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Schwarzman's olive branch

by Robert Teitelman | Published September 12, 2011 at 12:36 PM

And so he comes bearing an olive branch and a draught of bitters: Blackstone's Steve Schwarzman, who offers a vision of reconciliation in the Financial Times. Schwarzman, who has, on occasion, displayed a tendency to blame the financial crisis on poor people, now seems to agree with President Obama that the pain, notably through tax increases and entitlement reform, needs to be balanced across classes. Schwarzman seems to be shaken by the combination of continuing bad economic news and the political and policy paralysis that has taken hold. "For the first time in my 40-year career in finance, I am genuinely concerned by our long-term economic prospects," he writes.

So Schwarzman calls for a united front. After all, he says, the country is just like a business, just more complicated. What needs to be done is what Blackstone does with businesses that need turnarounds. "In each case, management had to meet three preconditions: a clear-eyed assessment, a decisive action plan and the ability to pull together a cohesive team." Alas, he admits, "We have still not agreed how serious our financial situation is, let alone agreed on a plan to create jobs and ignite economic growth." And he recognizes the depressing truth that, "A united front is difficult when our leaders cannot even agree within their own parties, much less between Republicans and Democrats -- witness the embarrassing spectacle of the debt ceiling impasse." All this is pretty standard, of course. What does give this column some bite is that Schwarzman seems to agree in "shared sacrifice," though details are thin. But he is clearly signaling a break with Republican orthodoxy by at least suggesting that the wealthiest Americans -- and he's certainly on that small yacht with other megawealthy folks like "tax-me-more" Warren Buffett -- should have to share the pain. (In cleanup mode for previous gaffes, he also admits "we cannot exempt any group or special interest, except for the poor and disadvantaged.")

All this is a little odd because a week or so ago on CNBC he disagreed with Buffett and claimed he paid plenty of taxes. But let that go.

Of course the devil is in the details, particularly when it comes to tax and entitlement reform. It is, after all, only an op-ed, not a policy paper. Still, Schwarzman, for all his attempt to generate a consensus, for all his decrying of polarization, does have a very odd view of the sources of discord and disarray. How did we get here? Well, first, Schwarzman manages to discuss our economic plight without really dwelling on the financial crisis, the near-collapse of Wall Street, the bailouts. The crisis was, after all, caused by a financial bubble in mortgages. There were many causes, primary and secondary, and few groups, from homeowners to regulators to Wall Street banks to credit raters to China, could claim total innocence. Schwarzman's earlier complaint that poor people were responsible wasn't wrong, it was just remarkably narrow, not to say ill advised. The crisis, like the related political breakdown, has had a long and similarly complex gestation. Part of it springs from increasing inequality, which Schwarzman again has come to represent. This breakdown has elements that go back to the founding; but the real source seems to be in the '60s and the '70s.

Schwarzman's view of the political and economic crisis? "This problem began when the administration sought to attribute blame for the financial and economic crisis and alienated large segments of the business and banking community. They cast them as villains regardless of their culpability. Predictably, business reacted with fear and limited economic expansion, hiring and new lending." Schwarzman then argues that the Tea Party emerged as a response to that situation. Well, this has a grain of truth to it -- the administration did create uncertainty among both consumers and business, particularly after the drawn-out struggle over healthcare -- but it's washed away by the absurdity of the larger argument. Schwarzman continues to blame nearly everything on the administration (both Congress and the Bush administration, like the crisis, go pretty much missing). As far as I know, the administration has not spent a lot of time blaming business, except on the issue of CEO pay and begging them to use their cash to hire. The administration did blame Wall Street and the big banks, but it was joined, particularly in 2009, by large segments of both parties in Congress. But the Obama attacks on the banks are muted and modest compared to Franklin Roosevelt's rhetoric; and, of course, Obama receives near-constant criticism from his own left wing for being too close to the banks -- too easy on them. As for the Tea Party, it clearly emerged as an anti-Washington group; and it focused on the administration as the embodiment of Washington, particularly with a Democrat and a black man as president. But its emergence had little to do with attacks on business and bankers. In fact, in 2009, the populist, anti-bailout cries that pilloried bankers were the very fuel that drove the Tea Party. The Tea Party critique, fair or not, blames our troubles on an unholy alliance of Wall Street and Washington. Tea Party populism may focus its ire on Obama, but it could easily swing to going after the bankers.

Does any of this matter? Only in that it represents the kind of reductionism that is far too common. Our problems are far deeper than an administration criticizing business. Indeed, Schwarzman's short and simple view of the history of our woes easily fits into his confident metaphor of the country as a troubled business. This is a common theme these days. It's the basis of the presidential campaign of another successful private equity investor, Mitt Romney. But it's a sort of wishful-thinking metaphor. A country has all kinds of complexities that a business lacks. Countries have this unique trait called sovereignty; countries go to war and print money. Disciplines necessary in a company may be counterproductive in a country. Indeed, corporations are relatively autocratic; our democracy is (supposedly) not. The governance of a corporation and governance, through the federal constitution and a vast forest of rules and regulations and practices, are qualitatively different. A corporation can be distilled (sometimes foolishly) to one standard: shareholder returns. A country, particularly one as large and as diverse as the U.S., has multiple interests and "goals" that, if they can be defined at all, tend to be large and amorphous and arguable: a rising standard of living, an improving quality of life, greater freedom, greater morality, greater power in the world, greater security, a higher degree of civilization. Those are political, not economic measures.

Indeed, even on the economy alone, what we don't know about the role of markets, big banks, taxes, deficits, financial psychology is as great as what we do know. It's one thing to see a bunch of contentious politicians spinning out their fantasies about how things work; it's another to see the finest credentialed economists in the land at loggerheads over central issues -- or worse, remaining silent because there's simply no empirical basis for this conclusion or that. One can applaud Schwarzman's belief that pain needs to be shared (though his ability to shoulder pain is very different than that of most folks); perhaps there is a center. But it's just not that easy or simple as bringing folks of good nature and good faith together and not beating upon the bankers. - Robert Teitelman

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