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Jeff Madrick author of Age of Greed: The Triumph of Finance and the Decline of America, 1970 to Present, discusses the roots of the current crisis

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay, today in New York City. Back in Washington, the debate continues: government’s too big; the deficit’s the problem. Of course, that’s the fight being waged over whether to raise the debt ceiling or not. Not a lot of discussion, really, about why there’s so much debt to begin with. At any rate, we’re told the real problem is how to cut. And joining us now to discuss this debate in DC and some of the history leading up to it is Jeff Madrick. Jeff is a regular contributor to The New York Review of Books and a former economics columnist for The New York Times. He’s a senior fellow at the Schwartz Center for Economic Policy Analysis, a senior fellow at the Roosevelt Institute. His new book is The Age of Greed: The Triumph of Finance and Decline of America, 1970 to Present. And now joining us is Jeff Madrick. Thanks for joining us.

JEFF MADRICK, AUTHOR: Thank you, Paul. Good to be here.

JAY: So talk about this debate that’s taking place in DC.

MADRICK: Well, it’s not an economics debate. It’s political showmanship, a carnival, I think, mostly the Republicans trying to get the edge. But Obama threw in the towel on the essence of this argument some time ago, when he agreed that balancing the budget was a primary goal of his administration earlier rather than later. Once he gave in on that, by naming the Bowles-Simpson commission to come up with a plan, he was going to start losing the debate.

JAY: So let’s back up for just a second. If people don’t remember, Bowles-Simpson commission was all about a bipartisan approach to cutting the deficit.


JAY: And there it becomes–the deficit becomes the problem, and not unemployment and not a stagnant economy.

MADRICK: Well, you know, the tragedy of this is we’ve got a serious jobs crisis. I’ve begun, like all of us, to hate the word “crisis”. It’s applied to everything. But the relationship between the growth of income in America, which is the growth in GDP, and the growth of jobs has changed radically. In fact, there is no relationship. Obama should be sounding the alarm about that. Had he been–had some passion about that before the last elections, he probably would have got–the Democrats, at least, wouldn’t have gotten clobbered as badly. But he doesn’t seem to have passion. And now he’s going with this argument, which is a false necessity at the moment. We have to worry about the economy now and the budget deficit way down the road–not just a little down the road, but way down the road when it takes off. That’s in the late 2020s, not in the near term. So this is–I would like to say it’s a charade, but it’s worse than a charade. It’s a folly. It’s one of the great historical follies. And it shouldn’t be surprising, because we’ve had many follies in our history, as have had most nations.

JAY: Well, is it folly, or is it interests that Obama is balancing who want to take advantage of this situation and beat back workers and labor wherever they can? Like, I know we did–in Wisconsin, there’s a good example of something that happened. Three plants–Harley Davidson, Mercury Marine, and Kohler plumbing–were all able to win two-tier contracts where new workers are going to start at half the wages workers had previously. And they of course threatened to leave Wisconsin. Like, there’s this whole atmosphere being created that not only is the problem the deficit; the problem is even wages are too high. So they’re taking advantage of this. And as Obama just–essentially that’s who helps fund so much of his election campaign.

MADRICK: Well, it might be some of that. Of course, Wall Street was big on the funding of the Clinton campaign. But this idea of the suppression of wages in order to control inflation goes back to the 1970s. And that’s part of my book Age of Greed.

JAY: Take us back there, because this debate that’s going on in DC now has been repeated over and over and over, and the underlying thing, the problem’s the deficit, the problem is big government.

MADRICK: Right. Well, I do want to say this: it is easy to arouse people’s fears over deficits. But I do think a lot of people are arousing their fears because of their own vested interests. Some of it is pure ideology, a desire to make government smaller. That’s driving a lot of people. A lot of it is that people make money off of this. But let’s go back a way, because in the late 1960s, America believed in government, had faith in government, and was even willing to pay taxes to support new social programs which we thought were necessary. That included Medicare, expansion of Social Security, and indeed the war on poverty. Let’s not forget that the poverty rates were 22 and 23 percent before the 1960s and the late ’50s, 22 and 23 percent. Poverty rates for the elderly were even higher. That all came down to 11 or 12 percent because of those social programs. They succeeded. Now, they may have needed some reform and so forth, but they did succeed.

