Evil Geniuses: The Unmaking of America: A Recent History (20 page)

Starting in the 1980s as well, rich Americans were given permission—by Reaganism, by the media, by themselves—to behave more like rich people in the old days, showing off their wealth. Conspicuous consumption had never disappeared, of course, but in the thriving decades that followed the Depression and the war, the big economic winners were really not supposed to flaunt their good fortune, and cultural norms were in place to enforce discretion. When I was growing up in Omaha in the 1960s and ’70s, no one there thought it remarkable that our local multimillionaire Warren Buffett lived in a nice normal house on a small lot among other nice normal houses on small lots in a neighborhood that wasn’t the fanciest in town. What seemed remarkable, rather, was the twenty-thousand-square-foot house that the founder of Godfather’s Pizza built in 1983, by common reckoning the first true
mansion
to go up in Omaha since the 1920s. Those national quiet-wealth norms were crumbling when a Rolls-Royce Owners’ Club newsletter morphed into a successful glossy national magazine for and about the wealthy called
The Robb Report
(1976), and they’d evaporated entirely when
Lifestyles of the Rich and Famous
went on the air (1984) to persuade people that the lives of the fictional superrich on
Dallas
(1978) and
Dynasty
(1981) were real—get a load of this
Glengarry
–meets–
Wall Street
Iacocca-Welch impersonator Donald Trump!—and that ostentatious personal wealth was now the only American Dream that mattered.

Our fantasy-industrial complex also reflected and normalized the new old-fashioned laissez-faire rules by making legal gambling ubiquitous, like in the Old West and in old Europe. Until the late 1980s, only two U.S. states allowed commercial casino gambling, but within a decade, legal casinos existed in half the states. Before the 1970s, only two state governments operated lotteries, but most did by the end of the 1980s, a decade states also spent cutting taxes. In addition to the bad odds of winning, the state-run numbers rackets really amount to a crypto-tax, maybe the most regressive ever, since lottery players are disproportionately poor.

I don’t think it was coincidence that this happened simultaneously with the U.S. political economy metaphorically turning into a winner-take-all casino economy. The gambling hall replaced the factory floor as our governing economic symbol, a flashy, totally temporary gathering of magical-thinking individual strangers whose fortunes depend overwhelmingly on luck instead of on collective hard work with trusted industrious colleagues day after day. Risk-taking is a good thing, central to much of America’s success, but not when the risks are involuntary for everyone except the people near the top, required rather than freely chosen, and when those at the top have arranged things so they don’t have much serious downside risk. As Americans were herded into literal casinos, they were simultaneously being herded en masse into our new national economic casino, where the games were rigged in favor of the well-to-do players.

People put up with it, for the same reason that the great mass of people in casinos put up with playing games that the house always wins in the long run. The spectacle of a few ecstatic individual winners at that poker table or the screaming slot machine over there makes the losers envious but not resentful and encourages them to believe that, hey, they too might get lucky and win.

After all, for as long as anyone could remember, Americans shared
proportionately
in the national prosperity, the fractions going to the people at the bottom and the middle and the top all growing at the same rate. In the 1980s it wasn’t yet clear to most people that the political economy was being changed from a more or less win-win game to one that was practically zero-sum, that over the next few decades, at least three-quarters of them would be the economic casino’s suckers, that their losses and forgone winnings would all go to the luckiest 20 percent, and that thenceforth in America
only
the rich would get much richer.

That’s because the successful and comfortable social contract that had been in effect in America from the 1930s was replaced by a new one. Social contracts are unwritten but real, taken seriously but not literally, which is their beauty and their problem. They consist of all the principles and norms governing how members of society are expected to treat one another, the balance between economic rights and responsibilities, between how much freedom is permitted and how much fairness is required. All the formal rules specifying behavioral constraints and responsibilities, the statutes and bureaucratic codes, are distinct from the social contract but overlap with it, because lots of the specific rules—tax rates, minimum wages, environmental regulations, the cost of education—are codifications of the social contract.

