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.