As John Turner and Brian Mulroney search with desperation for policy options to resolve the economic crisis one of them is bound to inherit, they could hardly do better than take time out from their campaigns to read a fascinating new book by Felix Rohatyn, the international financier who saved New York City from bankruptcy in 1975.
Rohatyn is one of those rare American capitalists who combines an original mind with a social conscience and he is not afraid to stake out some fairly radical proposals on how to reverse the trends threatening to engulf both the U.S. and Canadian economies. “We are,” he warns, “playing Russian roulette by allowing the budget to go out of control, by allowing the international monetary system to go out of control and by allowing the rapid industrial adjustment now occurring to take place without the slightest attempt to guide its direction or to dampen its shocks.”
In his new book, The Twenty-Year Century (Random House), Rohatyn lays out the reasons why the United States (which unilaterally declared the 100 years following the end of the Second World War as “The American Century”) lost its industrial, financial and military domination. “It all began to unravel in 1965,” he writes. “Now our economy oscillates between periods of growth accompanied by inflation or vast deficits and periods of recession accompanied by rising unemployment. Economic events are increasingly in the grip of forces we can neither control nor understand.”
Rohatyn’s brilliant analysis of the American downfall is made all the more impressive by his credentials: he is a senior partner of Lazard Frères, a New York-based merchant bank which last year recorded pretax earnings of $80 million, the equivalent of a 154-per-cent return on its capital. As chairman of the Municipal Assistance Corp. he worked out the tricky formula that prevented the City of New York from tumbling into bankruptcy nearly a decade ago.
Now Rohatyn wants to apply similar solutions on a national scale by setting up a federal agency similar to the Reconstruction Finance Corp. (RFC), established in 1932, an idea already championed in Canada by Senator Jack Austin when he served as one of the few thoughtful influences in the last months of the Trudeau administration. “Of
course I am an interventionist,” Rohatyn told me during a recent interview in his New York office. “The RFC was essentially a government instrument to protect the banks during the Depression, but its terms of reference were widened to finance the war effort and, in effect, to reindustrialize America. I envision its current incarnation much more as a negotiating and restructuring vehicle that would help management and labor make uncompetitive industries competitive again, turning losers into winners. It would invest in equity
and not put up a dime unless the owners themselves put up some money or other people made sacrifices and unless at the end of the road there was an expected profit.”
To help balance the U.S. budget Rohatyn advocates a five-cent-per-gallon gasoline tax and an oil-import fee, as well as doing away with some existing corporate tax exemptions.
On the issue of Third World debt he believes the industrialized world must prepare to deal with the unexpected. “That we would have an unsustainable situation by now was known three years ago,” he charges. “The only thing we
don’t know is how far the political and social radicalization in the affected countries will go. The fact is that these are not bankable loans, and all we’re doing is trying to protect our banking systems so that they can spread their write-downs over 10 or 15 years.”
He is appalled by Reaganomics, especially those of its defenders who claim that the American president is a good Keynesian by spending to turn the economy around. “John Maynard Keynes must be spinning in his grave, because while he did favor deficits during recession he was equally firm in recommending surpluses in periods of strong recovery. Now, we’re running high deficits with a consumption boom, an overvalued currency and huge amounts of foreign borrowing, which is exactly what the IMF says one shouldn’t do—and we’re bankrupting the rest of the world by doing it.”
Rohatyn advocates a North American free trade area of sorts, with Canada (“because of your English and French roots”) helping to bridge the AngloSaxon and Latin gap between the United States and Mexico. But his more immediate concern is the prevention of one of the many doomsday scenarios he paints in his books. “I suppose that short of a nuclear war we will muddle through,” he told me, “but it’s a question of how badly we maim ourselves and the system in the process. We’re dealing with numbers that are getting bigger and bigger and markets that are becoming increasingly volatile. The real problem is that we’re violating the most basic role of business: we’re betting the company.”
Rohatyn’s book is important because he comes to these and other issues without much doctrinaire baggage, including a healthy skepticism about that most untouchable of American capitalist conventions: the sanctity of the market economy. (“You shouldn’t pray at the altar of the market economy as if it were the only game in town, because it isn’t. It’s a myth. What we need is governments that impose long-term solutions and short-term safety nets.”)
As an international financier with a proven track record, Rohatyn has put all the formulas, both simple and complicated, to the test and he has concluded that growth in the private sector is the only solution that will ultimately revive the economy. “Inflation and deflation,” he says, “are like certain kinds of drugs. They’ll both kill you if you take them in excess.”
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