Where Did All the Money Go? Two Versions of One Sad Story

The Roaring Nineties , by Joseph E. Stiglitz. W.W. Norton, 256 pages, $25.95.

The Great Unraveling: Losing Our Way in the New Century , by Paul Krugman. W.W. Norton, 320 pages, $25.95.

Before they drifted into the respectable upper reaches of the left-leaning punditocracy, Paul KrugmanandJoseph Stiglitz were what might be called learned anti-utopians. As widely esteemed economists (Mr. Krugman won the John Bates Clark medal for the best American economist under 40; Mr. Stiglitz won the Nobel Prize), they investigated ways in which, in the real world, markets fail to act perfectly. Mr. Stiglitz made his name studying “asymmetric information,” or situations in which markets are not fully transparent; Mr. Krugman pioneered New Trade Theory, the hypothesis that sometimes, given imbalances of international power, protectionism can be justified. Both ideas flew in the face of the I.M.F.-CNBC 90’s, when a faith in the liberating powers of totally unfettered markets replaced Marxism as the world’s reigning secular evangelism. Each has now written his own popular account of how the great prosperity of the last decade was squandered. Because both are dutifully alarmed-by mounting deficits, regressive tax policies and a foreign policy seemingly modeled on lunch-money bullying-they’ll likely be greeted as complementary volumes. But the truth is, to appreciate them fully, you have to see how very different they are.

Mr. Stiglitz’s The Roaring Nineties: A New History of the World’s Most Prosperous Decade leads us once again through Tulipmania, globalization, Enron and, of course, the dot-com follies. (“Silicon Valley was a place where you could talk about the world-changing potential of something like an online pet food business, and not be laughed at.”) Even though Professor Stiglitz had the best seat in the house-he was chairman of President Clinton’s Council of Economic Advisors and chief economist of the World Bank-this is now an old story, and has something of a hum-a-few-bars quality to it. But at the heart of The Roaring Nineties lies a far more compelling account, of how underlying economic reality mixed with political opportunism and allowed the 90’s to become at once so flush and so corrupt. In effect, Mr. Stiglitz argues, there were two defining features to the decade: a precipitously low rate of unemployment that never triggered inflation (a paradisaic equilibrium economists had previously thought impossible), and a shift in public ethos by which financiers became minor gods. “What happened in the Roaring Nineties was that a set of long-standing checks and balances-a balance between Wall Street, Main Street … and labor, between Old Industry and New Technology, government and the market-was upset, in some essential ways, by the new ascendancy of Finance. Everyone deferred to its judgment.”

The roots of finance’s ascendancy lay, ironically, in the utter bungling of the savings-and-loan crisis by the Reagan administration 10 years earlier. By the 1980’s, high interest rates had effectively bankrupted the S&L’s, whose income from mortgage lending was fixed, but whose outlays to depositors, seeking competitive rates in an inflationary up-spiral, had soared. Anxious to keep the banks from blowing up on his watch, President Reagan attempted a stealth bailout: He allowed newfangled accounting standards that bordered on outright chicanery, told the S&L’s it was O.K. to buy junk bonds, and encouraged them to treat real estate as a tax shelter. The result was inevitable: The banks, in desperation mode, threw money at terrible investments.

By the time the bubble burst, the crisis had already been handed off, “see ya, suckers” style, to George H.W. Bush, who was forced to re-regulate the industry. The banks in turn were forced to clean up their balance sheets, the result of which was a temporary but serious decrease in lending. As a reward for tidying up after President Reagan, Bush père had the pleasure of watching the economy slide into recession-which inevitably ushered in Bill Clinton.

According to Mr. Stiglitz, President Clinton’s singleminded attention to deficit reduction during his first year in office inadvertently ended up recapitalizing American banks. Since 1989, the Fed had allowed banks to treat long-term government bonds as risk-free, even though shifts in interest rates radically change their value. Had interest rates risen, a second-wave banking crisis would have followed, and the Clinton Presidency, in all likelihood, would have foundered. Instead, long-term rates plummeted, the price of long-term bonds rocketed, and the banks were suddenly in clover. They started lending again, and the floodgates to an easy-money decade were thrown open.

