Coruscation

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.

The real causes of the crisis are more subtle and interesting than Madrick believes. Frequently, as the nation built the system that ultimately imploded, intelligent, pragmatic, nonideological and generally ungreedy individuals wrestled with the options that confronted them -- and concluded that some measure of deregulation was the least bad way forward.

Consider the response to Wriston's efforts in the 1960s to end-run Regulation Q, the rule that restricted banks' freedom to pay interest on demand deposits. Regulators fully understood that the demise of Reg Q would drive up the banks' borrowing costs, which would in turn lead them to chase higher-yielding loans to riskier customers. But regulators could also see that Q was an anachronism. Given the inflation of the Vietnam period, savers were not going to hand banks their money unless they were paid interest. If Q was enforced, depositors would lend directly to companies by buying their debt in the securities markets. The choice was between deregulating the banks, which would be risky, or seeing financial activity move into hard-to-monitor markets, which might be even more risky.

By allowing such stories into his narrative, Madrick rescues his book from his own unconvincing thesis. He makes extensive and generally good use of secondary sources (I am among the many authors cited), though there are some confusions and errors. He twice states that the hedge fund manager Julian Robertson escaped losses during the October 1987 crash. Actually, Robertson took a 30 percent hit that month, and afterward told his investors that "probably none of us have ever lost so much money so fast in our lives." More seriously, Madrick misconstrues the Princeton economist Alan Blinder, citing him in support of the curious view that policy makers could have dealt with the Carter-era inflation by waiting it out. What Blinder actually wrote was that part of the 1970s inflation required no policy response, since it resulted from temporary spikes in food and fuel prices that would self-correct. But the other part of the decade's inflation, Blinder acknowledged, reflected excessively loose money, and the Fed had no choice but to tighten the supply.