Jeff Madrick: Age of Greed

Mike Konczal: From Mass Prosperity to Severe Recession in Fifty Years: Good title, pretty much the story of our lives, especially if like me you're about sixty years old and experienced exactly that decline. (My parents started in the Great Depression, so Mass Prosperity came late for them and seemed hard earned, whereas we took it for granted, and those who came later spent all their lives feeling something they never really understood slipping away.) The more specific subject here is Jeff Madrick's book, The Age of Greed, which follows the rise of finance from the 1960s through its recent debacle. The historical context helps to make sense of how crazy it all got more recently:

The last major change that set the landscape for the financialized economy of today is the delinking of the real corporate sector and growth in jobs and wages. During the postwar period, productivity often translated into wage gains, but this relationship disappeared in recent decades. In Age of Greed Madrick argues that a resurgent Wall Street played a role in this change. Between shedding previous moral objections to hostile takeovers, creating funding for a merger of any size and making short-term stock prices the barometer of the health of a company, the financial sector overhauled how work is done in this country. As Madrick notes, just the looming threat of a hostile takeover forced firms to cut and squeeze workers, reduce their investment in R&D and focus on how to goose their stock prices.

Like a lot of recent historical work, the book puts the 1970s front and center as the decade when everything changed. The runaway inflation of the 1970s, a course set in by the expansive monetary policies of Federal Reserve Chairman Arthur Burns and the price controls imposed by the Nixon administration to keep the economy running in high gear through Richard Nixon's second term, forced further deregulation of the financial sector. When the financial sector approached a collapse, a collapse stopped by emergency Federal Reserve intervention, further deregulation was used to return the sector to profitability.

Madrick shows how each of the individual strands start reinforcing the others. With easy money to be made on Wall Street and pressure to keep stock prices high, management in the real economy wanted to mimic what Wall Street did. For instance, Jack Welch, CEO of GE, turned his subsidiary GE Capital into one of the main focuses of his business, moving away from the midcentury business model that had room for employees and innovations. And the antitax measures that formed the basis of the tax revolt, measures that failed in California when Reagan first introduced them in the early 1970s, passed in the late 1970s after a decade of stagflation.

The second half of the book covers the runaway financial sector and stagnating real economy of the past thirty years. Banking and financial crises happen more often and become larger and more threatening. Age of Greed tours all the major crises, from the Third World debt crisis of 1982 to the high-tech stock bubble of 2000, describing the increasing recklessness of the financial sector as the stakes get higher. The book concludes with the stories of the individuals who brought us the housing bubbles and who benefited from the bailouts.

Paul Krugman/Robin Wells: The Busts Keep Getting Bigger: Why?: book review of Jeff Madrick: Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present.

While 1970s inflation undermined confidence in government economic management and catapulted Friedman to fame, it also undermined the New Deal constraints on financial institutions by making it impossible to maintain limits on interest rates on customer deposits. To tell this part of the story, Madrick turns to an often-neglected figure: Walter Wriston, who ran First National City/Citibank from the 1960s into the 1980s. These days Wriston is best known among economists for his famous quote dismissing sovereign risk: "Countries don't go out of business."

But as Madrick documents, there was much more to Wriston's career than his misjudgment of the risks involved in lending to national governments. More than anyone else, he epitomized the transformation of banking from cautious supporter of industry to freewheeling independent profit center, creator of crises, and recurrent recipient of taxpayer bailouts. As Madrick deftly points out, "Wriston lived a free market charade," strongly opposing the federal bailouts of Chrysler (1978) and Continental Illinois (1984) while his own back was saved multiple times by government intervention.

The transformation of American banking initiated by Wriston arguably began as early as 1961, when First National City began offering negotiable certificates of deposit -- CDs that could be cashed in early, and therefore served as an alternative to regular bank deposits, while sidestepping legal limits on interest rates. First National City's innovation -- and the decision of regulators to let it stand -- marked the first major crack in the system of bank regulation created in the 1930s, and hence arguably the first step on the road to the crisis of 2008.

Wriston entered the history books again through his prominent part in creating the late-1970s boom in lending to Latin American governments, a boom that strongly prefigured the subprime boom a generation later. Thus Wriston's dismissal of the risks involved in lending to governments would be echoed in the 2000s by assertions, like those of Alan Greenspan, that a "national severe price distortion" -- i.e., a housing bubble that would burst -- "seems most unlikely." [ . . . ]

When the loans to Latin American governments went bad, Citi and other banks were rescued via a program that was billed as aid to troubled debtor nations but was in fact largely aimed at helping US and European banks. In that sense the program for Latin America in the 1980s bore a strong family resemblance to what is happening to Europe's peripheral economies now. Large official loans were provided to debtor nations, not to help them recover economically, but to help them repay their private-sector creditors. In effect, it looked like a country bailout, but it was really an indirect bank bailout. And the banks did indeed weather the storm. But the loans came with a price, namely harsh austerity programs imposed on debtor nations -- and in Latin America, the price of this austerity was a lost decade of falling incomes and minimal growth.

Moving on to the technology bubble of the 1990s and the housing bubble of the 2000s (specifically, "the Bush years") and the deregulation that made them worse, Madrick provides profiles of Angelo Mozilo (Countrywide), Jimmy Caine (Bear Stearns), Dick Fuld (Lehman), Stan O'Neal (Merrill Lynch), Chuck Prince (Citigroup), and Sandy Weill.

There are a lot of villains in this story -- so many that by the end of the book we were, frankly, suffering from a bit of outrage fatigue. But why have villains triumphed so repeatedly?

The proximate answer, clearly, is the abdication of regulatory oversight. From junk bonds to derivatives to sub-prime mortgages, regulators either turned a blind eye or were impeded by business interests and politicians -- Democrat as well as Republican. Undoubtedly the most outrageous act -- and the most economically damaging to the country -- was Greenspan's refusal to use regulatory powers at his disposal to rein in the exploding sub-prime market, despite being warned repeatedly that a catastrophe was brewing. Like Reagan and Friedman, Greenspan firmly believed in greedism; in his view, the financial markets could do no wrong.

Yet if the problem was lack of oversight, that leads to another question: Why did the regulators abdicate -- and keep abdicating despite repeated financial disasters? This is perhaps the most frustrating aspect of Madrick's otherwise excellent book: we get a lot of the what, but not much of the why. Madrick's character-centered narrative makes it seem as if the triumph of greed was the result of a series of contingent events: the inflation of the 1970s, the exploitation of that inflation by Reagan and Friedman, the wheeling and dealing of the likes of Sandy Weill, and the diffidence of Jimmy Carter and Bill Clinton. Yet surely there must have been deeper forces at work.

Conclusion:

But more than that, it's a much-needed reminder of just how we got into the mess we're in -- a reminder that is greatly needed when we are still being told that greed is good.

Greed is good? That's actually just one of a constellation of false platitudes, starting with Adam Smith's irony of a hypothetical model where the pursuit of self-interest manages to increase production. But even that only works up to a point, and that it doesn't take much greed to pass that point.