JAY: So 1970 for you is a turning point, particularly in this battle. You frame it as a finance sector taking dominance. Maybe I could add one more thing to it. Over the last 100 years, there seems to be this kind of contradiction or fight between sections of capital that try to do what’s good systemically for the whole elite and the system, and sections of capital that are for, you know, what’s good for me today and tomorrow, and apres moi le deluge.

MADRICK: You know, what we learned in the 1930s was finance run amok in the 1920s can lead to disaster. What we learned further was we knew how to regulate that. We learned how to regulate that. The New Deal supplied us regulations and the Glass-Steagall Act, federal insurance, the Glass-Steagall Act separating commercial and investment banks [crosstalk]

JAY: Okay. Just one thing. Just–I want to just quickly interject, ’cause I was refreshing my mind today and I think a lot of people forgot why we had Glass-Steagall. And my understanding of it is is ’cause the banks who were selling stocks were lending people money to buy the stocks, and they were lending it–.

MADRICK: Well, that was part of it, but they were also lending those companies money. So you had this conflict of interest that you were trying to sell the stocks of the companies you were lending money to. Well, let’s say those companies were doing badly or something, you had a lot of customers and stocks, and you yourself, your own bank was involved [incompr.] Well, you just lend them a lot more of your savers’ money to try and keep them out of trouble. There was a big contradiction there, a big conflict. That was just one of the things. We had the SEC to force disclosure. All these securities were issued in the dark, opaquely. We’d stopped speculation in commodities. We had insurance on deposits, which was one of the big things.

JAY: So the idea is, for the good of the system as a whole, this segment of the banking sector has to have serious controls on it.

MADRICK: Absolutely. Capital controls, controls on speculative behavior, controls on conflicts of interest, controls on disclosure. And it got us through the ’50s and ’60s quite remarkably well.

JAY: So then we get to 1970.

MADRICK: Brings us to the 1970s. I think the catalyst that changed things was the harsh economic circumstances of the 1970s: very high inflation, very high unemployment. Economists told us that couldn’t happen, I grew up thinking that couldn’t happen, and it did. People were–.

JAY: Yeah, ’cause it’s supposed to be high wages cause inflation.

MADRICK: Yeah. Well, they also thought that high–in fact, unions and high wages indexed to inflation were also considered causes of inflation. That was the beginning of an anti-union sentiment. Americans became very confused. Politicians started crying it’s the government. Federal deficits started growing. We didn’t really have big federal deficits. It was easy, again, to arouse fears about a deficit. That’s why I said earlier, you know, it’s so easy to take advantage of–when you have a deficit, take advantage of people’s fears. Americans started to distrust government. And along came an economic theory, essentially simplistic, led by Milton Friedman, that said government was almost always the problem. So can I frame the change in America? It wasn’t only, of course, economics. America became distrustful after the Vietnam War. Racial tensions arose ’cause a lot of the Great Society was directed at helping minorities and so forth. But in 1972, ’73, Governor Reagan of the state of California wanted to leave a conservative legacy. So he said, and with the–and I talk about this at length in this book Age of Greed–he said, let’s propose an amendment to the state constitution to cut state income taxes permanently, significantly and permanently. Californians voted it down in early 1973. California said, no, we don’t want to cut our taxes. America still believed in government. They still believed government was doing [incompr.] opinion surveys supported that. Nineteen seventy-eight, you know what happened. Proposition 13 cut property taxes drastically, overwhelmingly voted as an amendment to the state constitution in California–the beginning of a tax revolt across America. Five years–in my view, Americans change in those five years. And that led to the weakening of government and the abdication of government responsibility in controlling finance.

JAY: Why was that able to happen? And there’d been a contention on these issues for years, and then that side proposing this kind of tax cuts and all of that sort of wins.


JAY: Why?

MADRICK: I think I described why. Americans got afraid. Americans turned against government. Politicians exploited it. Media fell for Friedmanite economics. A fair amount of the economics profession started to adopt Friedmanite economics, which meant worry about inflation and keep wages down so it doesn’t jack up inflation. That’s remained in place in the economic lexicon for a long time, even, by and large, until this moment, led by men like Ben Bernanke, chairman of the Federal Reserve. And gradually, in that vacuum of weakened government and lost confidence by government officials, and especially by Democrats in the Carter administration, business, finance in particular, plowed through government regulation. There was an assault on government regulation. And as I write in the book, it was led by the head of First National City Bank, Walter Wriston, who many people haven’t heard of, but they should have heard of him. He’s the first long chapter in this book, and I think people will find that story quite interesting.

