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

by Chrystia Freeland

  Hence, a few months before his dispute with Carney, Dimon enlivened a public question-and-answer session in Atlanta with his own regulator, Fed chairman Ben Bernanke, by warning of the dangers of higher capital requirements. For one thing, Dimon argued, “Most of the bad actors are gone.” For another, he cautioned, in an inversion of the Charlie Wilson line, that what was bad for JPMorgan would be bad for the country as a whole. “I have this great fear that someone’s going to write a book in ten or twenty years, and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery. . . . Has anyone bothered to study the cumulative effect of all these things [regulations] and do you have a fear like I do that when we look back and look at them all, that they will be a reason it took so long that our banks, our credit, our businesses, and most importantly job creation start going again? Is this holding us back at this point?”

  That wasn’t the first time Dimon went public with his skepticism of the government’s ability to manage the economy. In January 2010, at the hearings of the Financial Crisis Inquiry Commission in Washington, D.C., he said, “My daughter called me from school one day and said, ‘Dad, what’s a financial crisis?’ and without trying to be funny, I said, ‘It’s the kind of thing that happens every five to seven years.’ And she said, ‘Then why is everybody so surprised?’”

  That couldn’t be more different from Mark Carney’s worldview. He obliquely dismissed Dimon’s daughter anecdote in Berlin nine months later, not referring to Dimon by name but alluding to his remarks and charaterizing the attitude they betrayed as “jaded.” Carney asked why the rest of us “should be content with the dreary cycle of upheaval” the unnamed bank CEO had described. In the Washington speech he delivered forty-eight hours after his direct clash with Dimon, Carney challenged what he called Wall Street “fatalism” head-on: “In no other aspect of human endeavor do men and women not strive to learn and to improve. The sad experience of the past few years shows that there is ample scope to improve the efficiency and resilience of the global financial system. By clarity of purpose and resolute implementation, we can do so. The current reform initiatives mark real progress.”

  Carney also took on another shibboleth of the banking lobby—that new rules would make little difference because they would always be arbitraged away. This is a polite way of saying bankers and their lawyers will always outsmart their regulators. It is a familiar poacher/gamekeeper argument—you can make the same point about terrorists and security regulations—with the added oomph of money and meritocracy. With bankers outearning their regulators by more than 100 to 1 (the ratio of Dimon’s salary to Bernanke’s), surely the bureaucrats will be hopelessly intellectually outmatched?

  The gap appears not just in the pay slips but in resources. One White House official who had earned as much as $5 million a year in the private sector was dismayed to learn he was expected to fly economy class to meetings in Asia, a significant discomfort and one that, at more than fifty, he felt made it hard for him to do his job. On a trip from Washington to New York in the spring of 2011, CFTC (Commodity Futures Trading Commission) officials took the Megabus (thirty dollars per person round-trip), rather than Amtrak or the Delta shuttle, saving more than a thousand dollars. To avoid the cost of hotels, SEC staffers sometimes try to squeeze in trips to New York, where most of the banks they regulate are based, into a single day. In the movies the underdog on the bus beats the plutocrat on the private jet, but it is hard to see why that should happen in real life with any regularity.

  Carney, who earns $500,000 a year, less than one-twentieth the 2011 compensation of Canada’s most highly paid Bay Street banker, explained why bankers’ outsmarting the system only made regulation even more important: “New and better rules are necessary, but not sufficient. People will always try to find ways around them. Some may succeed, for a while. That is why good supervision is paramount. Rules are only as good as the supervisors who enforce them, and good supervisors look beyond the letter of the rules to their spirit.”

  Eight months later, Dimon inadvertently bolstered Carney’s case. On May 10, 2012, JPMorgan revealed that a trader known as the London Whale had made a bet on credit derivatives that went sour, leading to a loss of at least $2 billion, and which analysts close to the bank believed could rise to $6 billion. Wall Street, led by Dimon, had spent the previous three years warning that Washington’s regulatory overreach was stifling the financial system. The London Whale’s trades suggested that the real danger was still too much risk. As Congressman Barney Frank put it, “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today.”

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  In the fight over capital requirements, the bankers would be delighted if the Fed returned to its Greenspan-era reliance on market self-regulation. But the bigger issue of the relationship between plutocrats and the state can’t be reduced to business battling for smaller government. Often, a big, intrusive state is the plutocrat’s best friend—true of state capitalist regimes like China and Russia and of industries, like the defense business, that live on state largesse, or of companies, like the U.S. steel industry under George W. Bush, that have lobbied for and won protectionist legislation. In 2008 and 2009 it was true of Wall Street, too, when the bankers pushed for and got a massive government bailout to save their companies—the biggest state intervention in a national economy, as a percentage of GDP, since Lenin’s nationalization. In fact, even the most ardent believer in small government and free enterprise can also think it is the duty of business to cut the best possible deal with the state. As Ken Griffin, the billionaire hedge fund manager who supports conservative super PACs, explained, “CEOs have duties to their shareholders. If the state’s willing to hand out gifts, there are many who feel compelled to go get them.” So this isn’t just a question of big versus small government.