Contracts are negotiated, ideally in a way that all the signatories feel fairly treated. In the evolving American social contract, the balance among the competing demands of liberty and equality and solidarity (or
fraternité
) worked pretty well for most of the twentieth century, the arc bending toward justice. But then came the ultra-individualistic frenzy of the 1960s, and during the 1970s and ’80s, liberty assumed its powerfully politicized form and eclipsed equality and solidarity among our aspirational values.
Greed is good
meant that selfishness lost its stigma. And that was when we were in trouble.

The best test of a morally legitimate social contract is a thought experiment that the philosopher John Rawls named the Veil of Ignorance in 1971, just as modern American ultra-individualism exploded. The idea is to imagine you know nothing of your actual personal circumstances—wealth, abilities, education, race, ethnicity, gender, age; all those salient facts are
veiled
from you. Would you agree to sign your country’s social contract and take your chances for better or worse in the social and political and economic system it governs?

Conservatives and the well-to-do in particular should submit to this test. A central tenet of economic libertarianism is the importance of literal contracts: if people sign a contract freely agreeing to its terms, it’s their business and nobody else’s what they do for or to one another. But “
social
contracts”? Fuck you, you do-gooders and losers and moochers. Libertarians fantasize that they’re action heroes and entirely self-made. They tend to exempt themselves from the truism that there but for the grace of God goes each one of them, because an implicit premise of their ultra-individualism is that anybody in America can make it on their own and that unfair disadvantages either don’t exist or can’t be helped. I have a hunch that the demographic profile of self-identified libertarians—94 percent white, 68 percent male, 62 percent in their forties or younger—has something to do with those beliefs and fantasies.

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An
Evil Geniuses
–themed film festival would include
Wall Street
(1987),
Glengarry Glen Ross
(1992),
The American President
(starring Michael Douglas, 1995),
30 Rock
’s season 4 episode 14 (in which NBC’s actual ex-overlord Jack Welch plays himself with Alec Baldwin’s fictional NBC executive, 2010), and Baldwin’s best several
SNL
performances as Donald Trump (2016–20).

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In the early twenty-first century, as the fantasy-industrial complex continued annexing American life beyond show business, Chrysler hired the eighty-year-old former CEO to be its Colonel Sanders, playing himself in TV ads with Snoop Dogg.

The ugly, confusing word
financialization
was invented in the late 1960s, the period of Peak New, just before America entered the era of extreme financialization. But it didn’t really become a common term until we all first experienced one of its spectacularly ugly, confusing, and destructive results, the market crash and meltdown of 2008.

Simply put, financialization is how Wall Street effectively took over the U.S. economy during the fourth quarter of the twentieth century. Our economy’s main players and private stewards went from a focus on actual work and production of goods and services to a preoccupation with financial scheming around productive enterprises and the work they do.

It was another paradigm shift. Financialization happening in sync with the other plotlines and big shifts in this book was not a coincidence. The changes were all of a piece and synergistic. Wall Street’s new hegemony was first enabled by Milton Friedman’s mainstreamed libertarianism and then reinforced it in turn—ditto with financialization and deregulation, the Law and Economics movement, the atrophying of antitrust, the lionization of guys like Jack Welch and Gordon Gekko, the digital revolution, increasingly short-term thinking, only the rich getting richer, and the explosion of corporate lobbying in Washington.
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The Harvard Business School political scientist Gautam Mukunda has a lucid explaination for how extreme financialization happened. “Real power,” he wrote recently in the
Harvard Business Review,

comes not from forcing people to do what you want but from changing the way people think, so that they
want
to do what you want….The ability of a powerful group to reward those who agree with it and punish those who don’t distorts the marketplace of ideas….The result can be an entire society twisted to serve the interests of its most powerful group, further increasing that group’s power in a vicious cycle….In the United States…it’s…the financial sector—particularly Wall Street—that has disproportionate power….The financial system is the economy’s circulatory system. The large banks that have driven finance’s incredible growth are the heart of the financial system….The American economy is suffering from an enlarged heart.

This chapter is the longest in this book. That’s partly because its story—a set of interlocking stories, really—is so central to America’s wrong turn. It’s also long because of some personal stories I’ve included. But mainly it’s because if you aren’t deeply familiar with finance, as I wasn’t, even a basic understanding of what happened requires some careful unpacking.

