Examining the 'Squandering' of American Promise

DATE November 12, 2007 ACCOUNT NUMBER N/A
TIME 12:00 Noon-1:00 PM AUDIENCE N/A
NETWORK NPR
PROGRAM Fresh Air

Profile: Maureen Corrigan remembers writer Norman Mailer, who
died at the age of 84
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

Ever since Norman Mailer died of renal failure Saturday at the age of 84, the
tributes have kept coming. We have a couple of remembrances to add. We're
going to listen back to an interview I recorded with Mailer in 1991. First
our book critic Maureen Corrigan has this appreciation of Mailer.

Ms. MAUREEN CORRIGAN: I've only crossed one picket line in my life, and it
was because of Norman Mailer. It was the late '70s and I was in graduate
school at the University of Pennsylvania, and Mailer was giving a talk on
campus. To enter the lecture hall, I had to cross a picket line of feminists
who were carrying placards that read, "I'd rather be reading Jane Austen." I
was a shy, nascent feminist back then, but I really disliked those precious
signs and the way they shunted Austen and Mailer off into gender specific
reading rooms, so I crossed the line and threw my lot in with the devil.

Mailer never made it easy on those of us who wanted to identify as feminists
and as fans. Throughout his near-60-year career as a writer, he was often
deliberately and adolescently provocative, acting out like a kind of Bobby
Riggs of the book world. In recent months, I've gotten gentle chiding from
colleagues about the fact that I'd invited Mailer to be the guest of honor at
a conference I'd planned at Georgetown to observe the 40th anniversary of the
march on the Pentagon. Mailer was to have spoken about his extraordinary book
on the march, "The Armies of the Night," but as it turned out, he had to
cancel because he was too ill. `Is he going to pee on stage?' asked one wit,
referencing the famous opening of "Armies" where Mailer, sloshed, lets loose a
mighty stream in the wings of a theater where he's about to speak.

At least that guy had read Mailer. So many others who dismissed him as sexist
or silly because of his uneven novels, and now politically incorrect essays
like "The White Negro," had never bothered to read any of Mailer's work. He
was one of those celebrity writers you could have an opinion about without
reading, but if you did pick up the right book, what a great American writer
you'd find. I say "writer" deliberately, because although Mailer wanted to be
remembered as a novelist, his most spectacular literary achievements lay
elsewhere.

After "The Naked and the Dead," his 1948 debut novel about World War II, he
looked a likely successor to Hemingway, whom he revered. But that ascension
never happened. Instead it was in the messy realm of creative nonfiction, a
genre he helped to bring into being, that Mailer soared. To read his 1979
nonfiction novel "The Executioner's Song," where he imagines his way into the
life of convicted killer Gary Gilmore, or the acrobatic new journalism of
"Miami and the Siege of Chicago," or the incandescent
history/novel/whatever-it-is of "The Armies of the Night" is to hear, in its
various accents, an American voice that's both visionary and comic.

In "Armies," Mailer marches with poet Robert Lowell and other luminaries to
protest the Vietnam War, but he's also marching with an immortal band of
American literally muses. Hemingway, certainly, but also, ironically for this
macho, macho man, Walt Whitman and Gertrude Stein. Like his queer brother and
sister in arms, Mailer here reads history through his own titanic ego and
forges a new literary style to give expression to the revolution playing out
before him.

The energy of Mailer's intelligence sparks off the page. Surveying the
thousands of young protesters, the then-44-year-old Mailer says, "A generation
of the American young had come along different from five previous generations
of the middle class. The new generation believed in technology more than any
before it, but the generation also believed in LSD, in witches, in tribal
knowledge, in orgy and revolution. It had no respect whatsoever for the
unassailable logic of the next step. Belief was reserved for the revelatory
mystery of the happening, where you did not know what was going to happen
next."

Like the best of Mailer's work, "Armies" combines sweeping cultural criticism
with navel-gazing, erudition and obscenity, pee and pathos. When he was in
fighting trim, Mailer could punch holes through the plasterboard between
literary categories and up-end assumptions. I was reminded of Mailer's
disruptive power earlier this year when I dipped into a new paperback called
"The Top Ten," in which famous writers list their favorite books. Mailer is
interviewed and, surprise, surprise, among his list of top 10 great books he
named Jane Austen's "Pride and Prejudice." Turns out that day so many years
ago at Penn, instead of lecturing, Mailer probably would have rather been
reading Jane Austen, too.

