March 5, 2021

Why We Deregulated the Banks

Jeff Madrick’s “Age of Greed” almost seems to have set out to be the economic equivalent of Mann’s history. Writing against the backdrop of the 2007-9 financial crisis, Madrick, the author of “The End of Affluence,” also starts his story in the 1970s, tracing the regulatory and cultural changes that led to our current trouble. In Madrick’s telling, a cabal of conservatives, driven first by greed and second by “extreme free-market ideology,” gradually seized power. The result, as proclaimed in his bold subtitle, was “the triumph of finance and the decline of America.”

It’s clear from the outset that Madrick has his work cut out for him. Where Mann’s story concentrated on six individuals who held office through successive Republican administrations, Madrick draws in a far wider cast of characters: thinkers like Milton Friedman; business leaders like Jack Welch; presidents like Richard Nixon and Ronald Reagan. It’s not always obvious what connects these disparate figures, so the book jumps from pen portrait to pen portrait without always advancing its main theme.

And the theme itself is slippery. A history of neoconservatism can home in on self-professed neocons, whose actions are clearly informed by a defined body of beliefs. But it’s harder to identify a cabal that self-consciously embraced greed as a guiding philosophy. To be sure, the insider trader Ivan Boesky once defended greed at a forum in Berkeley, Calif. But an undertow of avarice is surely a human constant. Was Sandy Weill, the Wall Street executive who retained a corporate jet while slashing retired employees’ health insurance, really so very different from a 19th-century Rockefeller or Vanderbilt?

If the greed of Boesky or Weill is unsurprising, the lack of greed evinced by some of Madrick’s characters is striking. Paul Volcker, the Fed chairman whom Madrick eccentrically berates for his determined fight against inflation, was known to be frugal; John Reed, Citigroup’s boss during the 1990s, was by Madrick’s own account “thoughtful and unflashy.” Reagan himself was more enthusiastic about self-reliance and hard work than about material advancement, remarking that “free enterprise is not a hunting license.” Early in his career, Walter Wriston, Reed’s predecessor at Citi and perhaps the character whom Madrick conjures most successfully, was offered a salary of $1 million to move to Monaco and work for Aristotle Onassis. He chose to remain in a middle-income housing project in Stuyvesant Village.

If “Age of Greed” is an unhelpful label, what of Madrick’s secondary contention — that the era was defined by extreme free-market ideology? Well, the extreme was pretty mainstream. Free-market ideas were embraced by Democrats almost as much as by Republicans. Jimmy Carter initiated the big push toward deregulation, generally with the support of his party in Congress. Bill Clinton presided over the growth of the loosely supervised shadow financial system and the repeal of Depression-era restrictions on commercial banks. Centrist intellectuals like Lawrence Summers, who was fully aware of market failures — indeed, who had emphasized them in his academic writings — nonetheless embraced pro-market public policies because, he thought, they were more right than not.

Besides, free-market policies were never embraced with the unqualified enthusiasm that some imagine. Throughout Madrick’s period, entitlement spending grew and armies of supervisors at multiple agencies tried to keep the financial sector in check. Contrary to Madrick’s view that the regulators were always retreating, the 1980s saw the imposition of new capital-adequacy rules on banks, and the 2000s brought the passage of the ambitious ­Sarbanes-Oxley accounting reforms. These regulatory efforts proved hard to enforce, but the record hardly supports Madrick’s argument that policy was captured by free-market extremists.

Sebastian Mallaby, the Paul A. Volcker senior fellow at the Council on Foreign Relations, is the author of “More Money Than God: Hedge Funds and the Making of a New Elite.”

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