A vividly told history of how greed bred America’s economic ills over the last forty years, and of the men most responsible for them.
As Jeff Madrick makes clear in a narrative at once sweeping, fast-paced, and incisive, the single-minded pursuit of huge personal wealth has been on the rise in the United States since the 1970s, led by a few individuals who have argued that self-interest guides society more effectively than community concerns. These stewards of American capitalism have insisted on the central and essential place of accumulated wealth through the booms, busts, and recessions of the last half century, giving rise to our current woes.
In telling the stories of these politicians, economists, and financiers who declared a moral battle for freedom but instead gave rise to an age of greed, Madrick traces the lineage of some of our nation’s most pressing economic problems. He begins with Walter Wriston, head of what would become Citicorp, who led the battle against government regulation. He examines the ideas of economist Milton Friedman, who created the plan for an anti-Rooseveltian America; the politically expedient decisions of Richard Nixon that fueled inflation; the philosophy of Alan Greenspan, on whose libertarian ideology a house of cards was built on Wall Street; and the actions of Sandy Weill, who constructed the largest financial institution in the world, which would have gone bankrupt in 2008 without a federal bailout of $45 billion. Significant figures including Ivan Boesky, Michael Milken, Jack Welch, and Ronald Reagan play key roles as well.
Intense economic inequity and instability is the story of our age, and Jeff Madrick tells it with style, clarity, and an unerring command of his subject.
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Jeff Madrick is a regular contributor to The New York Review of Books, a former economics columnist for The New York Times, and editor of Challenge magazine. He is an adjunct professor of humanities at The Cooper Union, and senior fellow at the Roosevelt Institute and at the Schwartz Center for Economic Policy Analysis, The New School. His previous books include The End of Affluence and Taking America, and he has written for The Washington Post, the Los Angeles Times, Institutional Investor, The Nation, and The American Prospect. He lives in New York City.Excerpt. © Reprinted by permission. All rights reserved.:
As Ronald Reagan led his rebellion against government, a quieter one was born in the business community. Its leader was Walter Wriston, a tall, slouched, deeply intelligent and taciturn man with unusual ambition, little regard for tradition, and a highly conservative political ideology that he had inherited from his father. Wriston wanted to transform banking into a business like any other, capable of increasing profits as rapidly as the most admired companies in the nation. The goal would require undoing the federal financial regulations established during the Great Depression.
Walter Wriston was born in 1919 in Middletown, Connecticut, his father, Henry, an eminent history professor at the town's prestigious university, Wesleyan. When Walter was five, his father was named president of Lawrence College in Appleton, Wisconsin, where Walter grew up until he entered Wesleyan in 1937. Despite the Depression, the Wriston family remained comfortable during Walter's adolescence.
Henry Wriston's reputation rose in these years and he was named president of Brown University in 1936, from which perch he was able to preach against FDR and the New Deal, convinced that the programs would lead to a planned economy. His heroes included Adam Smith, who, despite the complexities in thinking of the Scottish philosopher, he saw largely as the father of the invisible hand and laissez-faire economic philosophy. He also deeply admired the British philosopher Herbert Spencer, who a century after Smith had become popular for what was later called social Darwinism. Spencer, who beginning in the 1850s was philosophically opposed to government intervention in markets, was the popular author of the notion that human poverty was natural because the "survival of the fittest" (a phrase Charles Darwin borrowed from him) was a law of nature.
At Wesleyan, Walter Wriston studied history, his father's field. He entered the Fletcher School at Tufts University, one of the nation's most prestigious schools of diplomacy, just outside Boston, to pursue a graduate degree in foreign affairs. Wriston was married to a coed he had met at Connecticut College by the time he graduated in 1942. He was drafted into the Navy in 1944 and sent overseas but did not see combat. He returned to the United States in 1946, one of hundreds of thousands of other soldiers wondering what to do with their lives-and whether the economy would slide back into depression.
Wriston said he did not want an academic career like his father's. "I knew I wouldn't do that because you'd have nothing but comparisons," he said. "My sister's an academic and a very good one. But I didn't want any part of that." Hostility toward his father surfaced when Henry remarried in 1947, only a year after his mother's death, at which point Walter stopped speaking to him.
Wriston at first had "very little" interest in business. It was his mother's doctor who suggested he go into banking. "If I stayed up all night, I couldn't think of anything more stupid to do," he said, but the bank "hadn't hired anyone new since 1933," and it badly needed recruits. Moreover, it was willing to pay salaries comparable to those in industry. So in 1946 he took a temporary job in New York with National City Bank, at that time a diminished version of its pre- Depression glory, when it had been the largest and most visible bank in the nation. He fully expected to leave in a year and return to his planned career in diplomacy.
When Wriston joined National City, banking was a stodgy and unimaginative business. Regulations had been imposed in the 1930s to prevent the excesses in finance that had buffeted America time and again. Overaggressive banks had been a serious national concern throughout the nineteenth and early twentieth centuries.
