You may well find various of Madrick's views unacceptable and simply wrong. For one, I am totally unpersuaded of his defense of Keynes. However, a very thoughtful discussion and you are guaranteed to learn thing from it. Billy --------------------------------------------------------------------------- Conversation with Jeff Madrick, Author of Age of Greed (http://www.newdeal20.org/wp-content/uploads/2009/04/jeff-madrick-100.jpg) _Roosevelt Institute Senior Fellow Jeff Madrick_ (http://www.newdeal20.org/author/jeff-madrick/) recently sat down with ND20 Editor Lynn Parramore to discuss his latest book, _Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present_ (http://www.amazon.com/Age-Greed-Triumph-Finance-Decline/dp/1400041716/) , which hits stands today. If you’re in the New York City area and want to learn more, catch Jeff at Cooper Union on Thursday, June 2nd. _Click here_ (http://cooper.edu/news-events/events/greed-the-triumph-of-finance-and-the-decline-of-america/) for more information on the event. Lynn Parramore: You called your book Age of Greed, tracing the antecedents and activities of a four-decade period starting in the 1970s. Why did you choose greed as the central theme? Why not “Age of Risk” or “Age of Delusion”, for example? Jeff Madrick: I think greed always exists. It rises and falls with the times. But when it’s unchecked by government, which has been happening since the 1970s, it festers on itself. It becomes outsized and it badly distorts the economy. That is to say, self-interest rises to a level of greed that overwhelms the economic invisible hand. When self-interest turns into greed, people start using the power of business to undermine the way markets should work. What happened in this era was that people worked in their self-interest. They didn’t just take more risk. They were not deluded. Many of them took more risks than they should and merely did it because they made a buck. So greed really drove this decade: money and self-interest in the extreme drove very bad decision-making on Wall Street, which in turn, it’s important to emphasize, deeply harmed the American economy. LP: Walter Wriston, a name perhaps unknown to many Americans, gives the title to not one but two chapters of your book? Why is this figure pivotal? JM: My writing career began in the 1970s, so he was a big name to me. I interviewed him several times. Walter Wriston was the pioneer in the effort to deregulate financial markets. He was a talented, very bright man who ran a very powerful bank and had enormous access to the Republicans who took over in 1969 through Richard Nixon’s victory. And he is the one who began unraveling the regulations — the way controlled commercial banks, which took FDIC-insured savings deposits, could invest their money. In fact, as people read the book, they’ll see that he was a free-market ideologue. He really hated the New Deal. His father, a prominent conservative historian who ultimately was president of Brown University, hated the New Deal. Wriston inherited that from him in my view. But he also used it for his company’s own gain. In the 1970s, Wriston really began to whittle down the famous “ _Regulation Q_ (http://en.wikipedia.org/wiki/Regulation_Q) ”, which controlled the interest rate that could pay savers to attract money. And therefore the banks could get more aggressive about where they lent the money. He also developed an enormous international business. What was remarkable about Wriston — to the detriment of the American economy to a degree but especially to the third world –- was that he took the petrodollars of the Arab nations. The Arab nations got a lot of dollars when they tripled, quadrupled and again doubled the price of oil. All of that was paid in dollars to them. They had to do something with those dollars. Wriston leaped in to recycle them by making loans to the third world –especially by developing nations. Especially in South America. Government could just as easily have been handled by the I.M.F., the World Bank, or some ad hoc group of governments to oversee the use of that money, and even to make it equity money, not loan money –- investments and productive business. Instead it was lent to countries, and, to some degree, companies that had exported commodities. Wriston heralded how well his loan officers could manage that money and the loans almost all turned bad in the 1980s — so bad that the banks chose to stop lending to countries in trouble, particularly Mexico in 1982. The Fed and the I.M.F. had to rescue, in effect, the American banks. LP: Wriston started his career –and remained for some time — a rather unassuming man who lived in a middle class housing project. But by the end of his career he was living among celebrities and driving fancy sports cars. Does that trajectory reflect a key change in American banking and financial culture? JM: A good friend of mine told me back in the ‘70s that financiers never became wildly rich in American history. Take J.P. Morgan, the greatest financier in American history. When he died, Andrew Carnegie said, “I didn’t know he had so little money.” In the 1970s that began to change. Financiers became enormously wealthy. Wriston was the leading edge of that, but he wasn’ t the man to make by any means the most money. He wanted to make a bank into a growth company, like Xerox or IBM or Johnson & Johnson, which were the great growth companies. Or later, Microsoft, Apple. But should banks have been growth companies? In the meantime, he began to travel in a very powerful world and he began to live the good life. I think it was the beginning of that kind of thing, but others took it to excesses that made him look like a piker. LP: That brings me to Ivan Boesky. He’s the first character in the book who really seems to capture the very essence of greed. He’s a bandit with no pretense that he’s working on behalf of anyone else. Was he the beginning of this era’s greed in its purest form? JM: Ivan had no illusions about what he was doing. Now, I don’t know if that’s as un-admirable as it sounds. Because many of the other guys created a pretense to allow them to seek their self-interest—and, in my view, become excessive, even corrupt. Ivan knew he was corrupt. He intended to be corrupt. Where he was stupid is that he really didn’t even try to seriously cover