GROSS: Maureen Corrigan teaches literature at Georgetown University.

Norman Mailer died Saturday at the age of 84.

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Filler: By policy of WHYY, this information is restricted and has
been omitted from this transcript

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Interview: Robert Kuttner discusses his new book entitled "The
Squandering of America: How the Failure of Our Politics Undermines
Our Prosperity"
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

The subprime mortgage industry that has caused such volatility in the stock
market and the hedge funds that have also contributed have something in
common. "They've exploited loop holes in what remains of financial
regulation," writes my guest, Robert Kuttner.

Robert Kuttner is the author of the new book "The Squandering of America: How
the Failure of Our Politics Undermines Our Prosperity." Kuttner is an
economics writer. He co-founded and co-edits The American Prospect magazine,
and is a senior fellow at the liberal think tank Demos.

Robert Kuttner, welcome to FRESH AIR. You describe the stock markets as
having turned into a casino. The stock market has always been something of a
gamble. Give us one or two reasons why you think it's become more of a gamble
than ever for investors.

Mr. ROBERT KUTTNER: Well, it's more than just the stock market. It's the
entire financial economy, meaning banks as well as shares in stocks as well as
bonds. There are more ways to invest money speculatively. There are more
ways for banks to create bonds and other kinds of exotic instruments that
regulators don't understand, that investors really don't understand.

I suppose exhibit A is the subprime collapse where loans were made to people
whose outstanding characteristic was that they did not qualify for loans.
They were not even asked to provide income verification. But because blue
chip banks turned those loans into securities, bonds, and the bonds were
blessed by bond rating agencies, incredibly enough, with triple-A ratings and
some pension fund or some hedge fund or, as it turns out, some affiliate of
the bank could be persuaded to buy those bonds, everybody thought this was
just a great way to make high returns. That's a gamble because nobody really
knew what this stuff was worth until someone had to sell it. And it turns out
it's not worth very much. That's a casino. That's not like investing in
something that's transparent where you have some reasonable expectation of
being paid back. And what's true of subprime is true of more and more of the
financial economy.

GROSS: Now, you blame some of this on deregulation. What are some of the
regulations that no longer exist that you think might have prevented the
crisis that we're in?

Mr. KUTTNER: I blame virtually all of it on deregulation because if you go
back to the 1920s you can find three basic abuses that characterized almost
all of the excesses in that decade. Number one, a lack of transparency.
There were misrepresentations of what balance sheets and stocks and bonds were
actually worth, all kinds of opaque kinds of securities. There wasn't an SEC
in that era, Securities and Exchange Commission, so there were no mandatory
disclosures. You just had to trust the bank or the brokerage. Secondly,
there was much too much leverage, much too much margin, much too much
borrowing in order to speculate. Thirdly, there were conflicts of interest
where insiders were pedaling all kinds of paper that turned out to be junk and
not disclosing the fact that they were on both sides of the deal and they were
extracting fees.

Now, in the 1930s Congress passed all kinds of laws requiring disclosures,
reducing the temptation to engage in conflicts of interest. Probably the most
interesting for our purposes was the Glass-Steagall Act which said you either
have to be a commercial bank or brokerage that underwrites bonds and sells
securities. But you couldn't be both, because if you were both you would be
in a conflict of interest and you would be tempted to take dubious loans and
package them as bonds and sell them off to the unsuspecting investor.

Well, of course, this is exactly what Citigroup has done. And Robert Rubin,
when he was secretary of the Treasury, was one of the principal architects of
the repeal of Glass-Steagall, which finally appeared in 1999. And then not
long afterwards he goes to work for Citigroup as a very senior executive. At
the time, the legislation repealing Glass-Steagall was jokingly referred to as
the "Citigroup Enabling Act."

So I think all of these difficulties that the financial markets have gotten
into are the fruit of too much speculation with borrowed money which, in turn,
is the result of too much deregulation.