Ironically, they stayed open only when another happy accident intervened: The Fed underestimated the strength of the recovery and failed (for once) to reflexively raise interest rates. As the recovery continued, the productivity gains from technology, which economists had been on the lookout for decades, finally appeared, and Mr. Greenspan’s miscalculation suddenly looked like a stroke of genius. Unemployment was allowed to plunge far below the NAIRU barrier (that’s the “non-accelerating inflation rate of unemployment”) without a hint of inflation, and quarter after quarter, the economy hummed along in Goldilocks mode. In addition to making Mr. Greenspan into a financial-page idol, the good times made Robert Rubin and Lawrence Summers, as the chief Clinton administration deficit hawks, look like masterminds.

According to Mr. Stiglitz, Messrs. Rubin and Summers knew precisely what to do with their newfound prestige: They used it to rob Mr. Clinton of his broader vision (and, by extension, to rob Mr. Stiglitz, as a modest Keynesian who believed in refunding the social programs gutted by Reagan-Bush, of his power in the new administration). The watering-down of the idealistic agenda made it possible for Mr. Summers and, later, Mr. Rubin to tick off items on their Secretary of the Treasury wish list: the repeal of Glass-Steagall, the defeat of accounting and market reforms, and the exportation of I.M.F.-style “shock therapies” to fledgling market economies abroad. In the seeds of the decade’s massive success, then, lay its destruction. At least a dozen times in The Roaring Nineties , Mr. Stiglitz points his finger directly at “Treasury” as an obstructionist force unwilling to rein in the decade’s excesses, and as a prime cheerleader for hasty deregulation in electricity and telecom-both of which have proved disastrous. Most crucially, Treasury “exacerbated the conflicts of interest” within the banking community that led to the widespread looting of the bull market’s final years. In the most gently roundabout way possible, he lays the bursting bubble at Robert Rubin’s feet.

One glorious factoid sums up the magnitude of the disaster: At the beginning of the 90’s, as Mr. Stiglitz points out, not one U.S. firm was valued at $100 billion; a decade later, AOL Time Warner’s write-downs equaled that amount. With your blood now at a proper boil, the time has come to turn to Professor Krugman.

No one revs up the rhetorical jackhammer, God bless, quite like Mr. Krugman; and as with most deadline commentaries collected in hardcover, these are nearly impossible to take by the dozen. But the point he’s pounding into us is tremendously important: Whereas Mr. Stiglitz tells how accident moves history along, Mr. Krugman reminds us that history can be hijacked. Mr. Krugman is trying to blow open our minds by asking whether it’s really possible that George W. Bush, a man of limited gifts who lost the popular vote in 2000, could undo the great legacy of the Depression and World War II.

In the introduction to his new book, The Great Unraveling: Losing Our Way in the New Century , Mr. Krugman tells of the revelation he had while leafing through Henry Kissinger’s doctoral dissertation. The young Mr. Kissinger had written about how difficult it can be for a society, lulled by its own stability, to fully appreciate the ambitions of a “revolutionary power.” “The defenders of the status quo,” Mr. Kissinger wrote, in a passage that sent chills down Mr. Krugman’s spine, “tend to begin by treating the revolutionary power as if its protestations were merely tactical.” The parallel for Mr. Krugman was obvious. Democrats-and, for that matter, moderate Americans of any stripe-can’t believe what the Bush administration is up to, even though it’s staring them in the face: the repeal of an international order that’s prevailed since the dawn of the Cold War, and the repeal of a domestic order that’s prevailed since the New Deal.

Arriving on the heels of the 90’s kleptocracy, the aim of Mr. Bush’s tax regime is to put dynastic wealth into the hands of the nth-generation heirs of liars, thieves and dot-com Lotto winners. Think about it: wealth transferred unmolested to the distant progeny of Jack Grubman, Ken Lay and yes, ladies and gentlemen, batting clean-up, the Babe Ruth of the all-time All Lucky squad, Mark Cuban.

To fully appreciate Bush II, middle-class Americans should ask themselves: How do I feel about my great-great-(etc.)-grandchildren working in the scullery for the eighth Earl of Broadcast.com?

Stephen Metcalf reviews books regularly for The Observer .

Where Did All the Money Go? Two Versions of One Sad Story