Yesterday Daniel Henninger of the Wall Street Journal proposed that private equity firms like Bain Capital helped save American capitalism from stagnation and decline such as is being experienced in Europe today. I offered that perhaps other things (demographics, mainly) might explain the differences. But what if Henninger is right? Might electing a former private equity manager help keep America’s economy vibrant?
Much has been argued over the benefits and demerits of the practices of private equity firms. Private equity has been accused of being vulture capitalism (Rick Perry), swooping in to feed on the carrion of dying companies and the employees that depend on them for survival. Alternatively, it has been hailed as performing a necessary capitalist function, seeking out firms that are either poorly managed or ill-positioned competitively, and creatively destroying the firm’s impediments to success, returning it to competitiveness in the marketplace, or in the circumstance that it can’t be saved, reaping whatever gains can be had by liquidation and moving on.
Capitalism recently had a brush with death, or at least did its financial, housing and automobile manufacturing sectors in the US and elsewhere. What might a former private equity capitalist have done in the face of such a calamity? Had a private equity capitalist been in charge of the White House (or perhaps better, the Federal Reserve), would they have allowed markets to determine the fates of firms who had irresponsibly and ineffectively managed risk? Risk management, after all, is the sine qua non of firm management. To put the point succinctly, would there have been TARPs I and II, the bailout of AIG, the bailouts of Chrysler and GM, the bailout of Fannie and Freddie and the housing market in general, the bailout of GMAC (now Ally), etc, ad nauseum? After all, the foundational premise of the argument for private equity is that market-based capitalism requires the continual restructuring of firms, or even their occasional elimination, in order to ensure economic vitality such that the great and glorious growth upon which capitalism depends may proceed. It’s hard to see how these bailouts in the Great Recession helped that process along.
In fact, weren’t all these bailouts the diametric opposite of what a creatively destructive private equity manager might believe was appropriate? Wouldn’t a private equity capitalist have celebrated the failures as the necessary antecedent to growth?
Marx (generally regarded as the first to point out capitalism’s creative destruction tendencies, even if he never explicitly used the term) observed that capitalism is inherently unstable because it trends to the concentration of wealth, i.e., capital accumulation, that then trends to overproduction (if new markets can’t be imperialistically pried open), ultimately yielding collapse. From the collapse arises a new economic order, leaner and more efficient than the bloated one it replaced, in a process that continues incessantly, at least until the proletariat (the 99% in Occupy Wall Street vernacular) finally realizes the only ones benefiting from all this wealth creation and destruction are the bourgeois capitalists, and revolt to creatively destroy the social and cultural infrastructure allowing their exploitation. It’s not hard to imagine that Marx would have considered private equity fund managers nothing more than particularly unsavory and pretentious bourgeois capitalists that believed themselves indispensable to a process of creation and destruction that would have carried on with or without them anyway.
But how strongly does Mitt Romney believe in his past? Does he really believe the narrative that Henninger asserts, that private equity firms like his saved America’s economy from stagnation and decline in the eighties by imposing market discipline on its takeover targets? (Neverminding the recent and immense stagnation and decline, even in the face of a free and unfettered field for private equity capitalists).
Stephen Schwarzman is a giant in the private equity field. He manages Blackstone Group, LP. According to an article on Bloomberg.com, he recently opened his Park Avenue apartment to a fund-raising gala on Romney’s behalf. He apparently is of the camp that believes private equity performs a necessary capitalist function, his firm having purchased interest in an ailing Florida bank (BankUnited) after the Great Recession hit. But when it came time to reveal his personal finances to the Federal Reserve, as is required of bank principals, according to the Wall Street Journal, he balked, restructuring his firm’s investment such that it wasn’t required.
Commercial, deposit-taking banks are only quasi-private entities. Their loans are either explicitly (deposit insurance), or now implicitly (TARPs, etc) backed by the government. Is a firm that swoops in to feed on the carrion of a commercial bank really involved in a free-market endeavor? Is this the sort of thing that a President Romney would support? Why would Schwarzman refuse to disclose his financials had he nothing to hide? Would he have gotten a free pass from a Romney Adminstration? Is this payback for not supporting Obama?
Nothing of what happened or why in the eighties is very pertinent right now. What is pertinent is knowing how the candidates might navigate the ongoing capitalist collapse. That things seem quiescent right now does not mean they are. Nothing real has changed, only the accounts have been shuffled around. Marx was more or less right when he observed that capitalism’s inherent instability means that eventually all the factors of production would be socialised, he just didn’t get right whom would be clamoring for socialisation. Capitalists, believing themselves to be powerful enough to manipulate the political system to do their bidding (justifiably it seems) have led the revolution to communal ownership, at least as regards risk. What, I wonder, would a private equity, free-market zealot, think of that?