For better or worse, Congress is getting a makeover. As for the president's economic team, why can't Obama look beyond the usual suspects -- way beyond?
The day after the U.S. midterm elections, the Federal Reserve is yet again buying securities (it has bought more than $2 trillion of them since 2008), to keep down interest rates. U.S. interest rates have now been at historic lows for two years, a huge gift to the financial industry -- but one that has done little to help the broader economy. Not coincidentally, investment banking bonuses are at record levels, while unemployment remains above 9 percent (officially, that is: the real rate is probably 15 percent), home foreclosures are at record levels, and there has still not been a single criminal prosecution -- not one -- for the reckless behavior that caused the financial crisis.
It is blindingly clear that America needs different and better economic leaders -- preferably leaders not compromised by past errors and conflicts of interest. Yet the overwhelming majority of the Obama team, not to mention Wall Street and academia, is composed of people who were part of the problem, or at best remained silent. Well, I have a suggestion as to where excellent replacements can be found: outside the United States.
Others already recognize that talent and honesty know no borders. Recently, I spent a week in London while my new documentary about the disastrous decisions and systemic corruption that caused the global financial crisis, Inside Job, premiered at the London Film Festival. During my stay, I met with Ruby Films, which is run by a very witty, accomplished man who had previously managed the funding of independent films at the UK Film Council. All well and good; but now comes the interesting part: He's not British; he's Dutch. But the UK Film Council had concluded that he was the best person for the job.
The United States needs to learn this lesson, and in areas far more important than movies. It might be difficult for us to swallow our pride, but for some of the most important policy decisions facing the United States, the right people for the job might be foreigners.
This idea will doubtless meet resistance among U.S. academic and policy elites, in part because it is contrary to their own financial and career interests. But over the last several years, in the course of making two heavily-researched documentaries about the effect of American behavior on the world (the first about the occupation of Iraq, the second about the global financial crisis), I have come to realize that there has been a deep shift in how the world views America's economic, financial, and foreign policy elites. Washington's days as unquestioned role model for the world are over.
The rest of the world has a lot to teach America. In some domains, such as the "lean production" system pioneered by Japanese manufacturers, this is of course old news. But in economics, finance, and regulation, American experts still portray themselves as the gold standard. This is highly debatable, for two reasons. First, American experts and their thinking are often dangerously parochial. And secondly, to be unpleasantly blunt, the United States now has a major systemic corruption problem not only in its financial industry but also among its regulators and economists, from which supposedly impartial policy experts are often drawn. All too frequently, America's top experts have been paid off, with varying degrees of subtlety, by the industries they are supposed to be evaluating. Nowhere is this clearer than in American debate about the financial crisis.
The overwhelming majority of America's most prominent economists and financiers were astonishingly silent during the bubble, and many of them were deeply complicit in it, either through their policy roles, their highly profitable financial-sector involvements, or both. Not surprisingly, they have since opposed fundamental reform and been remarkably gentle in their assessments of American banking and regulatory conduct.
For example, Larry Summers was instrumental in crafting the late 1990s legislation that repealed the Glass-Steagall Act, which had kept a firewall between investment banks and lenders since the Great Depression, and banned the regulation of over-the-counter derivatives. Later, as president and economist at Harvard, he made $20 million from hedge funds and investment banks, while denouncing the first warnings against the coming crisis, issued in 2005 by the chief economist of the IMF, as Luddite.
Other senior administration officials have similar conflicts of interest and/or have dismissed warnings about the crisis. Federal Reserve chairman Ben Bernanke said in 2005 that housing prices never declined nationwide (which was not true, even then). Jacob Lew, nominated to be head of the Office of Management and Budget, and Michael Froman, coordinator of economic policy at the National Security Council, both made serious money while their employer at the time, Citigroup Alternative Investments, lost billions when the bubble collapsed. Laura Tyson, a professor at Univerisity of California, Berkeley who was director of the National Economic Council in the Clinton administration and may well replace Summers, has been on the board of Morgan Stanley for over a decade, and likewise remained utterly silent during the bubble.