GROSS: Now, you want more regulation in the financial world. But what about
the Fed? It's a regulator. It regulates interest rates. But you describe
the Fed as having become an enabler.

Mr. KUTTNER: Well, the Fed is a very interesting case in point. One of the
things I talk about in the book is all of the time since the late 1970s that
the Fed has come in and bailed out large financial institutions that have
gotten into trouble for making bad bets. So in the late 1970s and early 1980s
the big money center banks in New York made bad bets on third world loans.
The Fed comes in and cheapens money and bends the rules so that they don't
have to carry these underwater loans on their books at their reduced value,
because otherwise several banks would have been technically insolvent.

Interestingly enough, during the 1990s Alan Greenspan gave that famous speech
where he expressed worry about irrational exuberance because he thought the
stock market had been bid up to unsustainable levels. That was in 1996. The
stock market still had four more years to go before it crashed. But because
so many financial institutions were in trouble, Greenspan had to keep interest
rates lower than he thought prudent in order to bail out these institutions.

Now, my point is that the Fed has more than one weapon in its arsenal. One
weapon is lowering interest rates. The other weapon is regulation. If you're
not going to be in the situation where you have to bail these guys out on the
back end, it's much wiser policy to regulate them on the front end.

GROSS: What kind of regulation would the Fed be capable of outside of
controlling interest rates?

Mr. KUTTNER: The Fed has all kinds of powers that in the Greenspan era it
was loathe to use because Greenspan really believed that markets were
self-correcting--except, of course, when the Fed had to come in and bail them
out. So one example, precisely on point here, in 1994 there had been some
scandals involving predatory lenders. In a rare bout of regulation, Congress
passed a law, The Home Ownership Equity Protection Act, that gave the Fed the
authority to regulate lending standards for mortgage companies that were
otherwise not federally regulated. And Greenspan simply refused to issue the
regulations. And by 1995 the Republicans had taken back Congress, Congress
was not in a mood to insist that the Fed carry out the law. And so we
actually had more than a decade of warning that this was a problem that was
brewing that was only getting worse. The regulations were on the books, the
Fed refused to enforce them.

GROSS: So what do you think the Fed should have done?

Mr. KUTTNER: Oh, the Fed should have issued rules under the 1994 legislation
requiring anybody who was originating a mortgage loan and trading that loan in
what's called the secondary mortgage market to have normal, prudent
underwriting standards, not to make loans to people who had no reasonable
prospect of paying back the loans.

GROSS: You know, when you were running through some of the reasons that you
see behind the economic crisis, the financial crisis that we're in now, you
mentioned conflicts of interest. What are some of the conflicts of interest
that have contributed to the subprime crisis and the other crises related to
that?

Mr. KUTTNER: Well, people sometimes think that the subprime lenders are one
cut above your local mafia lender. In fact, they are literally put in
business by some of the bluest chip names on Wall Street. Citigroup and some
of the others underwrite these subprime lenders and then buy the paper from
them and then turn it into bonds. So if you are, let's say, Citigroup, and
you have a relationship with a subprime lender and you are extracting fees for
transforming the nature of the loan into a bond, and you have some reason to
suspect that that bond might never be paid off because the circumstances under
which the loan was originated are very dubious, and yet you sell that bond to
your customers and extract a very nice fee and a very nice mark up, that's a
conflict of interest. At the very least it should be subject to greater
regulatory scrutiny.

GROSS: You've singled out Citibank as being representative of a financial
institution that had conflicts of interest inside that led to larger problems
for the economy. Are there other financial institutions that you'd put in
that same category?

Mr. KUTTNER: Yes, of course. And I keep mentioning Citi because it's one of
the biggest and also because it had, by far, the biggest exposure to subprime
through these so-called special investment vehicles. But other banks played
these same kinds of games with off-balance-sheet entities like Wachovia,
although at a lower level. And, of course, we've seen what happened to
Merrill Lynch moving a ton of money through it. So it's hardly a question of
just one institution. We have a whole system where too much financial
engineering has been tolerated by the regulators at the expense of the rest of
the economy.

GROSS: Recently Citigroup has had financial problems. Merrill Lynch has had
enormous problems. Morgan Stanley is having problems. Wouldn't it be like a
terrible thing for the nation's economy for these banks, for these investment
banks to really falter? I mean, that would hurt so many people. So what's to
be done?

