We're Not All Friedmanites Now

Thomas Frank

Once upon a time there was a master narrative, and a neater little theory-of-everything you never did see. In its 19th century heyday it rationalized the having of the haves and commanded the deference of the have-nots; it spoke from the pulpit, the newspaper and the professor's chair.

Its name was market, and to slight it in even the smallest way was to take your professional life into your hands. In 1895, the economist Edward Bemis found this out when he was dismissed from John D. Rockefeller's University of Chicago thanks to his "attitude on public utility and labor questions," as he put it in a letter to Upton Sinclair. Professors elsewhere paid the same price for intellectual independence.

But the orthodoxy lost its power of life and death. Academia developed protections for scholars who pursued unpopular ideas. Rockefeller's University of Chicago went on to become the pre-eminent research university in the land, a temple of free inquiry and a magnet for Nobel prizes. I studied there and loved its atmosphere of endless debate.

Today, though, that old master narrative is back in a softer form. The market doesn't so much intimidate scholars as bend them in particular, profitable directions. For example, a contract between Virginia Commonwealth University and Philip Morris reportedly gives that company the right to veto publication of certain research done by VCU professors. The New York Times tells of a prominent Harvard child psychologist, a powerful advocate for certain drugs, who received large consulting fees from drug manufacturers. Further examples could be piled up by the dozen.

And now, courtesy of the University of Chicago, we get a glimpse of what might come next. As I mentioned a few months ago, the university has launched a $200 million academic enterprise called the Milton Friedman Institute, after the famous economist and Nobel laureate.

I have no problem with something being named after Milton Friedman. American University once had a building named after Adnan Kashoggi. At West Virginia University there is a Kmart chair of marketing. At the University of Memphis there is an Arthur Andersen Chair of Excellence in Accountancy.

What ought to alarm us, though, is the Milton Friedman Institute's apparent plan to transform free-market orthodoxy into a bankable intellectual product. What is evidently going to reel in the dollars here is not research but ideology.

I say "apparent" and "evidently" because the Institute won't open its doors until this fall. But the proposal which launched it fairly drips with politics. The Institute is to be concerned with economics, yes, but only with a specific sort of economics: with those that "reflect the traditions of the Chicago School and typify some of Milton Friedman's most interesting academic work, including his . . . advocacy for market alternatives to ill conceived policy initiatives."

Bruce Lincoln, a professor of the history of religions who is helping lead a faculty protest against the institute, told me the proposal "takes it as settled, once and for all, that the market is the only reasonable actor, while states, NGOs, and others just make a mess of things. . . . That's an ideologically committed, narrow perpetuation of a right-wing orthodoxy."

But what's the point in defending free-market orthodoxy if there's no free-market action for its defenders? The Milton Friedman Institute may have the answer, via an adjunct organization called the Milton Friedman Society -- which, according to a University Web site, will confer upon "donors at the $1 million and $2 million level" the right to participate in institute proceedings.

Actually, those high-net-worth individuals aren't giving, they're giving back, rewarding the orthodoxy that secures their wealth. "When you think about the big battle between socialism and free markets," mused Edward Snyder, dean of Chicago's Graduate School of Business, in a Bloomberg interview, Friedman "led the charge on behalf of the University of Chicago. There are a lot of people who will give back because of his name and effort and legacy."

Will there be room at the Institute for true academic debate? University provost Thomas Rosenbaum assured me that the Institute would bring in Keynesian economists as well as traditional Friedmanites, and that it would "make the University of Chicago a destination place for scholars across the spectrum." Furthermore, he said, "no intellectual enterprise at the university will ever be for sale."

Still, considering Mr. Snyder's remark about the "big battle," one may doubt. All sorts of academic disciplines are concerned with economies; thinkers of every description have defensible ideas on the subject. But apparently the only debate that ever mattered was between socialism and markets, and now that debate is settled. The intellectual cartel is back in the saddle, and no doubt the haves will soon be toasting its brilliance just like in the old days.

NATO's 'Empty Words'

"Empty words." That's how Moscow glibly dismissed NATO's criticism yesterday of Russia's continued occupation of Georgia. The Russians may be bullies, but like all bullies they know weakness when they see it.

The most NATO ministers could muster at their meeting in Brussels was a statement that they "cannot continue with business as usual" with Russia. There was no move to fast-track Georgia's bid to join NATO, nor a pledge to help the battered democracy rebuild its defenses.

Asked about NATO reconstruction aid, NATO Secretary-General Jaap de Hoop Scheffer pointedly said, twice, that it would go for "civilian infrastructure." So here we have a military alliance going out of its way to stress that it will not be providing any military aid. The alliance didn't even cancel any cooperative programs with Russia, though Mr. de Hoop Scheffer said "one can presume" that "this issue will have to be taken into view." That must have the Kremlin shaking.

NATO leaders also failed to mention Ukraine, another applicant for NATO membership that has angered Moscow in recent years and could become its next target. Also missing was any indication that the alliance would begin making long-delayed plans for defending the Baltic member states and other countries on its eastern flank in case of attack. The only good news of the day was that the Organization for Security and Cooperation in Europe will eventually send up to 100 monitors, albeit unarmed, to Georgia.

