The Doomsday Prediction

A Review of Kevin Phillips’s Bad Money

Kevin Phillips is an analyst and historian who has written fourteen books and correctly predicted financial crises, including the Great Recession. He gained prominence in 1968 as chief political strategist for Richard Nixon. He has devoted hours working and commenting on American political, economic, and cultural crises that have occurred and have yet to occur.

BY RUHULLAH AGHAZADAH

In the book Bad Money, Kevin Phillips argues that three main factors contributed to the decline of America’s economy and led to the Great Recession of 2007. First and foremost was the shift of America’s economy from the manufacturing sector to the unstable financial sector. The second contributor of American financial disaster was, according to Phillips, America’s petroleum policies and the issues with Middle Eastern countries. Phillips wants the United States to “produce enough of its own oil and manufacturers…and not fantasize about military and financial imperialism.”1 The third and the most important factor that led to the Great Recession was the combination of the crash of the housing market, as well as the significant rise of credit card debts, and soaring mortgages. These three deadly financial disasters combined to create a financial crisis rivaling even that of the early 1930s. What was found interesting was that Phillips, amidst the Reagan administration, went from a conservative Republican to a liberal Democrat. Even though he has officially sided with the Democrats now, Phillips ridicules the governmental policies of both the Republicans and Democrats, especially Democrat President Clinton.

Philips, in the first quarter of the book, briefly describes the combination of American foreign, economic, and even cultural decisions that led to the 2000 market crash and America’s Great Recession. He even ridicules the policy making of the current government by saying “God once again took particular care of fools, drunks, and the United States of America.”2 He also explains the first main reason for the “2007 Crisis,” the change of America from being an economic power based off of manufacturing, to just a country hanging by a thread because of the financial sector takeover. Phillips talks about how the growing financial sector is increasing, while the crucial manufacturing sector is rapidly decreasing in the United States annual GDP. Philips says that it “will take years, not months to undo the 2007 crisis because it took so long for it to develop.”3 According to one of Phillips’s charts, “The Great American Debt Bubble,”debt in the 2000s increased up to 335 percent in the year 2006 as a share of the United States market gross domestic product.3 The financial sector went up more than 300 percent as being part of the gross domestic product of the United States economy in 2000. In Phillips “Reversing Origins of U.S. Corporate Profits, 1950-2004,” Manufacturing goes from being almost 60 percent of America’s gross domestic product in 1950, to barely 5 percent of Americas GDP in 2000. While the manufacturing sector declines, the financial sector increased from only 10 percent of Americas GDP to being a staggering 50 percent.4 With the American economy depending so much on the financial sector, it’s not surprising that the recession happened as soon as it did. A country so dependent on the financial sector is, Philips writes, bound to fall because of how unstable the financial sector is compared to the efficient and reliable manufacturing sector. Another negative of the financial sector, according to Philips, is that when the banks do well, it sometimes could be because of raising mortgage prices for houses. This is not beneficial to the middle or home owning class because as they lose their homes to banks, the banks make a profit by selling the home owners hard owned houses.