Before the 1970s, finance—regular banks, investment banks, stockbrokers, credit card companies—was just another service industry, the one in charge of lending and investing and processing money. It was mostly dull, and not just because WASPs mostly ran it. Sobriety and restraint were the whole point, a point traumatically reinforced by the Crash of 1929, then codified by new federal laws and regulations in the 1930s. For a half-century after that crash, the financial industry’s appetite for risk was low. As the financial journalist and former investment banker William Cohan has written, “Wall Street’s ability to manage risk was one of its singular successes.” That’s why in 1972 a doctoral dissertation I happened across on “Wall Street in the American Novel,” for instance, casually stipulated that lately, “fewer novels are written which are based on the marketplace of high finance” because “the excesses and exuberances which made the headlines in an earlier day are now largely prevented from occurring,” and “the wide-open frontier quality has disappeared and Wall Street has settled down and become sedate and mundane.”

What that Ph.D. candidate and most of us didn’t yet realize was that in finance, according to Cohan, “starting in 1970, prudence gave way to pure greed.” The culture of Wall Street changed along with the rest of American culture during and after the 1960s. For instance, an exclusive new kind of mutual fund for rich people was proliferating, with managers who invested promiscuously, wildly—not just buying promising stocks but making bets that a stock’s price would fall, acquiring real estate, speculating in currencies, and investing with borrowed capital to get returns even higher if you bet right. In 1967 the American Stock Exchange issued a stern warning to its members to “consider carefully” any involvement in these newfangled “hedge funds,” to ask the exchange’s permission first, and to always obey the existing “prohibitions against excessive dealing”—a gentlemanly catchall term for aggressiveness that would be considered
bad form
.

During the late 1960s in America generally, sobriety and restraint were discredited as square while risk-taking and self-gratification were celebrated. In finance, starting in the 1970s, fusing
if it feels good, do it
with the Friedman Doctrine meant that the pursuit of maximum profit for
oneself
as well as for one’s company trumped every other value or motive, so recklessness and corner-cutting became normalized, even obligatory. The last guys who’d been in the business at the time of the 1929 crash retired. Until around then, investment banks were legally partnerships, consisting of people mainly investing their own personal wealth in deals, and thus they were strongly inclined to be prudent—eager to make more money, of course, but as eager as anyone not to lose what they had. But then, Cohan explains, “one Wall Street partnership after another became a public corporation.

The partnership culture gave way to a bonus culture, in which employees felt free to take huge risks with other people’s money in order to generate revenue and big bonuses. Risk management on Wall Street [became] a farce, with risk managers being steamrolled by bankers, traders, and executives focused nearly exclusively on maximizing annual profits—and the size of their annual bonuses.

As investment banks and bankers took more risks, managing it often meant persuading—sometimes conning—other people to assume the risks you didn’t want. Thus the invention of all sorts of new derivatives. Simple derivatives had been around forever, such as betting on what the price of cotton or oil would be at some date in the future. But then starting in the 1980s, based on work by economists trained at the University of Chicago, ever more complex and abstract bets on bets on interest rates appeared, and bets on those bets.

The financial industry actually coined the astonishingly shameless term of art
incognito leverage
for invisible corporate debt, debt kept off balance sheets, hidden from the clueless chumps among the investors. The “large banks start[ed] acting more like traders” than trustworthy advisers, the journalist Nicholas Dunbar explains in
The Devil’s Derivatives,
his history of financial innovation. The result was an “innovation race between ways of transferring risk”—such as the credit default swap, a derivative bought by financial firms that was actually
predicated
on unpaid loans and financial disaster, an invention that “Goldman Sachs quickly moved to exploit and was richly rewarded for its ambition and ruthlessness.”

It wasn’t just the more adrenalized loosey-goosey culture and going public that made Wall Street greedier to the point of recklessness. From the mid-1970s on, government was also an enabler in various crucial ways. In 1974 a new federal law regulating pension funds literally changed the operative definition of the term
prudent
to mean that henceforth, pension fund managers choosing investments were legally required to be
exclusively
driven by maximizing cash value
now,
by whatever means, even if—catch-22—that required making imprudent investments, or investments that might ultimately wreck their pension beneficiaries’ industries or communities.