JAY: Yeah. I should say that the book is–first of all, I’m just getting into it, and I have to admit that, but it’s a great read. And it’s based on individual personalities that–through these personalities, you learn about the main stages of how this process took place. So, well, keep going.

MADRICK: So Wriston–to take one example, there was Regulation Q. It came out of the New Deal. It said there should be a maximum rate you can pay savers. Now, some of–deposit their money with you. Well, some–but you say, why? Let them pay what they want to pay. Well, even Adam Smith, in 1776, The Wealth of Nations, said, don’t allow financial institutions to pay savers any amount of interest, because then they’re going to use that money and chase fanciful speculative deals to try to make a lot of money. That was the basis of it. It made some sense. Wriston, of course, hated it. It restrained the growth of his bank. To some degree it could have been loosened up. But he devised ways to get around it. Maybe it’s too long a story to tell. But, in any case, he devised at first a negotiable certificate of deposit to pay big depositors–corporations and rich people–more money. It had to be negotiable, however, like a stock. You had to be able to trade it like a bond.

JAY: And the idea here is he’s bypassing regulation to do this.

MADRICK: Bypassing regulation.

JAY: And this is the beginning of the unraveling of these kinds of regulations.

MADRICK: The upshot is he got it done. His lawyers said, you know, the Fed’s going to object to this; we’d better ask the Federal Reserve, our regulator. He said, let’s not go to the Fed; let’s just do it and let them stop us. That characterized Wriston, and he did it time and again, most notably in lending all those petrodollars, the Arab oil money, when they raised the oil price in ’73, ’74, and again in the late ’70s. He recycled that money mostly to Latin America, some to Africa and a few other Third World countries, based on commodities prices. The government could have been involved. A quasi-government or ad hoc group of countries could have been involved.

JAY: Could have been involved in making these loans.

MADRICK: In recycling some of the–making the loans, and making equity investments, changing the terms. Wriston barged ahead. Paul Volcker was disturbed by this. Even a couple of people in the Ford administration back then were. He barged ahead.

JAY: And it’s important, I think. A lot of people on the other end of these loans in Latin America are actually tin pot dictators who are pocketing big whacks of these, you know, in their own Swiss bank accounts. And if I understand [incompr.] correctly, a lot of these loans were for the first time floating interest rate loans. So they’re very cheap when they first lend the money, and then the rates start to skyrocket.

MADRICK: Well, the rates went way up later.

JAY: Like, about 19, 20 percent.

MADRICK: Yeah. That was when Volcker, Paul Volcker, chairman of the Fed, appointed by Jimmy Carter, raised rates to stop our own inflation. The upshot is almost all those loans turned bad by the 1980s. So here the great free market advocate Walter Wriston had to be bailed out, basically, by the federal government.

JAY: And that’s one of the big points of your story. The big bad government that they’re railing against is always coming in and bailing out the banks after they take these high-risk ventures.

MADRICK: And that kind of story kept repeating. And Washington did not step up to stop, or at least restrain or regulate, these guys. Meantime, the markets change. Stock prices stop going up in the 1970s. People on Wall Street started investing and utilizing new derivatives contracts to make investments in currencies which were newly floated, international currencies. Interest rates, which were bobbing all over the place with inflation, that replaced the old equity investment, but regulation did not keep up with it.

JAY: So in the next segment of our interview we’ll talk further about the rise of finance–or should we say the rise of the parasitical segment of capital? And so please join us with Jeff Madrick on The Real News Network for part two.

End of Transcript

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Jeff Madrick is a regular contributor to The New York Review of Books, and a former economics columnist for The New York Times. He is editor of Challenge Magazine, visiting professor of humanities at The Cooper Union, and senior fellow at the Roosevelt Institute and the Schwartz Center for Economic Policy Analysis, The New School. His last book, The Case for Big Government (Princeton), was named one of two 2009 PEN Galbraith Non-Fiction Award Finalists. His new book is titled, Age of Greed, The Triumph of Finance and the Decline of America, 1970-Present and is published by Alfred A. Knopf.