In the second half of his book Bad Money, Phillips introduces and explains the second of the three main causes of the Great Recession, America’s petroleum policies, and its connected issues with Middle Eastern countries. There were a couple of reasons why the United States was having issues with oil prices and the Middle East. First and most important of all was the “deepening international loss of respect for the United States after the miscalculated invasion and bloody occupation of Iraq.”5 This crucial blow to the core of America and what it believed its intentions in Iraq were was devastating. Another important reason for American problems in the Middle East was that most European countries believed that too much of the “Religious Right” influenced the Bush Administration and its domestic and foreign policymaking. Phillips believes that the Bush’s Administration decision to go into Iraq was partly motivated by the desire to control its oil rich lands and not solelyon the slogan and mission title made famous by Bush, “Operation Iraqi Freedom.” Also, many Muslims believed that the United States was fighting an anti-Muslim religious war in the Middle East, much like the Crusaders of 1200 AD. Muslims believe that the presence of the 1991 troops in Saudi Arabia sullied holy places, not to mention the resentment because of the United States alliance with Israel, also toppled the Middle Eastern Islam dominated countries against America and all of its foreign decisions. Oil prices in the Middle Eastern countries were jacked up because of a theory called “Peak Oil.” In this theory, it is believed that the global oil supply was “on the verge of reaching a plateau or peak and unable to support the demand.”6 Charles Weeden dramatized the oil crisis by saying “In 1930 we found 10 billion barrels of oil and used 1.5 billion barrels, in 1948 we found 48 billion barrels and used 12 billion barrels, and in 2005 we found only about 5 billion barrels and used 6 billion barrels of oil.”7 In essence, the demand for oil far outstrips its supply. Soon the oil reserves will be almost gone and thus the prices of oil will once again skyrocket. In other words, the consumption of oil far exceeds its production. A major factor in the decline of the U.S. dollar versus other major currencies was that it was over used in trade with oil and is now just being put in foreign countries banks to raise their currencies and lower the U.S. currencies. A famous saying by King Abdullah of Saudi Arabia summarizes what Phillips thinks that the United States should believe, and that is “The oil boom is over and will not return. All of us must get used to a different lifestyle.”8

Phillips summarizes the third and final reason for the Great Recession—the crash of the housing market, credit card debt, and mortgages—in the third quarter of his book. Perhaps one of the most staggering facts presented in Phillip’s book that the United States debt had increased from a mere $11 billion dollars to a staggering $48 billion dollars in only less than two decades. This immense increase in credit card debt shows how loose and laissez-faire the governments under the Reagan and Clinton Administration had been in regards to banks limiting the banks powers. In the Panic of August, banks were unwilling to send each other loans because of the stalled apprehensions of leveraged buyouts. Another crucial part ofthe Great Recession was the crash of the housing market and mortgage rates going through the roofs. Because of banks giving “ninja loans,” “loner loans,” and other tricky loans meant to get interest from its clients, people were afraid to borrow money from banks. This froze the housing market and greatly increased house prices along with mortgage payments. Most people on mortgage payments could not afford their newly raised pay rates, so their homes had to be foreclosed by their federal banks. Phillips includes a chart in his book that shows how quickly banks and mortgages grew between 1952 and 2004. In his chart of “Banks and the Mortgage Business, 1952-2004,” banks and the mortgage business increased almost 600 percent between the 1950s and the 2000s.10 Home prices were going down, while rent payments were going up. This was a clear indication of the failure of the housing market. It was no longer a seller’s market, but now a buyer’s market.

In Phillips’s final quarter of the book he reintroduces the three main causes of the American Great Recession, and addresses possible solutions on how to get back on track to becoming economically sound in the near future. Phillips also criticizes the Clinton administration and explains how he changed from a conservative republican to a liberal democrat. In his last section of his book, Philips summarizes each of the causes relating to the American governmental policy decisions. Philips names the tactics used by government administrations at this crucial time as the “Politics of Evasion.”11 Kevin includes a quote that makes Congress seem uninterested in fixing the current economic crisis involving oil. Energy Consultant Tom Petrie says that “[i]f you think there’s a problem in getting oil company CEOs to address the problem of peak oil, try convincing a politician to address it.”12 The Congress is so much against fixing the peak oil issue by drilling in the United States; it would be easier to just ask the foreign oil company CEO’s to do it. Phillips also brings into view the fact that the election of 2000 was pivotal in a sense because it was a continuation of the Bush Dynasty with the election of George W. Bush. No other dynasties had ever been so close to each other and George W. Bush and George H. W. Bush were in the same political party--Republican. Philips also introduces a key aspect of the 2000 era, the Internet. Kevin closes off his book with a piece of advice to the America and the Americans of the future; “that further abandoning the hubris of military and financial imperialism would help because both postures represent drags on the American future.”13 Phillips concludes with a piece of advice for the American government that abandoning imperialism and focusing on the domestic and national policy instead of foreign would greatly improve the lives of the American citizens.

