Days of Wine and Roses: How a Lesson from the Past Can Guide Leaders Todayby Steven R. Weisman | August 11th, 2011 | 04:58 pm
The sense of despair enveloping American politics seems to be at an all-time high. But a lesson from the past, counseling that it really is possible to work together during a crisis, is being delivered this week, following the death of the most creative, resilient, and gutsy political leader I have ever known, former Governor Hugh L. Carey of New York State.
In 1975 when he took office in Albany, and I was a neophyte reporter for the New York Times at City Hall in New York City, there was scant understanding that the city and state were on the threshold of an epochal financial crisis. Certainly there was also little expectation that Carey, a charming and prickly product of Brooklyn Democratic clubhouse politics, would measure up to such a challenge. It is amazing, in retrospect, how so much of that crisis foreshadowed the debt and deficit crises in the United States and Europe today. That similarity makes Carey’s performance all the more important and relevant.
The new governor said in his inaugural address back then that he had inherited a budget deficit following nearly 16 years of rule by Governor Nelson A. Rockefeller, who had resigned in 1974 to become vice president under President Gerald Ford. (“The days of wine and roses are over,” he memorably declared.) But he and everyone else initially underestimated the depth of the problem.
In his first months, Carey allowed a state agency, the Urban Development Corporation, to default, an event that paved the way for the tsunami of debt and deficit emergencies that followed, consuming both the city and the state. The contagion eventually forced President Ford to reverse himself and intervene. According to participants at the time, the White House was pressured by Chancellor Helmut Schmidt of Germany and President Valery Giscard d’Estaing of France, who warned that a bankrupt New York City could touch off a global financial meltdown.
Does this sound familiar now?
A little history is necessary. In the 1960s, as race riots engulfed American cities, culminating in the turmoil following the assassination of the Reverend Martin Luther King Jr., Rockefeller got the State Legislature to establish an urban renewal agency. It was given sweeping powers to borrow and build in stricken communities. The problem was that the state had a constitutional limit on its borrowing. The agency circumvented that ceiling, however, by issuing bonds backed only by the state’s “moral obligation” to pay.
This was one of the original “structured investment vehicles” like the ones that brought down several Wall Street houses in 2007-08 by establishing the principle of off-the-books debt. Wall Street lawyers and bankers came up with the idea back then. It was now-you-see-it, now-you-don’t debt. Today we have many such government vehicles—are they backed by the government or not?— most notably Fannie Mae and Freddie Mac, which the US government had to take over in 2008 in order to assure China and other investors that the United States was good for its debt. Recall also that Goldman Sachs helped Greece retain its credit rating in the last decade by taking much of its debt off the books.
Once the Urban Development Corporation defaulted, the contagion spread to New York City, which had covered up its own deficits for years by issuing short-term notes rolled over each month. The deficits were disguised by elaborate bookkeeping devices. The market for city securities slammed shut in the spring of 1975, just as it faced the need to roll over $600 million in notes a month. The mayor, Abraham Beame—like Carey, a product of the Brooklyn clubhouse—maintained that there was no problem, asserting that banks and investors didn’t understand municipal budgets and the city’s underlying solvency. His pledges to balance the budget were grudging, cosmetic, or minimal.
Carey’s response was, first, to reject such nonsense. He brought in a team of brilliant advisers from the private sector, like Richard Ravitch, a prominent real estate developer, and Felix Rohatyn, the investment banker. He worked with bankers like Walter Wriston and David Rockefeller. He reached out to the Republican legislative leadership and established a Municipal Assistance Corporation (ironically another “moral obligation” bonding agency) to buy the city’s debt. He got the Legislature to set up an Emergency Financial Control Board, putting him in charge of New York City finances, shoving Beame aside.
Most relevant for the crises of today, he prevailed on his closest allies, the unions, to accept wage concessions, layoffs, and purchases of city debt by their pension funds. The city drastically cut back on its services—imposing tuition at City University, for example. The municipal workforce was reduced by 60,000 over three years, and finally the federal government participated with a program of loans to tide the city over its crisis. Carey stunned the political world with a willingness to ask the most from his own supporters. He did so because he knew there was no alternative. He charted a course out of the morass and articulated a vision for a better day. Beame’s successor as mayor, Edward Koch, slowly restored the city’s services in subsequent years. This week Koch, a Democrat, lauded Carey as the greatest governor of New York since Al Smith.
Two of my former colleagues at the Times, Frank Clines and Linda Greenhouse, have written tributes to Carey this week. I doubt any of us knew at the time we were covering him that this would be a high-water mark for watching government rise to a challenge.
As Greenhouse pointed out, the results were not always pretty. The state’s highest court eventually nullified a dubious “moratorium” on $1.6 billion in debt repayments, rebuking the state in the process. But by the time the court acted, the city had gained the time to stabilize its finances. There was also the time that the Legislature rebuffed Carey and went home one evening without passing an emergency measure for the state agencies. The governor’s office responded by abruptly summoning them back into a late-night session, sending state troopers out to the New York State Thruway to bring them back to the capitol. Then there was the evening when the Teachers Union reneged at the last moment on its promise to buy city debt, prompting an all-night showdown with the union president Albert Shanker, before default was averted. (This was only two years after Woody Allen’s movie “Sleeper,” in which the protagonist travels into the future and learns that the world was blown up after “a man named Albert Shanker got hold of a nuclear warhead.”)
Today as well the days of wine and roses are over, and the whole world teeters on the brink of an uncertain future. For those of us watching at the time, Carey’s performance a generation ago changed our perceptions of what government can do.