday, Carney was the first speaker at the annual meeting of the Institute of International Finance, another international banking lobby group. He was introduced cordially by Waugh, a sparring partner back home who nonetheless told the audience, “He’s my governor and I’m very proud of that fact.”

  But neither Waugh’s courtesy nor Dimon’s bellicosity persuaded Carney to temper his message. “It is hard to see how backsliding would help. If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much too soon,” Carney said.

  “Everyone is claiming to be a Boy Scout while accusing others of juvenile delinquency,” he said. “However, neither merit badges nor detentions will be self-selected but, rather, determined by impartial peer review and mutual oversight.”

  Dimon and Carney were fighting about a lot of money: the Basel III requirements would significantly increase JPMorgan’s cost of doing business and could cut into its profits. But much more is at stake than JPMorgan’s balance sheet. That weekend exchange is a telling moment in the story of the plutocrats’ relationship with the state—more significant, even, than high-profile wrangling over taxes on the plutocracy, like carried interest or the charge on large estates.

  Here’s why. Even the most ardent right-winger agrees the state has the right to levy taxes—the fight is about who pays and how much. The battle between Carney and Dimon gets at a bigger and more contentious issue: Are the interests of the state and its big businesses synonymous? If not, who decides? And if they do clash, does the state have the right—and the might—to curb specific businesses for the collective good?

  This dispute has been around for a long time—remember the assertion of General Motors CEO Charlie Wilson, controversial from the moment he uttered it, that what is good for General Motors is good for America? And it is being fought everywhere there is private business. Carlos Slim’s relative economic power is so overwhelming that many local observers believe that even if the government of President Felipe Calderón wanted to regulate his businesses more aggressively, it would lack the muscle to do so. In the late 1990s, Russia’s oligarchs boasted that they controlled the Kremlin—a state of affairs that helped Vladimir Putin win public support for a repressive reassertion of state power. China’s plutocrats don’t fight the state because they are the state—and when any of them forget that, they are treated with summary brutality: between 2003 and 2011, at least fourteen Chinese billionaire businessmen were executed.

  In the West, particularly in the United States, the rise of the super-elite coincided with a strengthening of the conviction that what was good for business was good for the economy as a whole—and that business was in the best position to judge what worked. As Jed Rakoff, a New York judge and former federal prosecutor who has been pushing the SEC to be more exacting in its policing, reflected in an interview, “In the 1990s, of course, free enterprise, capitalism, and so forth were glorified to a degree. Some of that was political. We had finally won the battle against the Iron Curtain and part of the reason we won was because our economic system was a lot better than theirs. But I think maybe it was an overglorification of capitalism. I don’t mean to suggest that I’m personally for socialism. I’m not. But I am personally for some regulation.”

  That glorification extended to the masters of the universe on Wall Street. Donald Kohn, a former vice chairman of the Federal Reserve and a central banker whom Alan Greenspan called “my first mentor at the Fed,” now believes that this equation of the private interest with the public interest has gone too far. In fact, he, like Greenspan, has come to the view that it was a mistake even to think that bankers would be skilled at defending their own interests—that the markets could, as the prevailing theory had it, regulate themselves. At a British parliamentary hearing in May 2011, Kohn testified, “I placed too much confidence in the ability of the private market participants to police themselves.”

  COGNITIVE CAPTURE

  The Fed’s excessive faith in the bankers it regulated was caused by a phenomenon Willem Buiter has dubbed “cognitive state capture.” Like Carney, Buiter is no wild-eyed flamethrower. A former academic economist who served on the Monetary Policy Committee of the Bank of England, Buiter has himself joined the ranks of the global super-elite: born in Holland and possessor of British and American passports, since 2010 he has been chief economist for Citigroup. But in a paper delivered at the Federal Reserve’s annual economic conference in Jackson Hole in August 2008, Buiter argued, “The Fed listens to Wall Street and believes what it hears, or at any rate, the Fed acts as if it believes what Wall Street tells it. Wall Street tells the Fed about its pain, what its pain means for the economy at large, and what the Fed ought to do about it.”

  Buiter readily admits that during the financial crisis “Wall Street’s pain was indeed great—deservedly so in many cases.” But he asks, “Why did Wall Street get what it wanted?” His answer is cognitive state capture.

  “It is not achieved by special interests buying, blackmailing, or bribing their way toward control of the legislature, the executive, or some important regulator or agency, like the Fed, but instead through those in charge of the relevant state entity internalizing, as if by osmosis, the objectives, interest, and perception of reality of the vested interest they are meant to regulate and supervise in the public interest,” Buiter explains. “There is little room for doubt, in my view, that the Fed under Greenspan treated the stability, well-being, and profitability of the financial sector as an objective in its own right.”

  With hindsight, some of the leaders of the Fed during those years have become openly repentant. As Kohn said at the British parliamentary hearing, “I have learned quite a few lessons, unfortunately for the economy, I guess, in the past few years.” He added later, “I deeply regret the pain that was caused to millions of people in the United States and around the world by the financial crisis and its aftermath.”

  On Wall Street, though, the need for a more assertive state is not obvious. And if Dimon expresses this point of view with particular passion, that may be because he is one of the bankers who has the most right to it: he was, after all, one of the few CEOs who was actually pretty good at self-policing. Under h
is stewardship, JPMorgan, which is essentially a creature of Dimon’s deal-making genius, deftly avoided many of the most toxic assets that wrecked the balance sheets of other Wall Street firms. Dimon’s JPMorgan was strong enough to help Tim Geithner, then head of the New York Fed, in March 2008 by saving Bear Stearns (admittedly at a fire sale price); Dimon even left his own star-studded fifty-second birthday party to make the transaction happen. Dimon insisted from the start that his bank took the TARP bailout money only as a favor to the Treasury, which worried that unless the rescue was collective it would further stigmatize Wall Street’s weakest players. In 2009, the New York Times described Dimon as President Obama’s favorite banker, and his chief of staff at the time, Rahm Emanuel, even promised to speak at a JPMorgan board meeting. (Emanuel changed his mind after his plans were reported and the White House reconsidered such a visible demonstration of coziness with a specific Wall Street firm.)

  All of which not only adds to Dimon’s natural cockiness (he, too, is another largely self-made plutocrat, who ascended from Queens to Wall Street via Harvard Business School), it fuels his conviction that business will do a better job running the economy if the government, with its burdensome rules, stays out of the way.