Phillips’s thesis is that the crash of the United States economy was due to not only one event, but a combination of three of the most crucial factors in our economy. These three factors that contributed to the decline of the America economy and the value of the U.S. dollar were first of all, the transformation of the United States from an economic power because of manufacturing, to a fledgling country now overrun by the unstable financial sector. The second factor was the oil crisis and our deteriorating relationships with Middle Eastern countries. The third and most important factor was that of the house market crash, credit card debts, and mortgages soaring.15 Phillips is right in his theory that these three factors were the reason the American economy is failing for us. Although a Democrat, Phillips did not hold back in ridiculing the Democrat Party’s foreign and domestic policies as well as the Republican Party’s. The Los Angeles Times and the New York Times both reviewed Phillips’ss book, Bad Money. In the Los Angeles Times review; Tim Rutten praises how Phillips had been right fourteen previous times in predicting financial crises, although he says the quality of the book feels as if it was a first draft. Rutten also states that probably the most important cause of the Great Recession was that of the overextension of the power of the bank. In Barry Gewen’s review of Bad Money by the New York Times, Gewen stats that the Great Recession was “one of the slowest moving train wrecks [he has ever seen].”16 Gewen also agrees with Phillips thesis of the causes of the Great Recession, but argues that because the book was written so fast, it was hard to decipher some of his texts and commentaries. Philips’s book was written amidst the Great Recession, so some of his thesis could have been greatly influenced by the historiography. The book was at some times unclear, and hard to understand, especially for someone who does not know a lot of financial and business words mentioned in his book. Although Phillips’s book is unclear and hard to understand, it was worth reading because it gives the reader an in-depth look at why the economy is what it is today, and tells of what the United States government should do to get out of this slump.

The 1930s was a pivotal moment in American history politically, culturally, and especially economically. The policies under Franklin Delano Roosevelt and his New Deal completely turned our government politics away from being laissez-faire. It was pivotal because it was the first time that Keynesianism economics replaced the classical economic theory. The 1930s brought about rapid changes in popular culture because of technological inventions such as the radio. The radio became the most dominant mass media tool in industrialized America in the 1930s. Another pivotal change in popular culture was the creation of the “swing” music and popular cartoons of “Snow White and the Seven Dwarves,” “The Little Princess,” and “The Wizard of Oz.”17 The 1930’s changed the way that most people see their finances today. People, for the most part, have learned from the Great Depression of the 1930s, and have become money-wise.

Phillips summarizes the three most crucial factors that led to the 2007 crisis and the Great Recession. Although sometime unclear in his methods, Phillips hammers three main causes of the Great Recession. First, Phillip mentions the transformation of America from a manufacturing country, to country dependent on the financial sector. This was significant because the financial sector is way too unstable to be the primary economic contributor to a nation as big as the United States. Another reason for the decline of the America economy was the deteriorating relationship of America with almost all of the Middle Eastern countries because of America’s alliance with Israel. The invasion of Iraq in the early 1990s didn’t help either, not to mention the invasion of Afghanistan in 2001 under President Bush’s false title “Operation Desert Storm.”18 The third and most important reason was a combination of three factors. These factors include the crash of the housing market which caused soaring house prices, the credit card debt crisis which affected millions of “Average Joe” Americans, and the high mortgage rates that came with the crash of the housing market. Also, Gresham’s law applies to what is occurring to the United States economy right now. It states that “Bad capitalism tends to drive out Good Capitalism.”19 By themselves, these factors would only slightly alter a nation’s economy, but combined, they could destroy the nation’s economy and even lead to a crash as severe as that of the 1930s.

Endnotes

Student Bio

Ruhullah Aghazadah was born into a big family in Kabul Afghanistan on January 1st, 1993. Ruhullah is the youngest of nine kids in his family. He loves to play sports, hang out with his friends, and read books in his spare time. He hopes to one day make it to UCLA and live the college life.