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To Bust You Shall Return

The Rise of the Deal and the Decline of the American Dream
By Nicholas Lemann
320 pp., Farrar Straus and Giroux, $28

All four of Nicholas Lemann's major books examine crucial episodes of American history through the prism of lives that shaped or were shaped by that history. In 1991's The Promised Land, Mississippians Ruby Lee Daniels and George Hicks embody the Great Migration as they relocate to Chicago. In 1999's The Big Test, the Educational Testing Service's Henry Chauncey and Los Angeles attorney Molly Munger carry Lemann's analysis of an SAT-fueled meritocracy more privileged than it knows. Redemption's alarming and often brutal 2006 account of racist terrorists destroying Reconstruction makes flawed heroes of Maine-born Union general turned Mississippi governor Adelbert Ames and his politically connected wife, Blanche. Now Transaction Man anchors three periods of American capitalism to mini-bios of New Deal brain-truster Adolf Berle, conservative economist Michael Jensen, and LinkedIn tech guru Reid Hoffman.

All these books perform the impressive feat of elucidating complex and significant developments in under 400 lively pages--the appalled Redemption is barely 200. But none of the others bites off nearly as much as Transaction Man, which you could say outlines a century of American capitalism only if you allow that over those hundred years American capitalism determined the shape of world capitalism, delivering communism to Russian oligarchs and Chinese apparatchiks while undermining democratic socialism from Iceland to New Zealand.

A comparison might be economics journalist Jeff Madrick's 2011 Age of Greed, a longer and duller but more substantive history that traces the Great Recession back to 1946 via biographical critiques of thirty-one bankers, businessmen, economists, and politicians. In 2019, a decade after the crisis abated, Lemann clearly feels the need to take the story further. The New Deal rescued an economy devastated by the 1929 stock-market crash that finally boomed in the wake of World War II's synthesis of patriotic self-sacrifice and victorious confidence. Transaction Man explains how these achievements were eroded by a financialization in which capitalism distanced itself from the goods and services it provided to burrow down to the numbers beneath, so that eventually 40 percent of American profits were made selling money. Its pivot point was the late-1999 repeal of 1933's Glass-Steagall Act, which had long prevented Main Street savings banks from speculating as greedily and irresponsibly as Wall Street investment banks. But Lemann needed a capper, which he found in everybody's metaphor for change gone wild, Silicon Valley. It's telling, however, that Reid Hoffman gets far fewer pages than Berle or Jensen, and less crystalline pages at that.

Transaction Man is recommended to anyone who got through the Great Recession without tackling any books about it. As unnatural as mathematical thinking may feel to the reading classes, the income-gap fault line plus the virtual kudzu of an internet that outstrips comprehension should be enough to convince the stubbornest humanist to watch the numbers, and Lemann provides an entry point. His decision to track an entire century has an ideological motive: By beginning with Adolf Berle and the New Deal rather than Citibank's Walter Wriston the way Madrick does, he grounds the reader in an era when reining in private enterprise was the only way for the American experiment to survive. Berle's special obsession was controlling the directors who in fact ran giant corporations supposedly overseen by the mass of stockholders who were their legal owners, but the early months of FDR's presidency also slowed financialization via Glass-Steagall, with the Securities and Exchange Commission soon to follow. And it doesn't hurt that grown-up child prodigy Berle and his wife, the estranged daughter of the real-life counterpart of Edith Wharton's Lily Bart, are fascinating figures who reward Lemann's honed profiling skills.

Lemann's portrait of Mike Jensen, a working-class Minnesotan whose phenomenal intelligence and compulsive work ethic landed him in Milton Friedman's hyperconservative University of Chicago economics department, is harder to suss. Although Lemann describes him evenly and respectfully, in this narrative it's the relatively obscure Jensen who ruins everything, not one of the book's many Nobel Prize winners--monetarist kingmaker Friedman, Road to Serfdom libertarian Friedrich Hayek, or Myron Scholes, whose Black-Scholes formula weaponized the derivatives underlying the Great Recession. As judicious as Lemann strives to be, we know where his heart is, especially given his accounts of three Chicagoans--an unflinchingly ethical white Buick dealer and two much poorer African Americans, a retired working mother and a community activist--victimized by financialization's social costs. He understands that Berle's goal of government-overseen corporate planning had its shortcomings, starting with its failure to address racism or comprehend an evolving market system where corporations were more organisms than organizations, especially as computers speeded ever more complex transactions. But he has to be dismayed that Jensen was so committed to unfettered markets "that he didn't feel constrained to make the standard argument that they were better at creating general prosperity. They were just better." So figure the late-life change Jensen underwent is one reason Lemann settled on him.

Jensen had one big problem--he was an "asshole," his term, and unlike your average Wall Street sociopath he knew it. Twice divorced and on the outs with his two daughters, he never won his own Nobel, some conjecture, because he couldn't resist mouthing off to the selection committee. But then, at a daughter's behest, he saw the light via, well, Werner Erhard--that's right, of est, now rebranded Landmark Forum. Having finally met someone smarter than him, Jensen has devoted the rest of his life to articulating the master's principle of "integrity," the details of which Lemann discreetly declines to elucidate--Jensen's long paper about it was rejected by a major economics journal he founded himself. It says something about either Lemann's journalistic principles or his sense of humor that he recounts all this without once cracking a recognizable joke.

