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The Busts Keep Getting Bigger: Why?

However, the real star is a figure who, if not exactly neglected, isn’t at the center of most crisis narratives: Sanford I.—Sandy—Weill. 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.

Almost immediately, the new financial behemoth was wrapped in scandal. Nowadays it’s common to treat the technology bubble of the 1990s and the housing bubble of the decade following as having been very different stories. And in financial terms they were quite different: the tech bubble didn’t lead to a dramatic rise in debt the way the housing bubble did, and as a result the bursting of the bubble didn’t cause major defaults and a run on the banking system. Yet Wall Street—and Wall Street corruption—played a crucial role in both bubbles, as Madrick reminds us in a chapter titled “Jack Grubman, Frank Quattrone, Ken Lay, and Sandy Weill: Decade of Deceit.” As Madrick points out, Grubman, an analyst at Salomon Smith Barney who was effectively on the take, was central to some of the biggest accounting frauds. And Weill ended his reign at Citigroup immensely rich but under an ethical cloud.

There are a lot of villains in this story—so many that by the end of the book we were, frankly, suffering from a bit of outrage fatigue. But why have villains triumphed so repeatedly?

The proximate answer, clearly, is the abdication of regulatory oversight. From junk bonds to derivatives to sub-prime mortgages, regulators either turned a blind eye or were impeded by business interests and politicians—Democrat as well as Republican. Undoubtedly 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. Like Reagan and Friedman, Greenspan firmly believed in greedism; in his view, the financial markets could do no wrong.

Yet if the problem was lack of oversight, that leads to another question: Why did the regulators abdicate—and keep abdicating despite repeated financial disasters? This is perhaps the most frustrating aspect of Madrick’s otherwise excellent book: we get a lot of the what, but not much of the why. Madrick’s character-centered narrative makes it seem as if the triumph of greed was the result of a series of contingent events: the inflation of the 1970s, the exploitation of that inflation by Reagan and Friedman, the wheeling and dealing of the likes of Sandy Weill, and the diffidence of Jimmy Carter and Bill Clinton. Yet surely there must have been deeper forces at work.

We have argued elsewhere (and are not unique in doing so) that white backlash—especially Southern white backlash—against the civil rights movement transformed American politics, creating the opportunity for a major push to undermine the New Deal. Also, it’s hard to make sense of the growing ability of bankers to get the rules rewritten in their favor without talking about the role of money in politics, and how that role has metastasized over the past thirty years. There’s another book to be written here—perhaps less personality-centered and hence less entertaining than Madrick’s, but one that gets at the forces that made the reign of financial villains possible.

Whatever the deeper story, however, Madrick’s subtitle gets it right: what we have experienced is, in a very real sense, the triumph of Wall Street and the decline of America. Despite what some academics (primarily in business schools) claimed, the vast sums of money channeled through Wall Street 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.

And what has happened in the aftermath of the 2008–2009 crisis is still worse: all the evidence suggests that the United States 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.

Yet even now 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.

The Age of Greed is a fascinating and deeply disturbing tale of hypocrisy, corruption, and insatiable greed. But more than that, it’s 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.

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