Bad Money | Kevin Phillips

Summary of: Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
By: Kevin Phillips

Introduction

In ‘Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism’, Kevin Phillips unravels the deeply entrenched problems within the U.S. economy that have led to vulnerability and instability. Delving into the world of shadowy financial institutions, debt, and oil policies, Phillips argues that the rise of finance in the U.S. political economy spells potential disaster. Through a comprehensive analysis of historical patterns, political decisions, and evolving economic structures, this book summary explores how the U.S. navigates a path that may ultimately lead to national decline.

The Danger of America’s Financial Sector

Officials underestimate the problems with the US economy, which is weak and vulnerable. The nation’s politicians may not be prepared to handle the damage caused by policies on debt and oil. The metastasizing financial sector is a broader, more pressing concern that includes shadowy institutions that create money and evade regulatory scrutiny. The sector’s dominance in the US political economy is a worrying development, as history shows that when finance takes center stage, decline follows. The idea that the financial sector creates wealth and efficiency is nonsensical.

America’s Bubble Economy

In 2007, the US economy was on the verge of collapse due to credit shortages, subprime mortgages, and the dangerous financial bubble that had been created over the preceding ten years. Despite the warning signs, the government downplayed the extent and interconnectedness of the problems. Major financial institutions had become too big to regulate and had invented financial products whose risks were poorly understood. Meanwhile, ordinary Americans were facing increasing risks while being unaware of the impending crisis. The Financial Services Modernization Act of 1999 had created dangerous financial interdependencies. The US economy’s dependence on the financial sector was a harbinger of decline, and the dollar’s backing depended increasingly on hostile oil-producing entities.

The Rise of the Credit Society and Financial Deregulation

The American transition to a society of debt began in the 1970s, fomented by financial deregulation and innovative products such as derivatives. The financial sector, empowered by deregulation, became interwoven with government and politics. Leaders like Margaret Thatcher and Ronald Reagan rejected the Keynesian economic orthodoxy and embraced tax cuts, government deficits, and deregulation. The Federal Reserve, with its bailout of Citibank and the junk bond sector, set the precedent that failing institutions would receive government support. The U.S.’s current account deficits and reliance on foreign investment turned out to be bubbles that burst in the 2008 real estate crisis.

Economic Faith and the Efficient Market Hypothesis

The book explores how the ideology of the efficient market hypothesis gave rise to deregulation and unrestricted financial innovation, allowing hedge-fund traders, mortgage brokers, derivative engineers, and investment bankers to operate unchecked. Until recently, this hypothesis was an article of faith, justifying government intervention in the market to be limited. Regulators were portrayed as hindrances to the efficient distribution of economic resources. The author describes how this ideology found support in the Republican Party’s closely linked evangelical Christian base, as preachers of the prosperity gospel told their followers that God wanted them to be rich. The book also highlights how the government used statistics to manipulate the inflation figures, underreporting the inflation rate to make the market seem truer than it was. The author argues that a regulated public utility model for banks is needed to prevent big banks from failing. Finally, the author compares the economic policies of old-school Democrats, such as Truman and Eisenhower, who saw little connection between themselves and the moneyed elite, to those of Thatcher, Reagan, and their disciples, who embraced the Chicago School ideology and promoted a hands-off approach to the economy.

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