Mr. KUTTNER: Well, I think I am not the dog in the manger here. It gives me
no satisfaction to see these problems. My point is, let's learn some lessons
from this. The Fed has to step in and help. We may reach a point where some
public capital has to be put into this, as was done in the savings and loan
bailout, because to do nothing just to prove the point that markets are not
self-regulating after all would be churlish and would cause much wider damage.
The only reason that these kinds of credit panics don't lead to great
depressions the way they did in 1929 and in 1907 and in earlier financial
panics is that we have a central bank, the central bank's a lot smarter, it's
a lot more interventionist than the central bank. The Fed is going to let the
whole economy go down the drain.

But if you're going to do that, let's learn some lessons for next time. Let's
take away temptation. Let's restore a degree of regulation so that the
insiders don't play these speculative games with borrowed money and put the
whole economy at risk. And, by the way, having the Fed intervene by
cheapening money is not costless. It puts the dollar at greater risk. It
creates greater risk of inflation. You can't not do it. The Fed can't stand
by and run the risk that a credit panic is going to lead to a depression. But
bailing out these bad bets that were done so that a few insiders could get
very rich is not without costs.

GROSS: My guest is economics writer Robert Kuttner. His new book is called
"The Squandering of America." We'll talk more after a break. This is FRESH
AIR.

(Announcements)

GROSS: If you're just joining us, my guest is Robert Kuttner. His new book
is called "The Squandering of America: How the Failure of Our Politics
Undermines Our Prosperity." He is the co-founder and co-editor of The American
Prospect and a senior fellow at Demos, which is a liberal think tank.

One of the key points in your book is this: You say "the increasing financial
insecurity and inequality for ordinary people and the increasing risk of
collapse now afflicting financial markets are two sides of the same coin, and
that coin is the willful dismantling of managed capitalism." What do you mean?

Mr. KUTTNER: There was a period after the great depression and World War II
when events proved that unregulated capitalism didn't work very well,
laissez-faire was a practical failure. And then along came World War II,
which, of course, was a victory, not just for the Allies over the Nazis but it
was a victory for the success of government, showing that government could do
great things. And so there was a period of about 30 years where we had a
managed form of capitalism, what Paul Samuelson, the economist, called a mixed
economy, where you relied on markets for entrepreneurship, but you relied on
government for regulation, you relied on government for social investments
that markets didn't provide. And that was a golden era. The economy grew at
an average rate of 3.8 percent a year. And that prosperity was very widely
shared, and Americans who were poor in the depression became part of the great
post-war middle class.

Beginning in the '70s there was a reversal. We had a difficult few years,
mainly because of the OPEC oil shock, which created inflation and recession.
And coming out of that, the fashion changed, the politics changed, and over
the course of almost three decades the idea that you needed a regulated
economy, you needed a tax-and-spend economy where you had progressive taxation
and government supplemented what the private market couldn't do, that fell
into disfavor. And business liked that because business never likes
regulation, business never likes taxation. And by the 1980s both parties, I'm
sorry to say, are outdoing each other to deregulate, to cut taxes on wealthy
people and to limit government's expenditure on social insurance and the power
of trade unions to offset the power of businesses weak. And so the whole
balance in the economy gets out of kilter because we dismantle these
institutions of a managed form of capitalism. And that's bad for ordinary
people, it's bad for the stability of financial markets, and it's bad for the
system as a whole.

GROSS: Now, I want to get back to personal investment. You know, a lot of
people have--a lot of people think of themselves as not invested in the
market, and yet their retirement funds are in mutual funds in the market. And
then a lot of investors do invest in mutual funds thinking that they're a
safer investment than just thinking you're smart enough to pick individual
stocks and expect them to do well. And people are often encouraged to invest
in mutual funds for that reason. But in your book, you describe the mutual
fund industry as a scandal. Why?

Mr. KUTTNER: Well, what people don't realize is the huge middle men fees
that mutual funds take. And here I want to plug another book, John Bogle's
wonderful book. He was the head of Vanguard, one of the first and biggest
mutual fund companies. And Bogle calculates that if people just picked a
random list of stocks and the list is large enough so that you would have the
average return of the stock market as a whole, he'd be about 40 percent better
off than by buying a mutual fund, an average mutual fund, because of the fees
and the other forms of middle man income are so astronomical.

