How Americans were Persuaded to Put the Blame on Their Government
It all began in the 1970s when we were told that greed is good.
In his book The Age of Greed with the long and telling subhead, The Triumph of Finance and the Decline of America, 1970 to the Present, Jeff Madrick presents the prodigious cast of villains who transformed banking from vigilant guardian of industry to high rolling gambler. His chronicle begins when the structure of regulations -- that had kept banking safe and boring since the days of FDR -- began crumbling some 40 years ago.
Swearing that self-interest furthers the common good, many once cautious bankers turned into eager speculators, first creating and then using taxpayer money to bail out of repeated crises in order to plunge into their next speculation. After each bailout, the bankers ungratefully bit the federal hand that fed them, complaining that banker-bashing hurt their feelings.
Each subsequent calamity has been worse than the one that preceded it. If Yogi Berra was still with us, he’d refer to the past 40-year history of busts simply as “deju vu all over again.” Will the deju vu continue? If so, will the next bust be even worse than the wreck of 2008-2009?
Junk Bonds, Derivatives, and Sub-Prime Mortgages: Where were the Regulators?
As the regulators kept getting out of the way of the bankers, business interests, and politicians, the pattern of overstretch, taxpayer bailout, and Wall Street ingratitude took shape. Jeff Madrick says it began with Penn Central’s bankruptcy in 1970. The railroad’s banker, First National City, was saved by Federal Reserve emergency loans, a crisis was averted, and the bank renamed itself Citibank, a name that reoccurs throughout Mr. Madrick’s entertaining though alarming chronicle.
The next crunch was the severe debt crisis of the early 1980s, brought on by reckless lending to Latin America. Only official government lending to Brazil, Mexico, and other south of the border debtors kept it from turning into a ghastly catastrophe. The decade’s huge commercial real estate bubble, blown up with vast loans, finally exploded in 1991. Do you remember, or have your parents told you about, the savings and loan fiasco? Its cost to taxpayers was even higher than the current mess. Although the junk-bond market went bust, a major bank calamity was dodged because deposits were federally insured.
Subsequent deregulation enabled two more bubbles to form. The first, the technology bubble, filled up with the Internet’s hot air in the 1990s; the other was inflated with poison housing gas during the Bush Administration. The economic damage caused by both was severe, although the second was far worse, resulting in defaults and a run on the banking system. The world continues to suffer the pain of the debacle of 2008-2009. High unemployment combined with low, slow growth has especially hurt the young, the old, and all those who are financially vulnerable in between.
Reagan, Friedman, and Greenspan Promised the Financial Markets Could Do No Wrong
Nixon and Ford began the blame game against big government, ignoring sudden high oil prices and disappointing crop yields. Stagflation was all Washington’s fault, according to politicians who were attempting to deflect accountability. Treasury and Federal Reserve policy shifts, such as wage-price controls under Nixon, Ford, and Carter, made American voters doubt government’s management skills. An angry, frustrated public passively accepted the blaming attacks of Ronald Reagan ("government is the problem, not the solution" – his first inaugural speech) and Milton Friedman (“I say thank God for government waste. If government is doing bad things, it's only the waste that prevents the harm from being greater”-- interview with Richard Heffner on The Open Mind, December 7, 1975). The economic malaise opened the door wide for Reagan and anti-government “witticisms” such as, “"The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'"
The truth is that the annual average increase in government during Reagan's administration was 6.8%, compared with "big government" Bill Clinton's average annual increase of 3.6%. Reagan promised to balance the budget within his first term. Instead, the annual deficit grew from $79 billion to $212 billion in that first term. Reagan rule added $1.9 trillion to the federal debt.
Reagan is still honored as a tax-cutter. The term "Reaganomics" continues to imply dramatic cuts in tax rates. But after pushing through a tax cut to be implemented over three years, he cooperated during the second year in the largest tax increase in American history up to that time. The nation's annual tax load increased by 65% during his reign.
Why Bankers and Big Business Climbed Aboard the Politicians’ Blame Big Government Bandwagon
Mr. Madrick tells how leading bankers promoted anti-government, anti-regulation policies so loan peddlers could lend to unqualified borrowers and enable others to package them as safe, AAA-rated investments.
Paul Krugman and other economists have said the pattern of bust and bust again can be traced to Southern white backlash against the civil rights movement. This transformation of American politics led to a relentless attack on the New Deal that would undermine regulations and controls. The usual money men got richer as the poor got poorer. No one can argue that money’s influence on politics has exploded since the 1970s when the bubbles began forming and bursting.
Of course, Ronald Reagan is still St. Reagan for most Republicans and Milton Friedman is still honored by the American Libertarian movement. Republicans and Libertarians continue to blame big government for the nation’s economic predicaments. They still rally against the kind of federal rescue investments that have saved their banks and businesses from disaster.
Can we all at least and at last agree that greed is not good? Not good at all.
Madrick, Jeff, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present, Alfred A. Knopf, New York, NY, 2011
Krugman, Paul, The Conscience of a Liberal, W.W. Norton & Company, Inc., New York, NY, 2007