Almost 30 years ago, Michael Lewis, the dean of business journalism, wrote, “The zeitgeist… is ripe for another Ferdinand Pecora.” As you’ll recall, the “Pecora Commission” was the press name of the Congressional inquiry into the 1929 Wall Street crash. The Pecora Commission is generally credited with creating the popular support that encouraged Congress to pass Glass-Steagall, the ’33 Act and the ’34 Act. Whether you love or hate the New Deal era, most Americans can’t imagine life without investor protections. We invest money as a matter of course; you may not do so on your own account, but that’s what 401ks and IRAs are for, and that’s how pension plans fund themselves. Most middle-class Americans rely on functioning capital markets, not the state, to fund their retirements.
As you’ll also recall, southern Italy is largely run by organized crime clans, most famously (within Italy) the Camorra. This culture of organized crime grew out of “amoral familism,” the phrase coined by Edward Banfield in the sociological classic The Moral Basis of a Backward Society. Under amoral familism, patronage networks centered on the extended family provide jobs and money to their members. You don’t really get hired into a job in a Camorra-controlled industry. Instead, Vinnie talks to Vito and they agree that as Tony’s nephew, dey gotta do sumtin’ for ya. Then you get a job as a garbageman for which you show up one week a month, making half of what a full-time garbageman would make in Milan. You implicitly make double the Milanese guy’s hourly wage; you kick up to Vinnie and Vito; it’s true the garbage tends to pile up, but the insiders are pretty happy with the arrangement.
Thus, we see two poles of social trust. In one, people tend to extend trust to institutions and unfamiliar people as a matter of course. In the other, capital (whether social or otherwise) is appropriated by insider networks in a context of widespread distrust. Vinnie and Vito help you out because you are a sufficient insider to enter into patronage networks. When you put money in your Vanguard funds, however, you’re not trusting Vanguard because you’re a member of the Bogle clan — you’re trusting the overall honesty of the system.
If trust in the system breaks down, in short, we go from Pecora to Camorra. Which way are we going today?
I believe Michael Lewis was wrong. It says so right on the name of my blog. I don’t think he made his prediction out of sincere belief, but out of sincere desire and wishful thinking. I don’t think we’re going to get a modern-day Pecora because we are no longer the kind of society that produces informed anger over the abuses he aimed to correct. I don’t mean that we’re morally decayed — maybe, maybe not. No, we’ve lost the kinds of elites who could act effectively against abuses. Our contemporary elites are too centralized to be politically accountable to diverse constituencies with conflicting interests, and far from decrying abuses, they see them as necessary and good.
After the financial crisis, we wound up with a bunch of state action, it’s true. But as an insider, I frankly question its effectiveness. Contemporary business crimes have no names. In 1929, it was not illegal to do many things that we would consider morally repugnant, like stock watering, pumping and dumping, or some forms of insider trading. Back then, Wall Street pushed back on regulators ineffectively. Today Wall Street owns the regulators; worse, the regulators simply don’t have the acumen to understand preposterous scams, never mind subtle, legal abuses. One of the big takeaways from the Madoff case is that Madoff was simply too prestigious for the complaints about him to register with regulators (one guy sent 5 reports over 8 years pointing out why Madoff’s returns were impossible, but the SEC decided he was a stupid crank and tossed his letters).
The specific prohibitions on the abuses identified by the Pecora commission were enactable because Wall Street was not totally insulated against demands for accountability from politicians. National politics was polycentric and politicians were beholden to regional bases. Glass-Steagal was sponsored by two Southern politicians; the 73rd Congress that passed these laws during the Hundred Days had its deep blue strongholds in the South, the lower Midwest and the Western states. The civic-minded, polycentric elite of the day had plenty of people in places like Cincinnati and Richmond who were capable of making coherent, effective demands for reform because they understood the issues. By contrast, contemporary Wall Street enjoys, and doles out, bipartisan support while being run by a national elite from everywhere and nowhere, and regional politicians are descending into gestural politics and fecklessness.
The problem is the the contemporary system isn’t exactly evil. I wouldn’t have been clubbable enough to make in into the 1929 elite because I have a hick accent, crappy teeth, no family money, and wouldn’t have passed for a Hahvahd Man. We really do live in a more open, meritocratic society. So why does it feel so crappy all the time?
I believe it’s because our elites are too consolidated and have too few internal disagreements to be capable of meaningful conflict. Essentially, we’ve gone from a political society to a managerial one, and in a managerial society, people have best practices, not opinions. And in a strange way, this has brought us full circle, to something we might call “amoral classism”. The elite class in this country believes as thoroughly as any 1929 patrician in its mandate to rule; however, the process of elite socialization no longer allows for the kind of internal conflict that kept the elites of the New Deal era relatively honest. We are thus left with a society consisting of elites and proles with relatively little in the way of a politically active, financially informed middle class. And this class solidarity is why, in 2009, no bankers went to jail. How could they? Who would send them? Does Vito snitch on Vinnie?