To attract savers, deposit-taking banks historically had to make good the promise to pay back a depositor's money at a moment's notice, which in the 1800s usually meant maintaining specie (gold and silver coins) against deposits and investing those deposits cautiously. The essence of banking was dependability. The banks redeemed deposits in specie when requested and some created paper currency they also would redeem in specie.
During good economics times ever more confident banks offered higher interest rates to attract depositors and made riskier loans to farmers and businesses at higher interest rates. They kept less in specie as reserves and paid back less in specie for their paper currencies, and the system of credit expanded rapidly to support speculation in agriculture and livestock, land itself, and countless new businesses. Regularly, speculative bubbles were created, then burst, and financial panic turned into severe recession. Banks went out of business by the hundreds, depositors lost money, and debtors went bankrupt-and, in the early years of the century, often to prison.
In its early years, the United States had had a national bank, the principal legacy of Alexander Hamilton (there had also been an earlier, informal national bank just after the Revolution), to restrain overspeculation, but it also tended to restrict lending to elite businesses and urban financiers. The bank's original charter was renewed under President James Madison in 1816 for another twenty years. But in 1836, President Andrew Jackson's veto ended the reign of the Second Bank of the United States. Jackson flamboyantly sided with the farmers and populists who believed the big Eastern bankers were corrupt and habitually made credit too scarce or expensive for them.
Jackson's anti-bank policies have been widely criticized by business historians, but the farmers were correct about often inadequate credit from the national bank for smaller borrowers. Looser banking standards did contribute to economic growth and the democratization of credit in these years. But a balance between adequate credit and overspeculation could not be reached. Big centralized banks favored elites, and overspeculation at smaller banks almost invariably had painful consequences, contributing to the uneven if occasionally exuberant growth of the nineteenth century.
In the wake of a devastating panic in 1907, the U.S. Federal Reserve was created in 1914 to avoid such unstable conditions. But the bankers who manned the new young central bank had neither the experience nor the will to do the job properly, and lacked some of the necessary authority. Flagrant abuse in the financial community was unchecked in the 1920s and the roaring stock market, supported by highly indebted speculators, burst in 1929. The real estate market, also supported by mammoth levels of debt, collapsed as well. By then, banks were not only making business and consumer loans in excess, but also selling stocks and bonds, running investment management companies, and creating new and highly speculative investment vehicles for individuals-as well as promoting their own stock prices.
Such a credit boom and bust alone may not have resulted in the Depression but it contributed substantially to its severity. Thousands of banks failed in the early 1930s as savers withdrew their funds, fearing that the banks had no assets with which to pay them-a classic bank run. By 1932, one fourth of all U.S. banks had failed, and state after state imposed a moratorium on banking. Franklin Roosevelt, on taking office as president in 1933, declared a bank holiday, closing the deposit and withdrawal windows around the country temporarily. Roosevelt resisted pleas to nationalize the banks, but he and his advisers established comprehensive new regulations. Under Roosevelt, the federal government created the Federal Deposit In-
surance Corporation (FDIC) to insure savers' deposits in case of bank failure, giving the government further oversight of member banks. The federal government also restrained overly risky investments with insured deposits by establishing limits on the interest banks could pay savers to attract their money (Regulation Q of the new law), and eliminating interest entirely on checking accounts. The fear was that competition for deposits would drive rates up and encourage banks to make more risky investments to earn higher returns.
FDR and members of Congress were determined to end the conflicts of interest of the financial institutions. If a commercial bank owned equity in a company, it had incentives to lend money to the company, disregarding the risk of the loans. There were natural incentives to provide biased information to stockbroker clients about companies in which the banks had investments or to whom they made loans. The Glass- Steagall Act of 1933, named after its congressional sponsors, Senator Carter Glass and Congressman Henry Bascom Steagall, legally separated commercial banks, which collected deposits and lent money, from investment banks and stockbrokers, who could own parts of companies, raise equity for clients, and advise investors on what investments to make. (The establishment of the FDIC and Regulation Q were parts of the legislation as well.)
Wriston's bank, National City, was, before the Depression, the largest bank in the world, and was an aggressive leader in many of the interdependent businesses that eventually caused so much trouble, including stockbrokerage. Its high-profile chairman, Charles Mitchell, was forced to resign in 1933 in the depths of the banking panic, but the bank survived. Under Glass-Steagall, National City, like other major banks, was required to divest itself of its brokerage and underwriting arms, and do business only as a commercial bank, accepting deposits and making conservative purchases of government securities or cautious loans to business. The prestigious J.P. Morgan bank, run by the most influential financier of the age, was also separated from its investment banking arm, which took the name Morgan Stanley. The investment banks and brokerage firms were now regulated by the newly created Securities and Exchange Commission, whose first chairman was Joseph P. Kennedy, an aggressive financie...
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