Age of Greed: Finance and Take Overs Overwhelm Reforming Manufacturing
Jeff Madrick Pt.2: During the 70’s and 80’s the parasitical finance sector gains more power
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in New York City. And joining us again is Jeff Madrick. He’s the author of Age of Greed: The Triumph of Finance and the Decline of America, 1970 to Present. Jeff is a contributor to The New York Review of Books, 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. And his new book I just described, which is The Age of Greed. Thanks for joining us again. Alright. So we’ll pick it up–we left off in part one. If you haven’t seen part one, you really should go watch it. We’re into the 1970s and this contention between the more parasitical section of the economy, which is most embodied in the banks and the Goldman Sachs-type houses and the productive economy. You have a contention going on there, what’s good for the overall system and what’s good for me for tonight and maybe tomorrow sector of the economy. So get us in–we’re moving towards Reagan. So pick up the story.
JEFF MADRICK, AUTHOR: Well, by the 1970s a lot of mainstream America, corporate America, is being clobbered. You know that Detroit was being clobbered. People felt we needed some kind of revolution in managerial style. Along with that, however, came a revolution in finance–and I describe this in the book–a revolution in finance that overwhelmed the revolution in managerial ideas. And what dominated was really the takeover movement, takeover ethos, led by Wall Street.
JAY: Let me intervene just for a second. What you’re talking about is after Japan have–United States making a killing out of rebuilding Japan, all of a sudden Japan comes back and clobbers the American auto industry. So what you’re saying, instead of revolutionizing, or reforming, at least, our productive sector, we do what?
MADRICK: We do this. We do reform to some degree. But really the opening was a financial one: become lean and mean. Well, sometimes lean and mean works, and sometimes it’s just lean and mean. What led to this, what led the way, was the profitability of Wall Street. Wall Street investment bankers, lawyers, and so forth could make a killing by inducing companies to take over other companies at higher and higher bids. Not only that, they paid off the CEOs, to put it bluntly, with stock options, with shares in the companies. They’re taking over the newly formed entity and so forth. That’s when CEOs started to become very wealthy.
JAY: So this is the story of Oliver Stone’s Wall Street "Greed is good."
MADRICK: I guess so. Oliver Stone’s Wall Street, it’s the story of real Wall Street, or one aspect of what was going on, one aspect of how it began to affect mainstream American business. Used to be Wall Street worked for mainstream American business. Beginning in the ’70s, but really developing in the 1980s, mainstream business worked for Wall Street. CEOs could get really rich by participating in leveraged buyouts, takeovers, all kinds of other activities in which they–. And when they took stock options, they became beholden to short-term profit increases and stock price increases. That began to change America significantly. That was the beginning of extreme Wall Street influence on the essence of America, the productivity of America. We stopped really making–I shouldn’t–this is not a book that makes grand, all-sweeping deductions in that sense, but we tended to stop making productive investments and start making Wall Street financially oriented decisions. Mostly that involved suppressing wages, reducing R&D spending and other kinds of risk-taking, in order to get short-term profits up. That changed America significantly, and it made Wall Street very rich and many Wall Streeters into billionaires, as we know.
JAY: Now, the other thing it does is in this dynamic between who has more political clout, the pendulum really moves over to Wall Street in terms of controlling the politics, which leads to their ability to deregulate. So pick up that story.
MADRICK: One of the tragedies of severe inequality of income and inequality of wealth which happened in America was the very wealthy get powerful. They–campaign contributions. The big companies start extreme, aggressive lobbying operations. We get a vicious circle of ever-higher campaign costs, which make them even more powerful.
JAY: And the importance of TV advertising really takes over, which changes the finances.
MADRICK: TV is very expensive, and they can’t do without it. Changed the nature of America. So these–Wall Street began–because they got rich, began to have even more power, more regulatory power. And something still more pernicious, really beginning with Reagan, was the denigration of regulators themselves. Not only did he cut regulation down and cut and fire regulators, but he denigrated the job itself. Along with that came the idea of the revolving door. If you’re at the FDA, you may get a job with big pharma or some lobbying organization that represents big pharma, or defense, or finance. And it happened time and again, began to undermine the government.
JAY: And then, in terms of the deregulation that takes place of the finance sector, the first big fallout of that, I guess, is the saving and loans crisis. So do you–.
MADRICK: Yeah. Well, surely the dumbest–and I use that word advisedly–the dumbest deregulatory effort was the Garn-St. Germain Act, which allowed savings and loans to use federally insured savers’ deposits to invest in golf courses, beach resorts, junk bonds, and so forth. They made all kinds of bad investments and had to be bailed out. That was the 1980s. But that wasn’t only what happened in the 1980s. Junk bonds arose, and banks like Wriston’s bank started financing these leveraged buyouts and big corporate takeovers. The best evidence is not only did those takeovers usually not work, the combination of the two companies, but they paid way too much, usually, in bidding wars. Wall Street got very rich in the process, wasted money by the tens of billions of dollars, hundreds of billions of dollars.