In 1978 a federal tax law got a new line of code called 401(k), and before long
everyone
was encouraged to set up a 401(k) and funnel money from each paycheck into stocks and other investments for retirement—which amounted to an immediate and immense new revenue stream for Wall Street. Then during Reagan’s first year in office, Congress cut the tax on profits from stock sales—capital gains—to its lowest rate since the 1920s. And so after a steady drift downward since 1965, stock prices in 1982 began rising like crazy. The value of shares doubled by 1986 (and despite a one-day crash of 22 percent in 1987, they doubled again twice more by the end of the century).

Finance was
fun
again, as it hadn’t been since the mid-1960s. The well-to-do were getting
so
much richer
so
quickly, and without any of that ’60s lefty buzzkill to make them feel bad. The casino excitement encouraged still more Wall Street firms to go public and invent still more exotic new investments, and it encouraged government to deregulate more and cut taxes more. “You’re a writer,” a finance guy I’d just met actually said to me one night in the mid-1980s. “I just realized the other day that
rich
and
risk
are almost the
same word
—that happened on purpose, right, historically?” I told him I didn’t think so, but that unlike
team,
they do both contain an
i,
a joke he didn’t seem to get.

From the mid-1970s through the ’80s, the government began exposing all of us to more risk by empowering financial hustlers in another way. It’s a bit complicated and involves a subject I never thought I’d be writing about and that you probably never thought you’d be reading about: bonds. But it’s a good place for us to take a closer look under the hood of financialization. And bonds are important because they were a key part of the systemic undermining that eventually led to the financial disaster of 2008.

Issuing and selling bonds are how big corporations (and public entities like cities) borrow huge sums of money. Bonds were always less risky for investors than stocks, because if a company’s stock plummets, that’s just too bad for the stockholders, whereas the company is supposed to be obliged to pay back in full the people who bought its bonds. Three big American rating agencies rate each bond or other giant chunk of debt from triple A, the best, down through about twenty gradations of risk, more or less the way the big-three credit bureaus rate your and my creditworthiness.

The difference is that you and I have no relationship with the credit bureaus that might incline them to push up our scores improperly to please us and thus let us rack up more debt than we can afford. By contrast, the big-three corporate-debt-rating agencies are all paid by the big corporations and financial firms that are issuing and selling the tranches of debt—and
not
by the investors who want risk ratings that are, you know, objective. That business model, “issuer pays” rather than “subscriber pays,” has been standard only since, yes, the 1970s. In other words, while the fox did not start guarding the henhouse, he was definitely now employing and training the guard dogs. At the same time, in 1975, Wall Street’s federal regulators, the SEC, made rating bonds an even sweeter insiders’ business by deputizing the big three as the U.S. economy’s official corporate credit referees, effectively extensions of the government, thereby locking in those businesses as a no-competition triopoly.

Not coincidentally, the late 1970s were also when Wall Street started making fresh billions from a newly conjured type of bond, a financial species called mortgage-backed securities that were illegal at the time in most states. Millions of individual home loans were thrown together, ground up, nicely packaged, and sold to investors in bite-size pieces as financial sausages—nobody really knew what was in any given mortgage-backed security, but they were hot and tasted good. Their main promoter became vice-chairman of Salomon Brothers, the biggest bond-trading firm in the world, who by 1984 was claiming that just that one sausage-extruding part of his firm “made more money than all the rest of Wall Street combined.” No wonder he was giddy: a new federal law in 1984 declared by fiat that mortgage-backed securities were now as safe as U.S. government bonds, the ultimate low-risk guarantee, as long as one of those big private rating companies gave the particular sausage its seal of approval. In 1986 another federal law created a specific tax benefit that made mortgage-backed securities even more attractive to investors. For the rating companies, rating all these proliferating debt sausages was fabulous business, eventually generating as much as half their revenue.

At the bottom of this new scheme, of course, were tens of millions of regular Americans paying off their home mortgages every month. Because everyone in the financial industry—investment banks, mortgage lenders, raters,
everybody
—was now profiting in so many new ways from the mortgage boom, they kept making it easier for people to borrow money to buy houses and condos, and got the government to help. During the 1980s, prudent New Deal rules concerning mortgage loans were repealed, allowing people to get home loans with too little money down and interest rates that would “adjust” to unaffordable heights. So during the 1980s, the average price of a house in America doubled.
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