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An Economy Undermined
When I graduated from HBS in 1971, I chose journalism (at BusinessWeek) over business, a career decision that enabled me to observe “up close and personal” the coming Wall Street revolution.
It was a revolution no one anticipated, nor was it immediately evident. One of our HBS professors had always warned that if we spent $5,000 today, we would be giving up a fortune ten or twenty years down the road, given the stock market’s rate of return. A famous futurist of the day was predicting that U.S. productivity would grow at 4 percent annually from that point on.
In fact, stocks on average did not rise at all in the 1970s. Productivity grew more slowly in the ensuing thirty years than it had for any prolonged period since the 1800s. My class’s first decade out from HBS was marked by economic and financial pain, high inflation and high unemployment, widespread anger, and shifting ideologies.
Then, in 1982, the bull market in stocks began. It changed the way companies were managed. CEOs focused on getting the stock price up. There was a takeover movement, then junk bonds, and then leveraged buyouts, which emphasized short-term profit gains. Wall Street firms became securities-trading companies more than money-raising companies. Meanwhile, an ideological war was developing in the country between those who believed government was largely the cause of the economic problems that bedeviled the nation and those who believed unbridled business was the culprit.
As a journalist and writer, I had a front-row seat for much of this. I got to know many of the key players and interviewed and closely observed others: Walter Wriston, Joe Flom, Alan Greenspan, Milton Friedman, Fischer Black, Bob Rubin, Ivan Boesky, Jack Welch, and Michael Milken.
What I didn’t know was the damage — not always damage, but on balance, plenty of it — that some would do over time. In the name of profits, the workings of a free market, pure self-interest, and outright greed, the American financial system stopped doing what it was supposed to do.
It was not that innovation is bad, that maximizing profits is wrong, or that self-interest is morally repugnant. But things got out of hand. Consider, for example, the case of Wriston, who was really the father of financialization. As a top executive and later head of Citibank, he had been circumventing Regulation Q since the 1960s. Reg Q was a capital control instituted during the New Deal to keep banks from raising the rates they paid savers and then chasing risky investments for a big payoff — all with federally insured funds. To get around Reg Q’s focus on U.S. dollar savings, Wriston offered higher rates on Eurodollars, negotiable CDs, and so on.
Across Wall Street, with takeovers, LBOs, S&Ls, over-the-counter derivatives, high-tech stocks, telecoms, subprime mortgages, and of course mortgage securitization, innovation was too often accompanied by abuse. I felt obliged to capture it — mostly to capture the people — in a new book whose title, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present, sums up what I witnessed.
The big lesson from the book is that history could have turned out differently. Now we have a chance to get finance to do what it should, but it is not obvious we are about to do so. The Dodd-Frank Act has its good points, but it will not be adequately implemented. Many in Congress are already trying to eliminate the new regulations. Bubbles will arise again; there may already be one in social-media companies.
For decades, America’s capital went into bad real estate, inflated LBOs, securitization, high-tech fantasies, and inflated housing prices. For lack of productive investment, private and public (infrastructure, education), the foundation of the U.S. economy has been gravely weakened. Finance was not working because it was not adequately regulated. In the end, it is not a story of economics but of people.
— Jeff Madrick (MBA ’71), the editor of Challenge magazine, is a frequent contributor and commentator on business and economic issues in a variety of print and broadcast media. His new book, Age of Greed (Knopf), is out this month.
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