Jeff Madrick on Southern Californians and the financial crisis
The growing bookshelf of volumes on the financial crisis have tended to focus on the last decade and the various elements that gave rise to the subprime mortgage meltdown.
Jeff Madrick, a former economics columnist for the New York Times, takes a longer view in his new book, "The Age of Greed," which traces the roots of the financial crisis back to the 1970s when distrust of government began to crescendo and government regulation of the financial industry began to be scaled back.
He takes the story from there up to the current moment, arguing that deregulation allowed for the unbridled flourishing of greed, which in turn allowed for the boom and bust of the mortgage market.
Madrick tells his story through a handful of individuals who helped deregulate and grow the financial industry, including such big names as Milton Friedman, Michael Milken and Citigroup Chief Executive Sandy Weill. But the book begins with a chapter on a relatively unknown political operative from Southern California in the 1970s, Lewis Uhler, who joined Ronald Reagan’s Cabinet and helped him lead the tax-cutting fight. Money & Company caught up with Madrick to talk about Uhler and those who came after him.
Money & Company: Why did you start a book about the financial crisis with a guy from the Los Angeles area?
Jeff Madrick: I started with him because in many ways he represented something that I don’t think people realized existed back in the '50s: A strong undercurrent of what I would call right wing anger at growing government. People thought of this as a minority that would never flower.
I wanted to begin by showing that the roots of what happened lay in people like Lewis Uhler, a fairly unknown person who eventually hooked up with Ronald Reagan.
M&C: Why were ideas like that at the root of what has happened since?
JM: The financial crisis was a direct result of the government abdication of its responsibility –- and
deregulation was the leading edge of that. When America turned Uhler’s way in the 1970s, government began to be seen as the problem, and that made the battle that some of these business people fought much easier, ending financial regulations and lots of other regulations.
It was also a matter of not devising new regulations as markets changed rapidly. In the 1970 derivatives began to replace stocks as the favorite activity of Wall Street, but there was no concomitant increase in government regulation of the derivatives market.
M&C: What role did the environment of California play in Uhler’s thinking?
JM: California was particularly ripe for economic expansion after World War II. It had relatively inexpensive housing, it had fertile land, it had aerospace and it had the movie industry, of course.
There was a rapid economic expansion, and people tended to attribute their economic achievements to themselves. In a way it seemed to be the promised land -– in a way it seemed to many that they made it on their own.
A lot of the entrepreneurs who made it became serious right-wing activists. A lot of the seeds of right-wing America were planted there and blossomed.
M&C: What happened in the 1970s that made it a turning point for deregulation?
JM: There was a growing disenchantment with government, not least because of Vietnam War and Watergate. What really gave it momentum was the severe economic crisis. Americans basically panicked. They had never dealt with inflation of 9, 10, 11%.
There was a general panic and government became the main scapegoat, and it stayed that way.
M&C: At the end of the book, you look at another Californian, Angelo Mozilo, the former CEO of Countrywide Financial. How was he the end of the story you started telling with Uhler?
JM: Mozilo went out to California because that’s where the home growth was.
Nobody was regulating mortgages. Basically nobody. So companies were selling mortgages that people couldn’t understand or couldn’t afford. Mozilo was a part of that.
But there were two sides to that coin. The other was raising money on Wall Street -– through mortgage-backed securities and eventually collateralized debt obligations. Because Wall Street devised these structures to package subprime mortgages, they raised a lot of money around the world. People like Mozilo had all this money to work with and they had to make mortgages. Increasingly they dipped into the low-income market and nobody stopped them. They started selling products nobody understood.
Mozilo also had a Wall Street operation that securitized mortgages, so he was on both sides of the coin.
Deregulation or the lack of oversight was at the bottom of all that.
M&C: Speaking of regulation, this is the 1-year anniversary of the Dodd-Frank financial reform bill, a big effort to reregulate Wall Street. What do you think of the effort?
JM: I never loved it from the beginning.
What real financial reregulation plan should have been is, yes, let’s avoid the next crash, but let’s also make sure Wall Street is trimmed and tailored and made to direct your and my precious savings to productive investment, not just speculation, from which they always take their 7 or 10% and get fabulously rich.
Meanwhile, even what was passed, which would have been something anyways, is being diluted. The Age of Greed just goes on. It’s being diluted as we speak.
-- Nathaniel Popper
Photo credit: Random House/Michael Lionstar.