Understanding Mitt Romney's Bain Problem

The tide that lifted Bain did not lift all boats.

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The beauty of modern computational finance, or financial engineering, is how much wealth it can create beyond that which is produced through toil or invention.

As the liberal economist Brad DeLong has noted:

[L]iquidity creation, duration transformation, and simple diversification are all attempts to make the law of large numbers work for us. They are largely successful attempts not to buy liquidity, immediacy, and insurance from those who want to sell them, but rather to create them out of whole cloth—via clever applications of the principles of probability. As such, they are the preeminent examples of our largely successful ability to make the economy live beyond its means on its wits. Liquidity, immediacy, and insurance are good and valuable things: the marvel of financial engineering is that it creates them out of thin air.

Lots of people, on both the left and right, are deeply uncomfortable with this nebulous idea of “wealth.” This is the source of Rep. Ron Paul’s discomfort with “ fiat money.” At the risk of oversimplifying, Marx believed value is produced by physical exertion—turning a tree into a rocking chair, for instance. The adherents of Ludwig von Mises and Ayn Rand, meanwhile, believe more broadly that value is produced by entrepreneurship and genius.

Needless to say, we left behind that simple world—if it ever truly existed—a long time ago.

Also needless to say, it was this system of financial engineering run amok that crashed the global economy.

“What does this have to do with former Gov. Mitt Romney?” you ask.

Simple: He got rich in some measure by applying the methods of this high-financial wizardry.

[ Check out political cartoons about Mitt Romney.]

When he graduated from Harvard, Larry Cheng, founding partner of Volition Capital, says he turned down a job offer from Bain Capital because, at the time, the firm was more active in leveraged buyouts, or LBO, rather than venture capital, or VC:

Bain Capital, as a proxy for the LBO industry, principally relied on sound financial engineering to generate returns. They emphasized things like terms on debt, balance sheet structuring, and predictability of cash flow. They pushed me hard on my quantitative and modeling skills throughout the interview process. I came to appreciate that the VC and LBO worlds were two very different worlds.

On the campaign trail, Mitt Romney conveniently likes to talk only about the VC: for example, how he and his partners met “in the back of an old strip mall” to help start up Staples.

This kind of scenario—taking an informed financial risk and creating a successful real-economy enterprise—is easily relatable.

[ See Mort Zuckerman's five sure-fire ways to spur job growth.]

By talking in these terms, Romney tries to project the aura of classic Horatio Alger rags-to-riches Americana. In his South Carolina concession speech, he went so far as to say that an attack on Bain is an attack on every average enterprising American:

We cannot defeat the president with a candidate who has joined that very assault on free enterprise ... When my opponents attack success and free enterprise… they’re attacking you.

This line is as absurd as it is insulting. Lots of Americans work hard, or are willing to work hard, and they will never realize the kind of wealth that Romney has. It is not out of envy—or at least not primarily envy—that people question the acquisition of wealth through “thin air,” as DeLong puts it.

Furthermore, no one is asking Mitt Romney to “apologize” for his success.

Critics who are themselves wealthy—from Warren Buffett to Bruce Springsteen to Barack Obama—aren’t seeking to abolish capitalism with Russian or Chinese or Cuban command-and-control economics, as Romney asserted, ridiculously.

[ Read Robert Schlesinger: Mitt Romney's Lies.]

President Obama is going to respond to Romney’s fallback on the “free enterprise” mantra by saying, “I’m successful too; I’m just trying to tweak the our fiscal policy so it doesn’t favor me quite so heavily.”

A sizable chunk of the electorate—maybe the decisive chuck—simply will not believe that the tide that lifted Bain, lifted them—or will ever lift them again. This bloc of voters is going to hear Obama’s critique and nod in agreement. And there’s very little that Romney will be able to say in his own defense that will change their mind.

In a way, Romney’s dilemma is the unhappy result of about 50 years’ worth of capitalism-as-populism rhetoric catching up with the conservative movement.