Paul Krugman and Robin Wells review Jeff Madrick's new book, Age of Greed, in the current issue of the New York Review of Books. The piece largely mirrors Madrick's tale of Wall Street villainy over the course of the last forty years, a history of which the vast majority of Americans remain entirely ignorant.
The key points?
The first thing you need to know about the cycle of financial overreach, crisis, and bailout is that it was not always thus. The United States emerged from the Great Depression with a tightly regulated financial sector, and for about forty years those regulations were enough to keep banking both safe and boring. And for a while—with memories of the bank failures of the 1930s still fresh—most people liked it that way. Over the course of the 1970s and 1980s, however, both the political consensus in favor of boring banking and the structure of regulations that kept banking safe unraveled. The first half of Age of Greed describes how this happened through a series of personal profiles.
Madrick stresses a key point that is often forgotten or misunderstood to this day: the surging inflation of the 1970s had its roots not in some general problem of “big government” but in largely temporary events—the oil price shock and disappointing crop yields—whose effects were magnified throughout the economy by wage-price indexation. Yet constant policy shifts by the Treasury and the Federal Reserve (remember wage-price controls?) under Nixon, Ford, and Carter, Madrick argues, made the American public lose faith in government effectiveness, creating within it a ready acceptance of the antigovernment messages of Milton Friedman and Ronald Reagan.
Madrick also makes sure to take aim at the myth of Milton Friedman and Alan Greenspan as supertitans of American high finance and economics, a myth that obscures the fact that each was philosophically bankrupt and directly responsible for the socioeconomic and political suffering of millions of people the world over. This will be familiar terrain for readers of Naomi Klein's Shock Doctrine and Matt Taibbi's Griftopia.
Where Madrick departs from other economic histories of the wilful dismantling of regulations designed to mitigate against greed and cycles of irrational exuberance that have characterized the last four decades of global economic experience is his discussion of CitiCorp's central role in all this. At the heart of things is Sandy Weill. As Krugman and Wells note,
Weill’s personal rise paralleled the transformation of finance, as the genteel figures of the era of regulated, boring banking were replaced by aggressive outsiders. During the 1960s, old-school Wall Streeters mockingly referred to Weill’s brokerage—Cogan, Berlind, Weill & Levitt—as Corned Beef with Lettuce. By 2000, however, the old Wall Street was gone, and the former outsiders were in charge. Weill, in particular, had masterminded the merger of Citibank and Travelers, and after a power struggle emerged as the new Citigroup’s CEO.
What was truly remarkable about that merger is that when Weill proposed it, it was clearly illegal. Salomon Smith Barney, a Travelers subsidiary, was engaged in investment banking, that is, putting together financial deals. And New Deal–era legislation—the Glass-Steagall Act—prohibited such activities on the part of commercial banks (deposit-taking institutions) like Citibank. But Weill believed that he could get the law changed to retroactively approve the merger, and he was right.
Despite heaps of evidence that Wall Street has and will continue to piledrive the American economy into the ground, major resistance to regulatory oversight still obtains. Why?
Krugman and Wells close on a depressing note, made all the more upsetting by last night's news that the Obama administration will not seek to nominate Elizabeth Warren to head the Consumer Financial Protection Bureau.
We don’t seem to have learned the lesson that unregulated greed, especially in the financial sector, is destructive. True, most Democrats are now in favor of stronger financial regulation—although not as strongly as is required by the continuing manipulations by large financial institutions. But today’s Republicans remain firmly attached to greedism. In their view, it’s still government that’s the problem. It has now become orthodoxy on the right—despite overwhelming evidence to the contrary—that Fannie Mae and Freddie Mac, not Angelo Mozilo and Countrywide Credit, are to blame for the subprime mess. While proclaiming themselves defenders of the little guy, Republicans are currently hard at work undermining the Obama administration’s consumer protections that would largely prevent a replay of rapacious subprime lending.
And they've done so quite successfully, to the detriment of us all.