The Betrayal of Capitalism

During my nearly four years as ambassador to France I frequently gave a speech I called “Popular Capitalism in America” to audiences throughout France. This is a subject of intense interest to the French and to most other Europeans, who envy us our high rates of growth and low unemployment but who often believe that the price we pay for these benefits is an inadequate social safety net, a tolerance for speculation, and unacceptable inequality in wealth and income. They also see the American system as one that inflicts high levels of poverty and unemployment on developing countries by the harsh stabilization measures required by the IMF and other Western-directed financial institutions. I made this speech to dispel some of these notions and to encourage reforms in European countries in matters such as taxes, investment, and employment. These, I argued, would, to our mutual benefit, align our systems more closely.

In doing so, I defended our economic model as one that could deliver more jobs, and more wealth, to a higher proportion of citizens than any other system so far invented. A major component of this system is its ability to include increasing numbers of working Americans in the ownership of US companies through IRAs, pension funds, broad-based stock options, and other vehicles for investment and savings.

I agreed with, and cited, Federal Reserve chairman Alan Greenspan’s statement that “modern market forces must be coupled with advanced financial regulatory systems, a sophisticated legal architecture, and a culture supportive of the rule of law.” After forty years on Wall Street I had no doubt that, despite occasional glitches, our economy met Greenspan’s requirements.

However, as I regularly traveled back to America between 1997 and 2001 there were developments in our financial system that deeply troubled me. The increase in speculative behavior in the stock markets was astonishing. In 1998, as a result of reckless speculation by its managers, the giant hedge fund Long Term Capital Management went bankrupt and, in doing so, threatened the financial system itself. The New York Federal Reserve organized a group of banks and investment houses to rescue the company at a cost of several billion dollars. The sharp rise in dot-com stocks came soon after, together with relentless publicity campaigns to push the markets higher and higher. TV ads of on-line brokers urged everybody to buy stocks and trade them day by day. So-called independent analysts made fantastic claims about their favorite stocks in hopes of generating investment-banking business for their firms. These claims were often supported by creative accounting concepts such as “pro forma earnings”—a management-created fiction intended to show strong results by excluding a variety of charges and losses and one that was implicitly approved by supposedly independent auditors. A large part of the stock market was becoming a branch of show business, and it was driving the economy instead of the other way around.

The financial regulators—whether in the Treasury Department, the Federal Reserve, the SEC, or other agencies—were either unwilling or…

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