The Squandered Wealth of Nations: The Age of Greed

Jeff Madrick

When you write a book called Age of Greed, as I have, the derision about the title begins immediately. How is this age any different than others? Greed is a deep human trait; it does not disappear and suddenly reappear.  Even one of my wisest former book editors questioned the idea that greed is different now than it ever was.

But when he finally read about halfway into the book, he got the point.  Self-interest is one thing.  It is what Adam Smith wrote about in the Wealth of Nations in 1776. It makes the invisible hand work.  And if moderate, it can and sometimes does lead to widespread prosperity.

Self-interest rises to levels of greed, however, when it is unchecked by that other great sphere of modern social life, the government.   My argument is that self-interest broadly turned to greed beginning in the 1970s, and then crescendoed through the next three decades.  Milton Friedman and others argued that competition and price setting would themselves check the bad decisions stimulated by greed.  His claims were and remain nonsense.

Greed turned financial markets into rigged money-making arenas.  The level playing field of true competition was twisted by people who could make millions, hundreds of millions and billions by gaming the system, circumventing the rules, and outright cheating.   Greed became operatively destructive because it undermined and distorted markets—and that it did beginning in the 1970s.

The book, Age of Greed, is a history of men most of whom twisted the system in their favor because they could make great personal fortunes or ride waves of glory in doing so.  Government was not there to check them.  Abdication of government responsibility was the great cause, culminating in the crisis of 2007 through 2009 and continuing.

Take Walter Wriston, head of First National City, the first person I write about. To take but one example, he early on learned to circumvent Regulation Q, which kept the rates paid to savers restrained. There was good reason to restrain these rates. If they rose too high, even Adam Smith once warned, financial institutions would begin chasing speculative loans. Most famously, Wriston lent out hundreds of millions of dollars of Arab OPEC oil money to the Third World, making for his bank $2 or so for every hundred dollars he lent.  In the 1970s, his bank earned a fortune. Government properly run could have tamed Wriston, but government had begun to abdicate its authority by then. In the 1980s, almost all those loans went bad and Washington eventually had to bail out First National City, by then Citicorp. Wriston talked a tough laissez-faire game until he needed federal help. Then he could plead with the best of them.

The pattern kept repeating. savings & loan institutions made their CEOs and owners tons of money when they made bad loans to build golf courses, resorts, and so on, tolerated by federal authorities who had deregulated them. Washington bailed out the S&Ls. Junk bonds were unchecked when they were used to finance one overpriced leveraged buyout after another.  Hundreds of billions of dollars were wasted but new billionaires were created.

Alan Greenspan looked the other way as the commercial banks broke down Glass Steagall beginning in the late 1980s. Bankers Trust led the way to make all kinds of dubious derivatives-based products that eventually lost the likes of Orange County, California $1 billion.

In the later 1990s, we of course had the high-technology fantasies. Why? Yes, speculation has its own life. But mostly, Wall Street pros were making personal fortunes by over-touting these absurd companies.  Where were the SEC, the Fed, the Office of the Comptroller of the Currency, and on?   They were on an ideological holiday, led in particular by Alan Greenspan, who argued competition would lead to efficiencies, fairness and minimal excess.  Those who made billions deserved it, according to Greenspan’s “model.”

And so we got to the 2000s through crisis after crisis, scandal after scandal.  Financial firms that were caught red-handed financing Enron illegally led to issuing risky securities their customers couldn’t understand and urging mortgage brokers to write deceptive and outright fraudulent loans.  We know the Fed, the SEC, and the OCC were on a loopy ideological crusade, which by no mere coincidence allowed their friends to make towers of money.  Fannie Mae was even allowed its corruption, but it was not the cause of the later crisis.

An Age of Greed it was, then. It did not begin in the 2000s.  It was not inevitable. People made it happen. Unless you understand that, you cannot understand modern America. That is the story Age of Greed, the book, tries to tell.

How much of our precious savings were misallocated along the way?   Tens of billions in the 1970s, hundreds of billions in the 1980s, trillions in the 1990s and 2000s?  We need a careful toting up, but the waste was in that ball park.

Now we must put big finance in its place. The objective of re-regulation should not only be to prevent the next crisis, but to make finance do what it should—channel precious capital to where it is most productive. In other words, to prevent another Age of Greed.