  The issue, instead, is whether the interests of business and of the community at large are always the same and, if they aren’t, whether the government has the will, the authority, and the brains to defend the latter, even against the protests of the former. That’s why Carney wanted to raise capital requirements. As he reminded his Sunday morning Washington audience, “Four years ago, manifest deficiencies in capital adequacy, liquidity buffers, and risk management led to the collapse of some of the most storied names in finance and triggered the worst financial crisis since the Great Depression. The complete loss of confidence in private finance—your membership—could only be arrested by the provision of comprehensive backstops by the richest economies in the world. With about $4 trillion in output and almost twenty-eight million jobs lost in the ensuing recession, the case for reform was clear then and remains so today.”

  Carney then cited a Bank of Canada calculation that found that “even if Basel III were to reduce slightly the probability of such crises in the future,” the economic value of that decreased risk to the G20 countries would be about $13 trillion. In other words, this may hurt your business a little, but it will help the economy as a whole a lot.

  Luigi Zingales, a professor at the University of Chicago’s Booth School of Business, frames this as the choice between being promarket and being probusiness. Super-elites are often the product of a strong market economy, but, ironically, as their influence grows they can become its opponents.

  Here is how Zingales, an ardently patriotic immigrant to America and a passionate defender of the market economy, describes the dynamic: “True capitalism lacks a strong lobby. That assertion might appear strange in light of the billions of dollars firms spend lobbying Congress in America, but that is exactly the point. Most lobbying seeks to tilt the playing field in one direction or another, not to level it. Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established f
irms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions. As a result, serious tensions emerge between a pro-market agenda and a pro-business one.”

  WHOSE NEW CLASS?

  In January 1977, America’s boardrooms and universities were jolted by an unexpected piece of news. Henry Ford II, chairman and chief executive of the Ford Motor Company and grandson of the original Henry, had resigned from the board of the Ford Foundation.

  A former naval officer known for his aggressive and blunt management style—he rejected Lee Iacocca’s proposal to put a Honda engine in a Ford car on the grounds that “no car with my name on the hood is going to have a Jap engine inside”—Ford laid out the reasons for his departure in a blistering resignation letter that he released to the press:

  The Foundation exists and thrives on the fruits of our economic system. The dividends of competitive enterprise make it all possible. A significant portion of the abundance created by United States business enables the Foundation and like institutions to carry on their work. In effect, the Foundation is a creature of capitalism—a statement that I am sure would be shocking to many professional staff people in the field of philanthropy. It is hard to discern recognition of this fact in anything the Foundation does. It is even more difficult to find an understanding of this in many of the institutions, particularly the universities, that are the beneficiaries of the Foundation’s grant programs. . . . I am just suggesting to the Trustees and the staff that the system that makes the Foundation possible very probably is worth preserving. Perhaps it’s time for the Trustees and staff to examine the question of our obligations to our economic system; and to consider how the Foundation, as one of the system’s most prominent offspring, might act most widely to strengthen and improve its progenitor.

  The departure of the Deuce, as Ford was known, had no direct repercussions for the foundation that carried the family name. It had been created by his grandfather and his father, Edsel, in 1936, largely as a tax shelter and a vehicle to ensure continued family control over the car business. That structure worked, but it also meant that by 1977 the founding family had only moral authority over the philanthropy.

  In the social and cultural tumult of the 1970s, that didn’t count for much. McGeorge Bundy, then president of the Ford Foundation, responded with lofty unconcern to the public rebuke from the family scion: “He has a right to expect people to read his letter carefully, but I don’t think one letter from anyone is going to change the foundation’s course.”

  But Ford’s departure turned out to be a turning point. That was partly because of the prominence of the man, his company, and his family’s philanthropy. At that moment, Ford was the second-highest-paid CEO in America and the Ford Motor Company the country’s fourth-largest corporation by sales. In its universe, the Ford Foundation cast an even longer shadow. It was by far the nation’s biggest philanthropy; in 1954 it outspent runner-up Rockefeller fourfold and third-place Carnegie ten times over.

  Most important, Ford’s letter crystallized a fear that had been growing in the minds of many American businesspeople—that they were losing the national battle of ideas. Ford’s Greatest Generation had won the Second World War, and when they came home they had helped create two decades of unprecedented, and widely shared, national prosperity. But they now feared that the institutions that created the country’s intellectual and ideological weather—its universities, its foundations, and its newsrooms—had turned hostile to business and to capitalism.

  Irving Kristol captured what he described as this battle between “the academic and business communities” in a seminal essay he published three months after Ford’s cri de guerre. “It is a fact that the majority of the large foundations in this country, like most of our major universities, exude a climate of opinion wherein an anti-business bent becomes a perfectly natural inclination.”