Jensen's vision of capitalism as financialization is detailed in a chapter called "The Time of Transactions: Rising." Under Carter there's corporate deregulation, slackened savings-bank and pension-fund oversight, and the little-noticed creation of the 401(k). Under Reagan, these tendencies speed up: Stock and bond offerings run wild, savings banks traffic in adjustable-rate mortgages and other risky paper, antitrust safeguards are shelved, and, most egregiously and profitably, visionaries like the felonious Michael Milken underwrite ever vaster corporate takeovers with junk bonds. In 1989 the insolvency of the Federal Savings and Loan Insurance Corporation tops off what Elizabeth Warren likes to remind us was the first banking crisis since 1929, which ultimately sinks a full third of US savings banks, costing taxpayers $100 billion in FDIC guarantees. This doesn't faze Bill Clinton, who's encouraged by treasury secretaries Robert Rubin and Lawrence Summers and Ayn Rand-groomed Federal Reserve chairman Alan Greenspan to sign off on the Glass-Steagall repeal and a temporary ban on government oversight of derivatives. Mere weeks after the latter, Long-Term Capital Management, a hedge fund overseen by none other than Myron Scholes, loses $4.6 billion in four months of 1998, only to be bailed out by its literally luckier banking brethren. Yet just weeks before Clinton leaves office in 2000 he signs the Commodity Futures Modernization Act, which permanently prohibits governmental oversight of a derivatives market then valued at $95 trillion. After the 2008 crash, Clinton allowed as how this was a mistake.

By then the mistake was a known catastrophe, even if in 2010 Robert Rubin was still blaming it on a "perfect storm" that would never recur. But as Lemann notes, "the steady upward economic progress of the American middle class--which began with the New Deal and continued for almost half a century--was ending." Nor was it preceded by one of those rising tides that raises all boats. Instead, as "The Time of Transactions: Falling" explains, there were early warning signs aplenty in Lemann's representative urban locale, the racially fluid neighborhood of Chicago Lawn, where individual blocks were terrorized by site-specific gangs and freelance mortgage brokers who replaced the savings banks to bilk cash-strapped homeowners until the average house was carrying 120 percent of its value in debt.

Disappointingly, Lemann has nothing to say about the Dodd-Frank Act that passed eighteen months into Barack Obama's term, four months after the Affordable Care Act, which Lemann acknowledges helped save a Chicago Lawn hospital that once met its payroll only because the nuns who ran it put in $1.8 million from their own retirement fund. He's right to point out that Obama's mortgage-modification plan had a 1 percent success ratio and that Steven Rattner, the handpicked Democratic financier who supposedly saved General Motors, knew zero about the automobile business. But compromised though it is, Dodd-Frank has apparently helped keep Rubin's perfect storm from our door, leaving it open for Reid Hoffman, here dubbed "Network Man."

Hoffman is called on to represent the tech economy that was both the signal success of the post-2008 recovery and the de facto herald of our future. His mid-level historical size makes him a good match for Berle and Jensen. Hoffman, a deeply curious and relatively idealistic billionaire, splits his working hours between LinkedIn, the job-oriented social network he invented that was scooped up by Microsoft in 2016, and the renowned venture-capital firm Greylock Partners. But as what one friend calls an "epiphany addict," he also spends big time at big-think conferences from TED to Davos. Unusually proactive politically, he's donated major pro-Obama and anti-Trump bucks and has big-thought quite a bit about income inequality. But as Lemann makes clear without ever calling him out, his many good intentions have had no discernible positive effect on a tech economy where the relatively elite employees of Big Tech's Big Five and their feisty epigones work 22-7 as they live what LinkedIn labels "portfolio lives," a tonier but even more exhausting alternative to what millennial grunts call the gig economy. So what new future is this? To quote Lemann: "As a locus of economic power, Silicon Valley, as jarringly new as it was, had followed an old, familiar pattern."

Then comes a seventeen-page postscript that centers on the forgotten political theorist Arthur Bentley to make a determined argument for the elastic and somewhat musty term "pluralism." This idea Lemann separates sharply from the hypertolerant dreams of multiculturalism and its gender-focused correlatives. For him, pluralism is all "bosses, political machines, interest groups, lobbying, and bargaining," or, a little later, "messiness, squabbling, pettiness, and bargaining." As his last three lines put it: "Reaching people, doing right by people, building the next good society means using these institutions. Not transactions. Not big ideas." It's hard to know whether Lemann preplanned this denouement or conceived it as his research clarified how ominously the Silicon Valley trope of "disruption" meshed with financialization's exploitation of market instability. It's also hard to know how Lemann imagines pluralism might reassert itself in a post-we-hope transactional USA.

Personally, I'll take it however it comes without anything like certainty that it's on its way. So meanwhile I'll put in a few words for an interest group most have relegated to the conceptual scrap heap: unions. Lemann clearly respects unions, but he thinks so little about them that he fails to notice that the first major chink in Berle's program of government-overseen corporate planning dates to 1947, well before financialization: the passage of the Taft-Hartley Act, which by instituting a so-called right-to-work law at the federal level as well as prohibiting boycotts and other union messiness began an erosion of labor power that greatly eased the financializers' takeover. Bullhorn in hand, I will observe that unions are making a tiny comeback not just in my own pitiably pointy-headed online publishing industry but in Silicon Valley itself. This could well go nowhere. While always heartening, collective action is seldom a stand-alone cure-all. But it has a New Deal feel we should all hope a bunch of sectarian troublemakers, in Washington and elsewhere, can take to the bank.

Bookforum, September 5, 2019