January 24, 2010
Westbrook Responds: The Misplaced Populism of Out of Crisis
Posted by Gordon Smith

We recently reviewed David A. Westbrook's book Out of Crisis: Rethinking Our Financial Markets (see herehere, and here). Now we have an opportunity to read Bert's response:

I sincerely thank Professors Larry Cunningham, Lyman Johnson, and Mae Kuykendall for their gracious and thoughtful ‘Glom reviews of my book, Out of Crisis: Rethinking Our Financial Markets. Gratifyingly enough, the reviews have been reposted widely, reaching even economists. See here. I will say, however, that the ‘Glom reviews of my book were all quite sweet, and maybe a bit of lemon would be good. So, rather than succumb to the vanity of replying directly to positive reviews, I’m going to indulge in the anxious pleasure of attacking my own book, and perhaps suggesting a somewhat dark view of our situation.

* * *

Out of Crisis may be divided into three movements. The first movement, a radical reassessment of financial policy orthodoxies in light of the recent crisis, is mysteriously treated by Westbrook as if it were something analytically obvious that nonetheless needed to be said in Washington and perhaps Chicago. But, writing as a professor, one is obliged to go through the motions of analysis, however unconvincing, and at least Westbrook does so without wasting too much ink.

The third movement, a host of practical suggestions, is also both conventional and idiosyncratic. Again, though, professional obligations give Westbrook some excuse. Authors working in this idiom are required to be normative: “my analysis is ________, and therefore we must _________.” Of course what some professor says must be done, and what in fact will be done, is hardly the same thing. However, the fact that he is obscure does not relieve him of the professional duty of utopian design, and Westbrook delivers some modestly entertaining, if overly radical, suggestions. For example, he argues that the federal government should nationalize and liquidate major banks in trouble, as opposed to the government’s sensible policy of injecting massive amounts of capital and extending open ended lines of credit while “pleading” for the resumption of lending. Silly stuff, but kind of fun.

The book’s raison d’etre, and the focus of this review, is the second movement, in which Westbrook explores (or imagines) the possibility that this intensely capitalistic nation might reconceive its financial markets. Financial policy, he says, has an intellectual history. Alan Greenspan was right when he told Congress that the intellectual edifice collapsed. And if the house of finance has collapsed, then what might be built out of the ruins? On this sandy foundation, Out of Crisis simply goes to work imagining financial markets in new terms, suggesting new “metaphors” for marketplace action, and the like.

The book’s temerity is astounding, and, of course, unjustified. Even though economics – and so financial policy – has understood itself as a science, in which knowledge accumulates, Westbrook blithely assumes that financial policy changes over time, as if finance were merely one of the humanities.

Second, Westbrook takes it as given that the intellectual edifice collapsed, and that to think otherwise is to argue Ptolemaically after Copernicus and Galileo. It must be admitted that many recent steps taken by the federal government, e.g., refusal to mark bank assets to market and bans on short selling, conflict with neoliberal economic orthodoxy, e.g., that financial markets are informationally efficient. Surely, however, such deviations are anomalies. The vast majority of policy proposals are rightly grounded in a very traditional imagination of the economy, especially financial markets. Greenspan misspoke; we in finance still know what we have long known and taught.

Third, Out of Crisis simply asserts, on the basis of recent unfortunate events, the proposition that our policy elites – in the academy, in the government, and in the private sector – will seriously rethink the role financial markets play in U.S. and indeed global society. But why? Our leaders, fortunately, remain very privileged. Acknowledgments of error, much less apologies, have been few and far between, no doubt because this crisis was caused by a shifting of the tectonic plates, and the resulting tsunami. Moreover, finance is serious business. Nothing in the training or dispositions or raw talents of our financial leaders inclines them to reinvent themselves, and that is as it should be. Westbrook provides no clue why mature dogs should want to learn new tricks, for the simple reason that we do not, and should not. It is now over two years since the Fed opened the discount window to investment banks, and by working together, we have done quite well, without the disruptions of a substantial reform.

Fourth, the book offers “new metaphors” for thinking about financial markets, and proposes massive legal changes, and the wholesale reconsideration of attitudes toward business and finance. On the basis of what? This is not the usual unjustified normative argument that we have come to expect from law professors. Out of Crisis is a strangely American and bizarrely bureaucratic fantasia, like some love child of Max Weber and Joan Didion, conceived during a long road trip. For all his irritating cosmopolite pretensions, Westbrook seems to think he is writing from the fulcrum of the nation, perhaps in the Flint Hills, and like farmers since the founding of the nation, he does not like what he sees in the big city, on Wall Street. And so, in the long populist tradition, he simply imagines another financial world, a better American capitalism.

Which brings me to the fifth and most important failing of Out of Crisis: its perverse patriotism. Westbrook acknowledges that transparency and portfolio management are inherently antagonistic, and that we are “tragically” condemned to suffer marketplace dangers. Rather than concede the futility of trying to regulate global capitalism, however, Westbrook desperately argues that the antagonisms within our political economy should be managed by law. More dramatically and in very old-fashioned liberal style, he imagines that we can, through law, shape or even “construct” markets.

But how, in a country as vast as the United States, could one find agreement on how a market should look? More deeply, Westbrook’s hope that political economy can rest on the public, legal, and even democratic management of contradictions within finance heroically assumes a consensus on political economy, publicly minded leaders, and a society in which both the rich and at least the middling believe in those leaders. Westbrook assumes, in short, a commercial republic, evidently unaware that republics are unstable, and that this one is long gone, as the Supreme Court made clear this past week in the Citizens United case. At this juncture in our history, Out of Crisis is quixotic.

* * *

Perhaps presuming oligarchy would have resulted in a stronger book. In that case, my arguments about how our government should address the financial crisis would be grounded on essentially aristocratic virtues. And surely our financial classes could use a finer sense of honor, more profound loyalty to our institutions, and greater compassion for what Leona Helmsley famously called “the little people,” employees and consumers and the like. It would be a fine thing if investment bankers had a modicum of decorum; those of us in the academy would enjoy life more if we conducted ourselves like gentlemen intellectuals instead of professional knowledge workers. And given that these discussions take place well within the top 5% of the population, noblesse oblige seems appropriate.

Those things said, I cannot discuss politics in essentially aristocratic fashion without acknowledging that in some significant ways both the American experiment and the forms of globalization with which I have made my peace are over. And at least this winter, Sancho, I’m unwilling to do that.

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