  Judged by today’s standards, that is certainly the case. The marginal tax rate on top earners was 70 percent, capital gains were taxed at a maximum rate of 49 percent, and Wall Street, constrained by the separation between investment and retail banking of the Glass-Steagall Act, was still the rather sleepy handmaiden of industry. Like their philanthro-capitalist successors, the foundations of the 1960s and 1970s hoped to leverage their projects into influence on government policy.

  But rather than bringing the techniques and skills of the private sector to the social sector, the foundations of that era hoped to transform private charity into state largesse. As Paul Ylvisaker, a Harvard social theorist who became an influential Ford staffer, later explained, the job of the foundation was to promote “programs and policies, such as social security, income maintenance, and educational entitlement, that convert isolated and discretionary acts of private charity into regularized public remedies that flow as a matter of legislated right.”

  Kristol said business needed to fight back. Different corporations, he wrote, could well have different views of their social responsibility, but they would all surely agree that it included keeping the world safe for capitalism and capitalists: “Most corporations would presumably agree that any such conception ought to include as one of its goals the survival of the corporation itself as a relatively autonomous institution in the private sector. And this, inevitably, involves efforts to shape or reshape the climate of public opinion—a climate that is created by our scholars, our teachers, our intellectuals, our publicists: in short, by the New Class.”

  Kristol concludes his essay with a modest proposal. To change public opinion, business needed to support those “dissident” elements of the New Class “which do believe in the preservation of a strong private sector.” Unless it recruited its own army on the intellectual battlefield, business would surely lose the political and ultimately economic wars, too: “In any naked contest with the New Class, business is a certain loser. Businessmen who cannot even persuade their own children that business is a morally legitimate activity are not going to succeed, on their own, in persuading the world of it. You can only beat an idea with another idea, and the war of ideas and ideologies will be won or lost within the New Class, not against it. Business certainly has a stake in this war—but for the most part seems blithely unaware of it.”

  Kristol was, of course, one of those dissident members of the New Class—he concludes his essay by urging businessmen to seek out intellectuals like himself “to offer guidance,” just as they would hire competent geologists to help find oil—and over the next thirty years he, his fellow conservative intellectuals, and the business leaders who bankrolled them did a remarkable job of building up a network of conservative think tanks, foundations, elite journals, and mass media outlets. But what is really striking isn’t the rise of what Hillary Clinton once dubbed the “vast right-wing conspiracy,” it is the extent to which the climate that Kristol complained of so bitterly in 1977 is today so much more conducive to his ideas.

  Just take a look at the pages of America’s leading newspapers. In April and May of 2011, when unemployment was 9 percent and the ten-year rate on U.S. Treasury bills—the American government’s cost of borrowing money—hovered around a historically low 3 percent, the five largest papers in the country published 201 stories about the budget deficit and only sixty-three about joblessness. The left won the great culture wars of the 1960s, but the right has succeeded in setting the terms of the economic debate. A good outcome for the 1 percent.

  The life choices of Democratic first families tell a similar story. Amy Carter, who came of age in the White House, took part in anti-apartheid protests at the South African embassy in 1985 (for which she was arrested). She met her husband at an Atlanta bookstore where he was a manager and she was a part-time employee. Chelsea Clinton, the next Democratic daughter, has worked at a hedge fund and as a management consultant. Her husband, a fellow legacy Democrat, worked at Goldman Sachs before they married and went on to set up his own hedge fund.

/>   One reason Kristol’s wing of the New Class won is that they were right. Capitalism works, and its triumph became a global fact with the collapse of the Soviet Union.

  The demise of communism was, of course, tremendously encouraging for the free market intellectuals of America’s New Class, but it had an even more profound impact on the New Class in the emerging markets. The intellectuals in most of those markets have lived through some version of central planning, ranging from the repressive Soviet model to the freer but also inefficient Indian version. You could argue that, as a group, the New Class didn’t do too badly under communism—that, after all, was the thesis of Djilas as well as Szelényi and Konrád—but to most people who actually experienced it, that theory doesn’t stand up to the routine humiliations of life in a dictatorship. In the emerging economies, the scorecard is even starker. In India and China, the past three decades of freer markets have lifted hundreds of millions of people out of poverty, a feat the previous three decades of left-leaning development economics had singularly failed to accomplish.

  The result is the intellectual dominance of the sort of thinking Kristol described as a dissident view in 1970s America. In the 1990s, the brightest intellectuals in the former Warsaw Pact, from Warsaw itself to Tallinn to Moscow, were those figuring out how to transition from communism to capitalism. The smartest Chinese were working on the same question. Today the most famous African intellectual outside that continent is Dambisa Moyo, whose big idea is that foreign aid is self-serving and disempowering.

  In the United States, that self-proclaimed capitalist tool Forbes magazine is suffering the slow, sad decline that seems to be the fate of most print magazines; meanwhile, it now publishes fifteen international editions, including versions in three former Soviet republics, India, China, and the Middle East. The Harvard Business Review, the proudly dry bible of the C-suite, has eleven foreign editions and can be found in most kiosks in the Moscow subway.