Quote of the Day (William Simon, on an ‘Elitist Approach to Government’)

“The American citizen must be made aware that today a relatively small group of people is proclaiming its purposes to be the will of the People. That elitist approach to government must be repudiated.”—American businessman, philanthropist, and Treasury Secretary William Simon (1927-2000), A Time for Truth (1978)

Twenty-five years ago this week, William Simon died at age 73. In both the public and private sectors, he appealed to a generation of free-market conservatives with warnings like the.

At the time, Simon identified this group as liberals who were threatening the foundations of America with a leviathan central government. But, nearly a half-century after the peak of his influence, with this bestseller, it is more apparent that this “elite” consists of financial sector titans who possess the arrogance of Gilded Age robber barons but all too little of the physical infrastructure they built.

I was reminded of Simon this past week after watching Drop Dead City, the recent documentary about New York City’s 1975 bankruptcy crisis. As Gerald Ford’s Treasury Secretary, Simon vehemently opposed bailing out the city, then, after the President reversed his earlier decision refusing aid, held out for more punitive terms, with treasury loans carrying an interest rate of 1 percent higher than the market rate.

All of this was pretty rich considering that, before entering government service in the Nixon Administration, Simon had been an extremely well-compensated bond trader—and he hadn’t raised a peep then about the extremely flimsy financial instruments and budget tricks used by New York City and Governor Nelson Rockefeller, then on a construction spree so wild that he was said to have an “edifice complex.”

It was all of a piece with the position maintained by the financial industry in general in these years, noted Village Voice investigative reporter Jack Newfield:

“The banks never warned the public about excessive borrowing, because they were busy making millions of dollars in commissions on underwriting the city's paper. The bankers made a pusher's profits, while the city slipped into addiction like a junkie. Then the banks suddenly ordered the city to withdraw cold turkey, or mug its own citizens."

A year after leaving the Ford administration to become a consultant for an investment‐banking house, Simon wrote A Time for Truth, part of a boomlet in conservative economics bestsellers that found receptive readers as the GOP sought a return to power, such as Milton Friedman’s Free to Choose and George Gilder’s Wealth and Poverty.

He reputation for straight talking with observations that shaded from being outspoken to outrageous (e.g., the “the hostile collectivism unleashed in the 60's” set the stage for Watergate, not Nixon’s paranoia). Some of his more ardent admirers even hoped that Ronald Reagan would select him as his running mate for the 1980 Presidential campaign.

It’s too bad that Simon’s penchant for straight talking wasn’t matched by straight dealing.

No, I’m not saying Simon was a swindler. But it was more than a little disingenuous that, in the 1980s, the treasury secretary who had denounced using other people’s money and debt financing made staggering amounts of money with the same two practices in the private sector.

In 1982, Simon and his partner, using only $330,000 each of their own money, borrowed $79 million from Barclays Bank and General Electric to engineer a leveraged buyout (LBO) of Gibson Greeting Cards. Eighteen months later, they flipped the company, taking it public again and selling it for $270 million.

This transaction was a key moment in the Reagan era upsurge of private equity, the investment strategy of acquiring ownership stakes or control in companies not publicly traded. From a mere 24 in 1980 in the US, it has grown to more than 17,000 today. It was all part of an era of laissez-faire capitalism that, in many ways, has lingered on to today.

The problem was that the U.S. economy moved decisively away from manufacturing, according to Bad Money, by the late political and economics commentator Kevin Phillips. “LBOs and debt speeded manufacturing’s ebb, inasmuch as goods producers constituted a disproportion of companies affected, and when they were stripped of some assets and loaded up with debt, blue-collar jobs and futures were usually at risk.”

You could also call it “Simonomics,” to signify the influence of this conservative icon who hailed the genius of the marketplace. The influence of private equity on politics spread beyond Republicans to Democrats, with donors from these companies contributing to candidates who aligned with conservative positions on taxation, regulation, and economic growth.

Away from his work, Simon was a devout Catholic active in philanthropy, and a foundation he established continues to provide scholarships for inner-city students. One wishes he would have given more prayerful consideration to papal encyclicals such as Rerum Novarum and Mater et Magistra that advocated for social progress and justice.