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.
Roosevelt
Institute Senior Fellow 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, 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 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”, 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 1980s
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.
