In the June 14th New York Review of Books Paul Krugman, Professor of Economics & International Affairs at Princeton, and Robin Wells Krugman, former Professor of Economics at Princeton, place the return to avaricious profit in Wall St. in the context of a history of repeated Government Bailouts.
There is a repeated pattern – Financial Institutions over-reach, creating new instruments they don’t understand the risks of, ignore warnings as to such, rely on government help (aid and guarantees, placing tax-payers money at risk) and then once out of the woods ‘they went right back to denouncing big government and resumed the very practices that created the crisis‘
When have we seen this pattern?
- 2008-09’s financial crash (Citigroup, BoA etc) and the 2011 attack’s on ‘banker bashing’
- 1991’s junk-bond collapse due to the consequences of vast loan-financed overbuilding of commercial real estate in the 1980s (again Citibank) which require Federal insurance to avert a crisis.
- 1982-1983 Latin American Debit Crisis (similar to the Greek EMU debacle of today) where banks, (again Citibank) were bailed out by huge US Govt. loans to foreign governments (bailing out the banks who they had debits with).
- 1970’s Penn Central bankruptcy‘s impact on its lenders (again the nascent Citibank, then called First National City) requiring emergency lending from the Federal Reserve to avert bankruptcy.
So much for the ‘once in 100 year economic flood’.. The financial crash was.. ‘in fact, just the most recent installment in a recurrent pattern of financial overreach, taxpayer bailout and subsequent Wall St. ingratitude. And All indications are that the pattern is set to continue.’.
Madricks ‘Age of Greed’ is a ‘frustrating’ series of fascinating and disturbing vignettes which suggests not only a repeated cycle but that the busts keep getting bigger. The primary thing to understand is that ‘it was not always thus..the US emerged from the Great Depression with a tightly regulated financial sector, and for about 40 years those regulations were enough to keep banking both safe and boring.’ The Age of Greed shows how, in the 70s and 80s this regulation unraveled.
The book emphasises how Nixon & Ford blamed economic problems on ‘big government’ rather than the actual ‘economic shocks’ – the OPEC crisis & Crop failures along with wage-price indexation. Republican Shtick and treasury / Fed ‘flip-flops’ (such as wage-price controls) under Nixon-Ford-Carter led to the public losing faith in Government.. ‘creating within it a ready acceptance of the anti-government message of Friedman and Reagan’. As Madrick describes ‘Reagan’s enormous capacity for doublethink and convenient untruths enabled him, the front man for business interests, to convince a credulous public that ‘government had become the principal obstacle to their personal fulfillment’. The ‘Great Moralizer’ made unchecked greed and runaway individualism not only acceptable but lauded in the American psyche. Krugman & Wells commend Madrick’s analysis as show how partial ,flawed and ‘at odds with the data’ Friedman’s economics were.
1970s inflation undermined confidence in govt economic management, catapulted Friedman to fame and undermined the New Deal constraints on financial institutions by making it impossible to maintain limits on interest rates on customer deposits. Madrick tells this section by the story of Walter Wriston – head of First National City/Citibank from the 60’s to the 80’s and author of the famed quote (on sovereign debit) ‘Countries don’t go out of business‘.
Madrick marks Wriston as the epitome of the transformation of banking from cautious supporter of industry to free-wheeling independent profit centre, creator of crises and recurrent recipient of taxpayer bailouts. He opposed Govt. bailouts to industry (Chrysler (1978)) and opponents (Continental Illinois (1984)) while being in receipt of the very same to save his own company many times. First National’s issue of Certificate of Deposits (CDs) in 1961 was the first major crack in the New Deal’s bank regulation system. It side-stepped legal limits on interest rates. This use of ‘financial instruments’ has led to their constant use to avoid any regulations and constantly pile risks higher. In his time in control Wriston oversaw the Emerging Markets crash – a crash he had predicted would never happen.
‘When loads to Latin American Govt..s 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 & 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…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.’
Krugman & Wells notes that the political response to all these crisis has been ‘to shower more favours on the financial industry, dismantling what was left of Depression-era regulation’ and creating the ‘anything goes’ deregulated world of the 1990s onwards. This environment has already provided two huge bubbles – the tech bubble of the 1990s and the housing bubble of the 2000s. Madrick charts this period with profiles of men who have become increasing famed in the sub-prime era ‘ Angelo Mozilo (Countrywide Financial Services), Jimmy Caine (Bear Stearns) Dick Flud (Lehman Bros) Stan O’Neil (Merrill Lynch) and Chick Prince (Citigroup) as well as the man recreating the Friedman role with his ‘entirely undeserved reputation’ as economic guru Alan Greenspan.
Krugman and Wells point to Sanford I. (Sandy) Weill – who masterminded the merger of Citibank and Travelers / Smith Barney to create Citigroup and then became its CEO. They note ‘what is truly remarkable about that merger is that when Weill proposed it, it was clearly illegal. Smith Barney, a Travellers sub. was engaged in investment banking – that is putting together financial deals. And New Deal-era legislation – the Glass Stegal Act – prohibited such activities on the part of commercial banks (deposit-taking institutions) like Citibank. But Weill believed he could get the law changed to retroactively approve the merger, and he was right…. Weill ended his reign at Citigroup immensely rich but under an ethical cloud.‘
Why have these people been able to repeatedly act this way? Lack of Regulation and political contrivance, from both Republicans and Democrats, are the clear answers. ‘Undoubtably 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.‘
The authors note Madrick doesn’t deal with why regulators have abdicated responsibility, his book is more a catalogue of Greed. Krugman and Well’s reaffirm their previously presented belief that ‘white backlash’ against the Civil Rights movements transformed US politics and created the opportunity for a major push to undermine the New Deal. This combined with the metastasization of the influence of money in politics in the TV era has made deregulation the dominant meme.
Madrick’s subtitle ‘the triumph of Wall St. and the Decline of America’ is apt. Despite what business school academics claim the vast sums of Wall St. money did not improve America’s productive capacity ‘by efficiently allocating capital to its best use’.. Instead ‘it diminished the country’s productivity by directing capital on the basis of financial chicanery, outrageous compensation packages and bubble-infected stock price valuations.’ The USA ‘is ‘on track to spending the better part of a decade experiencing high unemployment, and sub-par growth blighting millions of lives – particularly the old, the young and the economically vulnerable.‘ The Democrats favour light regulatory reform, inefficient to tackle the problem and ethos of Wall St. and the Republican’s remain wielded to Reagan and Friedman: still blaming ‘big government’. ‘While proclaiming themselves defenders of the little guy, Republicans are currently hard at work undermining the Obama administrations consumer protections that would largely prevent a replay of the rapacious subprime lending.’
Madrick’s book is ‘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‘.