Glenn Hubbard, chief economic advisor to the Bush administration and now dean of Columbia Business School, has multiple advisory relationships with financial services firms, which bring him over a half a million dollars a year, and is a much sought-after commentator on economic policy. Yet in 2004, he co-authored an article with William C. Dudley, then the chief economist of Goldman Sachs, extolling the virtues of deregulation and financial derivatives.
These are not isolated examples. Over the last quarter-century, the academic and governmental elites of the United States have been progressively coopted and corrupted by powerful interest groups, particularly but not solely the financial services industry. In part, this is because the United States suffers from both the blessing and curse of its size, wealth, power, and parochialism.
Want proof of why we should look to foreign economic advisors? The five most prominent experts in the United States who warned about the dangers of financial deregulation and the impending financial crisis were Raghuram Rajan, Simon Johnson, Nouriel Roubini, George Soros, and Charles Morris. Rajan, a professor at the University of Chicago, is from India, and is now an advisor to India's prime minister. Johnson is from Australia, Roubini is an Iranian raised in Italy, and Soros is a Hungarian refugee educated in England. Morris, the only one of the five born and raised in the United States, is an outsider too in his own way, not affiliated with any academic economics department.
And yet the United States continues to behave as if the only people who can run the government, or give it good advice, are Americans. This is an extraordinarily foolish, outdated, and dangerous illusion.
Upon hearing this call for outside help, some might panic. So just for the record, no, we should not have an Iranian energy secretary or a North Korean defense secretary. But it might make excellent sense to have a European or Asian as treasury secretary, or chair of the Securities and Exchange Commission, the FDIC, or the Commodity Futures Trading Commission. At the very least, serving as a senior advisor to the president.
In mid-2009, I took a small film crew traveling for six weeks, filming interviews for Inside Job with senior government officials and economic experts around the world. I was struck by how much more accurate, direct, and honest many of the foreigners were. They also had a higher level of international training, experience, and awareness than the senior U.S. officials I interviewed. They spoke foreign languages, had been educated internationally, and had lived and worked for extended periods in other countries (including the United States). And they certainly didn't feel any need to bow down before America's economists and financiers, who had, after all, just nearly destroyed their countries' economies.
Take the prime minister of Singapore, for example. Lee Hsien Loong was educated in England and rotated through many ministerial positions before leading the country. He and his advisors studied American securitization and decided it wasn't for them; consequently Singapore, like most of Asia, avoided purchasing the toxic financial products that American banks peddled. Christine Lagarde, the French finance minister, speaks fluent English and lived for years in Chicago running an American insurance company. As she says in my film, she warned then-Treasury Secretary Henry Paulson in February 2008 of a coming "tsunami," only to have him tell her that she didn't need to worry. And Martin Wolf, the British writer and chief economic commentator of the Financial Times, described the housing bubble on camera, as a "gigantic national, in fact global, Ponzi scheme." When was the last time you heard Larry Summers, Ben Bernanke, or Treasury Secretary Tim Geithner, or say that?
Or look to Andrew Sheng, chief advisor to China's banking regulator. In my two-hour interview with him in Beijing, Sheng was brilliant, perceptive, and extraordinarily direct. But the most striking thing about Andrew Sheng was that he is not Chinese; he is Malaysian. After growing up in Malaysia, he worked for the Malaysian Central Bank, the World Bank in Washington, then was deputy director of Hong Kong's central bank, and wrote a superb book on the Asian financial crisis of the 1990s -- all before taking his current job in Beijing.
Of course, there are economic and financial experts in America who are untainted by these systemic problems. But there are surprisingly few who feel truly free to speak their mind and act on their principles, without fear of professional isolation or retribution. So I have a suggestion for Larry Summers' replacement: Andrew Sheng. If he's not available, try Christine Lagarde.