From Mass Prosperity to Severe Recession in Fifty Years
The financial crisis of 2008 produced a rash of books on Wall Street covering these events from the point of view of all the major investment banks, politicians, mortgage dealers and everyone else within arm’s reach. Judging from most of them, though, you might think the problems in our financial sector go back only a decade and originated in the schemes of Wall Street’s financial geniuses to repackage bad mortgages into super-safe assets.
The story is now a familiar one: speculation in mortgage-backed securities added steam to a runaway housing bubble. When the house of cards eventually collapsed, it required a taxpayer bailout to save Wall Street while the subsequent bad debt lead to the most severe recession since the Great Depression.
Even the most ambitious books generated by the meltdown go back only fifteen years or so and discuss such things as the bailout of the hedge fund ironically titled Long-Term Capital Management; the removal of the last piece of New Deal banking regulation, Glass-Steagall; Goldman Sachs going public; and the isolation of the few regulators, such as Brooksley Born, head of the Commodities Futures Trading Commission, who sounded the alarm about the rapidly expanding derivatives market.
These books, however, describe a world that already existed, one that functioned inside a financialized economy dominated by a conservative political system and libertarian economic policies.
Jeff Madrick’s Age of Greed looks at the current financial mess from a much longer historical perspective, starting from the early 1960s and concluding with the meltdown. The book walks us through the major changes in the economy over the past half century and describes how we got from the shared growth of the post–World War II economy to where we are now. Madrick describes a world where regulation contained Wall Street excesses, the real economy built mass prosperity and the economics and politics of Keynes and liberalism worked to keep unemployment low and wage growth high. This was an economy of strong unions, wage growth and jobs that featured secure access to retirement savings and healthcare. It was a radically different world than the one we live in now.
The first half of the book covers the years between 1960 and 1980 and chronicles three overlapping stories. The first is the dismantling of the New Deal financial regulatory regime. The second is the rise of a conservative ideology that is hostile towards any type of government and that romanticizes free markets. And the third is the advent of an environment where businesses refocused on shareholders and appeasing Wall Street rather than on workers and communities.
In Age of Greed, Madrick describes how the New Deal restraints on financial sector excesses barely made it to 1961 before they come under major assault. One of the crucial banking regulations of the New Deal was Regulation Q, a prohibition on banks offering interest on checking accounts. Madrick shows how Walter Wriston, an energetic rising star at the First National City Bank, created a series of financial instruments designed to unravel Regulation Q in the early 1960s. These financial innovations were explicitly designed to sneak around regulation. The idea that financial innovation is mainly about getting around regulations is commonly asserted these days, but Madrick shows that these practices go back much further.
While the financial sector keeps growing, a revolution in politics is taking place. Madrick follows the rise of the anti-government conservative movement. Each of his nineteen chapters offers short vignette about an influential person at an important time in history. They range from academics like Milton Friedman to rising political stars like Ronald Reagan and Jack Kemp. Many recent books treat the rise of the ideological conservative movement with a kind of fatalism: it was all a matter of Milton Friedman and others at Chicago writing some papers on financial markets and forty years later—voilà! we get the Great Recession. Madrick shows how these individuals worked to turn their ideas into reality and how political choices were made in the process. Instead of being inevitable, he writes, the changes were the result of specific people fighting battles in the short term but also making the arguments for the long-term.
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.
Madrick’s book ends a bit abruptly. There’s little in terms of recommendations or even a guide to how we move forward. There’s an implication that all we need to do is go back to the New Deal–era financial regulations, though one of the stronger and more original points the book makes is that this regulatory regime was coming undone as early as 1961, a mere sixteen years after the end of World War II. Has there ever been a strong, enduring way of keeping the financial sector from persistently wrecking the economy? More important, what is the kind of financial sector that we want to build for the twenty-first century?
Though the main story in Age of Greed is how an elite group was able to privatize the gains and socialize the losses of an out-of-control financial system, there’s another story in the background that could lead us somewhere. Most of the people we meet were thinking of the long-term when it came to changing the world to be closer to their free market image they had in mind. Many of the original architects of the demise of Roosevelt-era financial reforms were anti-New Dealers who thought of their project as a generational shift. Will the battle against the increased financialization of the economy look the same way? Will the battle require thinking in terms of decades, and have to be fought in all parts of the economy? If history is any guide, that might be the only way to get to an economy that works for all of us.