his tracks. LP: Was he an outlier? Did this type of behavior become something others wanted to emulate? JM: He was the leading edge of the culture. Few people were quite as crude as Boesky. They disguised it. They didn’t brag about it that much. But they were very aggressive in their own way and Ivan occasionally talked about that famous line from Adam Smith that greed is healthy. He thought he was emulating Smith. By greed he meant self-interest. But he wasn’t really concerned about those bigger things. He had certain psychological issues, some of which I trace in my book. He needed constant social affirmation. He needed it. In my view, he couldn’t walk into a room anonymously. It just was too much for his shallow and very weak ego. He needed that money and would do anything for it. He was a mobster. He was addicted to money and he would commit financial crimes to get it with no qualms. LP: You outline how the hatred of government intrusion drove many of the early proponents of the free market model. This seems a great irony, given that financiers who hate government need its cooperation — its guarantees, its bailouts — in order to get and stay rich. How do you explain this contradiction? JM: Self-interest means that you will do anything, even utilize government, to make your money and to retain your place in society. There are many examples of people who think that the rules apply to others but not themselves. Wriston was a classic example of this. It wasn’t only the bad bank loans. In 1970 when Penn Central went bankrupt, his bank made the most commercial paper loans to Penn Central. He was scared to death everything was going to fall apart. He called the Fed – I don’t know if he spoke to the Chairman, Arthur Burns, but the Fed opened its window like it did in 2007. This happened many times with Wriston. He talked this game of free competition, but when he needed to be bailed out, he got bailed out. So it’s an extreme hypocrisy — not an unusual characteristic of egotistical, ambitious men and women. There are double standards. LP: Many argue today that government has been captured, or even restructured through the influence of the financial and banking industries. Is this true? If so, how can trust in government – trust in its ability to intervene in crises — be restored? JM: There is no explanation for the deregulation and lack of oversight on the part of Washington except that they were snookered, beholden, or saw where their bread was buttered because of the rise of Wall Street and how much money you could make. Something we have to be cautious about: we’re snookered by a simplistic ideology. The people who adopt ideologies and idealism do so often because it favors themselves and their own pocketbooks. The history of this period is a history of the abdication of government authority. Part of it was the result of this rising ideology in the ‘70s. Part of it was because Americans became convinced that big government and some kinds of regulations are problems. A lot of it had to do eventually with the sheer power of business to attract and influence these decision makers. LP: Could government have done anything to stop greed? JM: Greed would have remained checked had government been doing what it should be doing. And that’s a tragedy of the age. One point we have to make clear is that the nation did not start wasting its money and losing its precious resources in 2007, 2008 and 2009. The financial community has been ill-serving the nation since the 1970s. I talked about the bad loans Wriston made. There were also all kinds of bad real estate loans made in that period. In the ’80s the banks and other financial institutions financed the corporate takeovers – that was billions and billions of dollars. The S&L’s made all kinds of bad loans because they were deregulated. In the early ‘90s banks and securities firms began using derivatives to make tricky loans to companies like Proctor&Gamble and Orange County. In 1994, when the Fed raised interest rates, those financial structures fell apart and Wall Street almost with it. In the late 1990s, Wall Street financed all kinds of high-tech fantasies. There was bad accounting. Outright lies by financial analysts on Wall Street. You could not keep your job and make your fame on Wall Street unless you lied. Accounting fraud and unaccepted accounting practices were rife throughout American in the late 1990s. LP: So greed is the central problem, but deceit is the handmaiden? JM: When you sell a product — Electrolux vacuum cleaners, Avon hand lotions – it would be naïve to think that there isn’t some kind of exaggeration. But Wall Street became imbued with deceit at very high levels of transactions. The cost to the economy – the misallocation of resources – was huge. In the 1970s there were the bad loans in Central America. In the 1980s, the outrageous investments made by S&Ls with federally insured money. In the 1 980s again – huge hostile takeovers financed with tax-deductible dollars that were not ameliorated by government. In the 1990s, the high-technology fantasies — Enron and WorldCom, telecom companies rife with accounting frauds. This amounted to hundreds of billions of dollars of bad investment. Even trillions of dollars. And then, of course, the 2000s – there were the subprime mortgages and other bad mortgages. Trillions, literally. LP: What have these losses meant to America’s economy? JM: This is all a misallocation of resources in America. When Alan Greenspan said his great mea culpa—“I have this model of the economy and it worked for forty years and then it didn’t work” – that is nonsense. It did not work. There was constant misallocation of losses. He would argue, well, we need those losses in order to have the good. But look what happened to the economy during this period. We had twenty-two or twenty-three years of low-productivity growth. When productivity did start to rise, typical workers benefited from it only for a few short years in the late 1990s. Wages over this period of the Age of Greed have stagnated. They’re actually down for men. They’re up for women but only moderately over time, and women still make significantly less than men do with the same qualifications on average. What kind of economy is that? We haven’t invested in transportation, education, health care