Now, it's true that diversification makes sense. It doesn't make sense even
if you think you're absolutely certain that Google or some other favorite
individual stock is going to go to the moon. But it doesn't make sense to
have all your eggs in one basket, as the old saying goes. So you want a
diversified portfolio. But mutual funds are not the only way to get a
diversified portfolio. You can just buy an index fund where you're simply
buying a fund that's representative of all of the stocks on the stock exchange
and the fees are much, much lower. It's a second-order scandal. It's a kind
of ongoing low level scandal, but it's an example of how markets are really
rigged in favor of insiders at the expense of the average investor.

GROSS: My guest is economics writer Robert Kuttner. His new book is called
"The Squandering of America." We'll talk more after a break. This is FRESH
AIR.

(Announcements)

GROSS: My guest is economics writer Robert Kuttner. His new book is called
"The Squandering of America: How the Failure of Politics Undermines Our
Prosperity."

Now, a lot of the financial problems that we're seeing right now have to do
with hedge funds. And you describe hedge funds as a result of a loophole in
the Investment Company Act of 1940, an act, of course, I know nothing about.
So what's the loophole and how are hedge funds created?

Mr. KUTTNER: OK. Back in the day when Congress was regulating financial
markets and requiring all kinds of disclosures, Congress required that if you
were going to set up a mutual fund you had to make a variety of disclosures to
protect the investor and to protect the system. There was a small exemption
created whereby if you had, essentially, an investment club or a private
investment fund where you were not selling shares to the public, you didn't
have to register with the SEC and you didn't have to make disclosures. And
for a long time, for 40 or 50 years after that act was passed, hedge funds
were very small players. They were niche players that made a few people very
rich that could engage in all kinds of exotic gambles. And if they were very
smart, like George Soros, they could make a lot of money for themselves and
for their investors.

And then in the '90s hedge funds just exploded, and one of the reasons they
exploded was that people realized that, `Hey, we don't have to make any
disclosures.' And initially they were selling only to very rich people, which
is what the law required. But then there were loopholes on top of loopholes
in that you could invest in what was called a fund of funds where a fund
invested in lots of different hedge funds. And then the requirement that you
got to be rich in order to invest in it was waved. Or your pension fund could
invest in a hedge fund. You were talking before about how people were at risk
in ways they didn't even realize. If your pension fund is invested in hedge
fund, your pension could be at risk.

And the problem is that everybody can't be above average. And so you read
that X hedge fund made 30 percent last year and you say, `Wow, that's
fantastic, I don't mind paying the huge commissions because I want that 30
percent return.' But what you don't read is that the average hedge fund no
longer even beat the market average. And so hedge funds are another accident
waiting to happen. We haven't had the crash of a big hedge fund since 1997.
But I think that's only a matter of time as well.

GROSS: In what sense do you think that hedge funds are an accident waiting to
happen?

Mr. KUTTNER: There's too much money invested in very exotic gambles that is
beyond the purview of regulators or even of the investors who put their money
into hedge funds. Often different hedge funds make the same kinds of bets.
That's what happened in the late 1990s. And I think they ought to be more
tightly regulated. The UK, which is the home of a lot of European-based hedge
funds and private equity companies, has a much tougher system of regulation
than we do. We basically don't regulate hedge funds. The UK requires the
biggest hedge funds to disclose their investment strategies to the regulator,
to disclose their holdings so that if you get into the kind of accident that
we had with one of the big hedge funds 10 years ago, the regulator can see
whether these exposures are affecting other hedge funds. And I was actually
expecting that there'd be a hedge fund crisis before there was a crisis in
subprime. But any one of these is an accident waiting to happen.

GROSS: Now, I thought the subprime created the hedge fund crisis. I though
the hedge fund crisis kind of happened already.

Mr. KUTTNER: Oh, no. Some hedge funds were overinvested in bonds backed by
subprime mortgages. But there's a lot of other dubious paper out there and a
lot of other gambles made by hedge funds, and there's at least another shoe
left to drop.