JAY: And Reaganism, in the name of fighting big government, actually has big government as the lynchpin in all the speculative activity for the banks, ’cause they know big government’s going to come save their ass.
MADRICK: Well, eventually that began to become obvious. Greenspan takes over. We have a market crash in ’87, a big market crash. Greenspan steps on the gas. In ’82, as I mentioned in our earlier episode, Wriston and other banks were bailed out by the federal government because of all those bad Third World loans. And after 1994, Wall Street had to be bailed out again. Then we started having crisis after crisis in the 1990s–East Asian crisis, Long-Term Capital Management crisis, Russian crisis. Nevertheless, we had this high-tech fantasy. What fed that high-technology fantasy, one crazy company after another going through the roof? What fed it was Wall Street profits. They made $1, $7 sometimes, on every initial public offering, $7 for every $100. They promoted it like crazy. And you couldn’t keep your job on Wall Street unless you lied about the quality of those companies. That is not an exaggeration. That is not political posturing on my part. It’s clearly documented. They all had to lie about the quality of those companies.
JAY: So they deliberately create these bubbles, built to a large extent on lies, [incompr.] false value to things they know. They make money on this side of the bubble. And then most of them have pretty good knowledge when the bubble’s going to burst, so they often are making money on the other side too.
MADRICK: Yeah. I’m not–I think a lot of them lost money in the bubble. You know, it’s very hard–you may know there’s a bubble; it’s hard to know when the bubble’s going to burst. And usually those who are wise enough to know there’s a bubble get out too soon, ’cause bubbles always get–you know, become even more irrational than you can imagine. But the companies that made money on the high-technology bubble and then took some losses were back in operation making lots and lots of money on the housing bubble and the mortgage securities and the collateralized debt obligations we keep hearing about. So all that profitability based on, often, undue power or outright deception attracted money to Wall Street. Why invest in productive–investments that might be productive and that are by nature more uncertain, when you can make money playing games and shuffling paper? And we haven’t even talked about everything yet. I think that began to seriously distort the economy.
JAY: And we’re not even into subprime stuff yet.
MADRICK: We’re not even into it yet. Yeah.
JAY: The issue of–there’s a quote you have in your epilogue from Sheila Bair, who was the–who became the head of the Federal Deposit Insurance Corporation.
MADRICK: FDIC. Right.
JAY: And she says that the–.
MADRICK: And a Republican appointment, by the way.
JAY: Right. And she talks about this issue of where capital could have–maybe she said "should have"; I can’t remember the exact quote–gone into the productive sector instead of the speculative finance sector. But it’s not like someone–you know, that they’re going to make a choice, oh, let’s put it there rather than here, ’cause that’s good for society. Capital goes where it makes the most return. There’s no other consideration.
MADRICK: Yeah. I think the returns were very high in finance because there was basically a lot of cheating, and lack of regulation, and speculative excess. And it became so out of hand, and people like Alan Greenspan were so willing to look the other way for ideological and more complex personal reasons, that it just became too easy to make a buck. The Wall Street firms–the evidence of that is the Wall Street firms’ rates of return on capital were enormous, if properly measured. Year in and year out, if you’re taking risks, sometimes you should lose. That’s the nature of this. On balance, these companies never really lost.
JAY: That’s at least where the libertarian Republican argument is consistent. You know, they’re saying, you know, when they take their big government argument, they say, let Wall Street collapse, let these banks burn. Now, I don’t think they deal, myself, with the consequences of what that would mean for the rest of us, ’cause we’d suffer plenty.
MADRICK: Right. Enormously.
JAY: Enormously. But the leadership of the Republican Party, there’s no way on earth they’re going to let these places go down.
MADRICK: No. I mean, they’re corporate minders. You know, they’re going to–. If we, for example, in the current environment, get a real showdown on the debt ceiling, it’s hard for me to believe the people who finance Republican campaigns are going to let them proceed with the showdown [crosstalk]
JAY: The US Chamber of Commerce has told the leadership of the Republican Party, you had better lift this debt ceiling. It’s hard to believe they’re going to defy them.
MADRICK: It’s hard to believe it’s going to happen. And what’s probably going to happen is, if we really get close, interest rates are going to start going up. And that’s going to–that at least will, I think, be the stake in the heart of this movement. But we’ll see. If it happens, it’s going to be very bad for the economy.
JAY: Okay. In the next segment of our interview–well, we were just trashing the Republicans, so we’ll be equal-opportunity trashers: we’ll deal with the Clinton years. So please join us for the next segment of our interview with Jeff Madrick on The Real News Network.
End of Transcript
DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.