advances, energy. The list goes on and on. And who knows how much manufacturing innovation we failed to invest in because of what happened on Wall Street. ---------------------- LP: If the recent financial crisis disproved the dominant free market/efficient market economic models of the Age of Greed and exposed rampant fraud, deceit, and risky behavior, why are we still so firmly in the grip of faulty economic thinking? JM: I think we’re still in the grips of it for a couple of reasons. One is the extraordinary power of Wall Street and monied interests and the power of money in campaigns. This is a very serious sphere in the heart of democracy in America. Number two: the reformers, the good guys, are basically only looking to stop the next crisis. In fact, they should be looking to make the financial system work properly again. It didn’t fail only in 2007 and 2008. It failed time and again since the 1970s. Reform has to be directed at that. That’s a much harder issue. LP: What areas of the financial system are most in need of new policies and practices? JM: It’s not about Too Big to Fail. It’s about restraining crazy levels of speculation. It’s about seriously restraining compensation that’s based not on productive investments but on shuffling paper. It’s about making individual executives responsible for what they do and subject to losses. Now they are not subject to losses because the shareholders bear the loss. One of the remarkable things about the Age of Greed — and why I call it that — is that not only did people make enormous money and were able to pursue their self-interest unchecked, but they reversed the history of American reforms. We learned how to deal with this in the 1930s. We learned the problems. We developed regulations. And not only were some of those regulations reversed in letter, they were basically reversed in spirit. LP: What lessons of the 1930s did we unlearn in the Age of Greed? JM: FDIC insurance was the most successful program of the 1930s. But when money-market funds came around, and you and I put our money there without thinking about it. Nobody thought, my God! We better ensure that these money-market funds are okay — they’re not insured! Well, sure enough, in 2007-8 there was a run on money-market funds. The SEC was created to make sure investment banks, when they raised money through stocks and other relevant securities, disclosed all relevant information. In the 1990s and 2000s, federal regulators stopped forcing disclosure. No one even knew what was in a collaterized debt obligation any longer. In fact, I think you aren’t even allowed to know what was in it unless you were an investor. The SEC was created to make sure that pricing was transparent. Then we had the development of over-the-counter derivative markets where pricing was totally secret, totally subject to the whim of a particular investment bank — Morgan Stanley, Goldman Sachs, and so forth. Things became obscure, which was the opposite of the spirit of the SEC. So America reversed history in this period. LP: To get the fundamental restructuring that’s necessary to put us on more sound economic footing, what’s most vitally important for financial regulators do to? JM: To concentrate on capital requirements, which is no small thing in a global world. To raise capital requirements significantly in order to restrain speculation. The same with leverage requirements. I believe what would help is a financial transactions tax to diminish over-speculation. But I think what regulators have to begin to come terms with – and it’s not even in the air, certainly not a serious consideration – is to understand that Wall Street is a monopoly. Almost like an electric utility used to be a monopoly. Why is Linked In trading so high? Because Wall Street makes an enormous of money on an Initial Public Offering—5, 6, 7% of that offering. That’s what drove the crazy high-tech fantasies of the late 1990s. Wall Street made absurd levels of compensation. That’s what drove Walter Wriston’s loans to South America. It wasn’t the interest rate spread – you know, “we’ll charge you a certain interest rate and we’re paying a slightly lower interest rate”. It’s that they made 2% of the face amount. 1-2% for every loan they made, which went right to the bottom line. This is monopoly stuff and it violates good economics and it’s justification for the federal government to come in and begin to control the compensation. Now that, in the current environment, is considered radical. And it should not be considered radical. LP: Some point to the current weak economy and high unemployment rates as evidence that the Keynesian economic model, which favors government intervention, doesn’t work. The argument that things could have been much worse without the stimulus, for example, is easy to dismiss and attack. Are you optimistic about a revival of Keynsianism under these circumstances? Who are its most effective proponents? JM: The issue is – as is often the case – that the president has not reminded people how effective the stimulus was. Now most economists know this. The right wing denies it. Alan Greenspan continues to do damage by claiming a “lack of confidence” and uncertainty and saying that it’s the budget that has kept people from investing. It is utter nonsense. And it has to be combated at the very top. I’ve heard Geithner combat it. I don’t think he’s a very effective guy, but at least he tried to combat that and show that those policies work. Unemployment would have gone to 12 and 13% if there had not been these Keynesian policies. The loudest credible voices are obvious. It’s Joe Stiglitz and Paul Krugman. How effective they are, I’m not so sure. But they are right. And right is all you can be, in some senses. LP: What would you say is the main message of your book? JM: I hope that the main message of my book is that individuals created this crisis. It was not an act of nature. It was not inevitable. People say, what are you getting so angry about? Just roll with the punches. But this is not just ‘how it is.’ Sure, there’s going to be overspeculation in a free market system occasionally, and some kinds of market contractions, but they don’t have to be catastrophic. There is no inevitability unless government abandons its responsibility.
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