GROSS: Do you think we're heading for a recession?

Mr. KUTTNER: Oh, I'm convinced of it. I mean, you can't have these kinds of
hits to financial markets and not have impacts on the rest of the economy.
And this is happening simultaneously with a weakened dollar, which means that
anything you import is likely to be more expensive. Or if you're thinking of
traveling abroad, that's likely to be more expensive. Or if you're staying in
a hotel in New York, all the room rates have been bid up because so many
Europeans are here taking advantage of the bargain basement prices. And then,
of course, oil is denominated in dollars--I'm not sure how much longer that's
going to continue, but for the moment oil is priced in dollars--and if the
dollar is worth less, the oil producing companies just raise the price of oil.
So we have oil hitting something like $100 a barrel, everybody pays for that
at the pump. You combine all these three things--cheaper dollar,
higher-priced oil, weaker financial institutions--and then on top of that, for
the first time since the great depression, you have a long term decline in
housing prices. I don't know how you avoid a recession when all of those
things are happening simultaneously.

GROSS: You describe your book as being about the connections between a
precarious economy and diminished politics. We've talked about regulation.
What are the other ways that you think diminished politics have affected the
precarious economy?

Mr. KUTTNER: Well, here's the vicious circle. Democrats, who used to be the
party of the mixed economy, used to be the party of tax and spend, Democrats
have been complicitous in this dismantling of the mixed economy, they have
been part of this effort to deregulate. And Democrats have become very
reliant on campaign finance by Wall Street and by other very wealthy people.
And, as a consequence, it's less persuasive when Democrats try to run as
champions of ordinary people because they're not offering ordinary people all
that much.

So the political scientist Walter Dean Vernon, someone I admire very much, has
a wonderful phrase he uses called "the politics of excluded alternatives." I
think there's a whole alternative path for the American economy that involves
better regulation of Wall Street, better social investments so the people
don't have to be afraid of losing their health insurance or losing their
pensions if they change jobs, or are laid off. And the problem is, at the
level of presidential politics, few candidates seem to be offering this. I
think the good news, from my point of view anyway, is that if you look at the
2006 mid-term, all of the Democrats who took back Republican seats in the
Senate, most of the Democrats who took back Republican seats in the House ran
as economic progressives and did win by offering something to ordinary people.

GROSS: You've given us a lot of not very good news during the course of this
interview. Is there a positive note that you could find someplace to end on?

Mr. KUTTNER: Oh, I can think of two very big positive notes. Number one,
we're not going to have another great depression. And number two, we're going
to learn some lessons from this. And if the Democrats, in particular, have
their wits about them, it gives them a basis for proposing a very different
kind of politics, a very different kind of way of organizing the economy.
We've had now a 30-year field test of the proposition that financial markets
can regulate themselves. That proposition has been proven false. And that
opens the door to a very different way of managing the economy, which would be
better for ordinary people. So I think another world is possible. We've had
a very different brand of economy in the past, and I hope we're going to have
a different one in the future.

GROSS: Well, Robert Kuttner, thank you very much for talking with us.

Mr. KUTTNER: Thank you so much, Terry.

GROSS: Robert Kuttner is the author of the new book "The Squandering of
America." He's the co-founder of The American Prospect magazine, and a senior
fellow at the think tank Demos.

You can download podcasts of our show by going to our Web site,
freshair.npr.org.

(Credits)

GROSS: I'm Terry Gross. We'll close from the opening track of Nelly McKay's
new CD, "Obligatory Villagers." She'll join us for an interview and
performance a week from this Wednesday. That's the day before Thanksgiving.

(Soundbite of "Mother of Pearl")
(Soundbite of laughing)

Ms. NELLY McKAY: (Singing) Feminists don't have a sense of humor
Feminists just want to be alone
Feminists spread vicious lies and rumor
They have a tumor on their funny bone

They say child molestation isn't funny
Rape and degredation's just a crime
Rampant prostitution, sex for money

Unidentified Man: What's wrong with that?

Ms. McKAY: (Singing) Can't these chicks do anything they like?
Dance break

(Soundbite of music, tap dancing)

Ms. McKAY: Woohoo!

(End of soundbite)
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