Meanwhile, Russia found new ways to ignore the West and punish the Georgians who are actually abiding by a cease-fire. After exchanging prisoners with Georgia, Russian troops took about 20 Georgians prisoner after briefly retaking the oil port of Poti, blindfolded them and held them at gunpoint. Russia also sank another Georgian navy vessel and stole four U.S. Humvees that had been used in U.S.-Georgian training exercises and were waiting to be shipped out of the country.

All of this continues the Russian pattern of the past week, in which it agrees to a cease-fire and promises to withdraw, only to leave its forces in place while continuing to damage Georgia's military and even its civilian centers. Russian commanders had the cheek to suggest that a return to the troop placements before war broke out on August 8 means that 2,000 Georgian soldiers would have to return to Iraq, from which they had been airlifted home.

One of Moscow's goals is clearly to humiliate Georgia enough to topple President Mikheil Saakashvili, so he can be replaced with a pliable leader who will "Finlandize" the country, to borrow the old Cold War term for acquiescing to Kremlin wishes. In the bargain, it is also betting it can humiliate the West, which will give the people of Ukraine real doubts about whether joining NATO is worth the risk of angering Moscow. Judging by NATO's demoralizing response on Tuesday, the Kremlin is right.

Reliving the S&L Meltdown

It was the worst of times -- or maybe not so bad. Such was the tale of three conference calls. Merrill Lynch sold $30 billion of subprime mortgage-related debt to a hedge fund for 22 cents on the dollar. Does that mean the houses underlying these debts (assuming an improbable 100% default) are worth only one-fifth of what owners paid for them?

Whereas Freddie Mac and Fannie Mae avoided any big writedowns of their dodgy "Alt-A" mortgages, on grounds they don't need to sell these to any hedge funds and will hold them to maturity, when they will be seen to have paid off after all.

Getty Images

Daniel Mudd, president and CEO of Fannie Mae, and Richard Syron, chairman and CEO of Freddie Mac, at a Capitol Hill hearing.

So Merrill's houses are worth 22 cents while Fannie and Freddie's are worth a buck?

You can reasonably posit the truth lies in between, even given the depressed credibility of all three CEOs. You can also learn a lot about the subprime state of play. The Merrill story shows how dubious mortgage debt came to be distributed far and wide, souring confidence in financial institutions. It also shows why the solution is to move these damaged credits off the balance sheets of publicly traded financial institutions (whose investors can't see through the murk and don't trust management) to private investment partnerships (whose investors can and do).

For their part, Fannie and Freddie demonstrate why these two are now the cleanup's biggest foot draggers, posing a giant risk to taxpayers.

Merrill's John Thain has caught hell from reporters and analysts because Merrill's losses have been a moving target, and because his efforts to shift assets seemed a tad cosmetic, given that Merrill agreed to finance 75% of its own fire sale. But the stock market applauded anyway. The knockdown price, more than the boss's strained credibility, was investors' best assurance that the IOUs won't return to Merrill again.

In contrast, simply nobody believes a word Fannie's Daniel Mudd and Freddie's Richard Syron are saying, because their interest now is in delaying recognition of any losses and gambling on a turnaround, using the government's credit card.

That gamble may be looking more hopeless by the day, judging by their share prices. But Congress just increased the size of the mortgages they can buy. Washington has all but thrown itself on their mercy to keep the housing market afloat. In theory, Fannie and Freddie can now Ponzi themselves to the sky -- the capital markets will continue to finance them no matter what losses they store up, or even whether they appear to be solvent.

Their only vulnerability now is political-technical -- their sinking and increasingly mirage-like capital ratios, which might embarrass Treasury Secretary Hank Paulson, our new president-plus for the economy, into blowing the whistle.

In effect, we are reliving the S&L crisis, with two giant S&Ls gambling on survival with taxpayer funds while politicians summon the will to act. Fannie and Freddie have started lending new money to delinquents to avoid foreclosures; they're dangling cash incentives in front of loan servicers to delay recognition of hopeless cases. To preserve their mostly symbolic capital, the duo also are cutting funding for new mortgages (or at least saying so to drive up mortgage spreads) just when public policy has delivered us into total dependence on them to finance home sales.

Who knows when the terminal market panic will come, forcing Mr. Paulson's hand, but it surely was helped by this week's Barron's story pronouncing Fannie and Freddie doomed.

In the meantime, the cost to taxpayers can only go higher -- Mr. Paulson would be unwise to assume Fannie and Freddie's current managements are doing a better job of earning their way out of trouble than a government receivership would. Just the opposite: Management has every reason to go for broke, risking any amount of future taxpayer losses in hopes (however faint) of shareholders living to see another day. Mr. Paulson's clear duty is to revoke these incentives before they bury us all. At this point, doing so would probably lift the entire financial sector.

And then? Make sure we never get here again by breaking Fannie and Freddie up, returning their functions to the private sector and (if we really feel more subsidy to homeowning is needed) insisting that Congress do it the fiscally honest way, through the tax code.