[P2P-F] On how Wall Street won (Rolling Stone)

[Dante-Gabryell Monson]

http://www.rollingstone.com/**politics/blogs/national-**
affairs/jeff-madrick-on-how-**wall-street-won-and-america-**lost-20110624<http://www.rollingstone.com/politics/blogs/national-affairs/jeff-madrick-on-how-wall-street-won-and-america-lost-20110624>

( thanks to Erminio for the link )

Jeff Madrick on How Wall Street Won and America Lost

POSTED: JUNE 24, 3:04 PM ET | *By* JULIAN BROOKES


In his latest book, *Age of
Greed*<http://knopf.knopfdoubleday.com/2011/05/31/age-of-greed-by-jeff-madrick/>,
former*New York Times* economic columnist Jeff Madrick tells how Wall Street
triumphed and America paid the price. It's the story of how, starting in the
1970s, right-wing economics – a mystical cult centered on small government,
low taxes and financial deregulation – and human greed teamed up to produce
not shared prosperity but obscene economic inequality and financial
instability, through the ideas and doings of a bipartisan roster of
politicians, financiers, and economists, some obscure, others prominent
(hello, Robert Rubin, Larry Summers!). We recently got him on the phone to
talk about the triumph of finance and the decline of America in our age of
greed.

*In the book you say the roots of our economic troubles are in the 1970s.
What happened in those years?
*

The American people turned against government, and the catalyst was the
confusing and painful period of high unemployment and high inflation that
struck harshly in 1973 and didn't really subside until 1980-81.

*And right-wing politicians and economists blamed government.*

The right wing claimed the government had become too big, that deficits
caused the problem, and that the Federal Reserve had allowed the money
supply to run amok. And this idea got ingrained in the public imagination
and in the media. America began to doubt government, and that opened the
door for business to abuse regulation and change regulation, a chance for
right-wing politicians to get more power.

*But you point out in the book that government wasn’t all that large at the
time.*

Government wasn’t very big, and federal budget deficits were much *smaller,
*as a proportion of GDP, under Carter than they were under Ronald Reagan,
when inflation was falling.

*But the idea took hold anyway that government was the problem and
deregulated markets the solution.  And Milton Friedman was the big
intellectual force behind this view.*

Yes. He started out as something of a New Dealer but became a right-wing
advocate of the idea that the free market will solve almost all social
problems. He thought all you had to do was control money, and there was no
way you could really affect the unemployment rate. He was very articulate,
especially in journalism and in debates, and his simplistic way of thinking
captured minds and hearts at a time of enormous confusion, in the 1970s.

*And meanwhile, the financial industry was starting to develop new kinds of
securities, derivatives and so on, that would change the nature of
investing.*

Right. And nobody in Washington started talking about regulating these
derivatives. On the contrary, Jimmy Carter - the first really conservative
Democrat in economic matters - was very much in favor of deregulation.

*Reagan and Bush continued the trend toward deregulation, obviously, but so
did Clinton.*

Clinton played the game and made matters even worse. His treasury
secretaries, Lloyd Bentsen and then Robert Rubin, really believed that Wall
Street had the answers – that if we give them their head they will create
prosperity in America. They also knew that Wall Street is a place Democrats
can get campaign financing. Republicans had lots of other areas of business
sewn up, and the Democrats went for entertainment, Silicon Valley, and
finance.

*So let's turn to the consequences.*

The consequence was a misallocation of capital for 40 years. In the 1980s,
the S&Ls were deregulated. They made absurd investments for which they had
to be bailed out. That's when the corporate takeover movement got crazy,
financed by banks and junk bonds, which in turn received tax benefits
because the interest was deductible. I think the evidence shows the
takeovers mostly wasted money. And then the high-tech fantasies of the
1990s, the WorldComs and Enrons, the enormous accounting frauds, and finally
all that wasted money in housing.

*Wouldn't free-market types say you have to allow finance to make these
mistakes in order to get the benefits of their good investments and of
overall growth?*

Well, but what happened over this period? There were only a few years here
and there where productivity grew rapidly. Capital investment was weak as a
proportion of GDP for the most part, except for a few years here and there.
And wages as we know basically stagnated. So no, the benefits did not
outweigh the costs; we've had enormous waste and then a failure of public
investment because taxes have been so absurdly low.

*What do you have in mind when you say "failure of public investment"?*

A lack of investment across the board – in energy, in new kinds of R&D, new
kinds of manufacturing, general public investments in health care and
transportation infrastructure, broadband and so forth. I think we're going
to see America have a very hard time climbing back to serious prosperity in
the future because of this lack of investment.

*You call this period an "age of greed" but couldn't you as easily call it
an "age of ideology" – of true believers?*

Well, you always have to worry when ideology somehow lines your pockets. And
I supposed some of them truly believed and some of them still truly believe,
but clearly these were large-scale rationalizations, and as greed went
unchecked, a climate of greed grew. And greed received approbation. Nobody
began to question if you had gigantic houses anymore - once upon a time,
people used to be a little bit embarrassed. Now, nobody was embarrassed.

*What's your take on the Dodd-Frank financial reforms?*

I think Dodd-Frank has some good points, but it's not going to be enforced
well, and anyway they're still writing the rules. I think there's been way
too much emphasis on "too big to fail." That's really not the issue; the
issue is too much speculation, too much leverage and too much incentive to
promote investment.

*What would you like to see, regulation-wise?*

I think we need seriously higher capital requirements, we have to prohibit
certain kinds of securities that cannot be truly understood or are very
easily given to speculation, like collateralized debt obligations. I think
we probably have to limit what big institutions can do – not because of size
but because of conflict of interest. And then I think we have to do
something which is a no-no in America: We have to recognize that Wall Street
is a monopoly, or at least an oligopoly. They get away with charging
ridiculous fees – 7 percent for an IPO! – because there's no real
competition.

*Lastly, what do you make of the deficit fight in Washington?*

I think austerity economics now are a disaster in Washington, because we may
be facing another recession. We're going to get a very slow recovery –
because of private debt, not so much public debt. And I think this argument
about balancing the budget right away, right now, will prove to be one of
the great follies of American history.

*Related: *How Alan Greenspan Helped Wreck the Economy (Book Excerpt: Age of
Greed)<http://www.rollingstone.com/politics/blogs/national-affairs/how-alan-greenspan-helped-wreck-the-economy-20110616>
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