by Thomas Frank
But the Right just couldn’t catch a break. Not even totalitarian-baiting could turn the tide of the awful thirties; the public was far more interested in mocking the “Millionaire’s Union,” as the league was lampooned, than in rallying around its spectacular fears of the Constitution laid waste.15 So Franklin Roosevelt built his great coalition of blue-collar workers and other traditional outsiders, winning electoral triumphs by popular-vote majorities of a kind rarely seen since; in the House of Representatives his Democrats held, as of 1937, more than three-quarters of the seats. So lasting was the thirties realignment that Democrats retained that majority, with two brief intermissions, until the Gingrich Revolution of 1994.
Spirits of ’76
Here is an example of the hard-times scenario, drawn from a chapter of the history of the Midwest.
The state of Iowa boomed along with farm prices in the years just after World War I; the nation convinced itself that farms were the thing to own; everything was mortgaged and mortgaged again; it was a scene of unrivaled prosperity. Ten years later, in the pit of the Depression, the price of farm products had fallen to a sliver of former values. Now no amount of hard work sufficed to keep up the farmer’s mortgage payments, and the farm foreclosures began. By 1933, a third of the cases in Iowa courts were foreclosures.16
As conditions soured and no relief came from the Hoover administration, Iowa farmers began to organize themselves into a “Farmers’ Holiday Association,” the name being a dark joke on the euphemistic “bank holidays.” The idea was for farmers to withhold their products from the market until prices rose and the politicians did something to help them bear their crushing burden of debt.
But this was the thirties, people were desperate, and matters quickly got out of hand. Farmers blockaded the roads around cities in Iowa and Nebraska, forcibly dumping out truckloads of produce that got close to their picket lines. They faced down police and government officials. They disrupted so many foreclosure proceedings that it “became virtually impossible,” according to one observer, “to prosecute a foreclosure in counties where the Association was strong.” The farmers railed against bankers and produced a manifesto that echoed one of the classic Depression themes: the common people coming together to defend themselves against a predatory world. “We pledge ourselves to protect one another in the actual possession of our necessary homes, livestock and machinery as against all claimants,” it read—and by “claimants,” one journalist wrote, the farmers meant “the holders of mortgages.”17
That same journalist marveled at the farmers’ old-fashioned tactics of “direct action,” which he saw as a Depression-induced throwback “almost to the days of 1776.” It was a comparison much in the air in those rebellious years. One Iowa picketer even justified the trashing of his fellow farmers’ products as follows: “They say blockading the highway’s illegal. I says, ‘Seems to me there was a Tea-party in Boston that was illegal too. What about destroying property in Boston Harbor when our country was started?’”18
The 1932 farm strike didn’t do much to raise farm prices. Instead, it was just one dreadful note in a grand chorus of hopelessness that eventually brought the various ag bills, social insurance plans, and mortgage remediation schemes of the New Deal.
Still, the plight of Iowa in the thirties is worth remembering because it provides such a stark contrast with our own, hard-bitten era. We have just come through the worst recession since the days of the Farmers’ Holiday Association. And just as in the awful days of 1932, average people have risen up in outrage, fuming against the moneymen who drove the nation into the ditch and the politicians who stuck by their cronies while the rest of us lost our jobs and our savings. Thirties-style populism has made a triumphant return, claiming to juxtapose decent Americans against an uncaring, predatory world.
But should you happen to hear an homage to the spirit of the Boston Tea Party nowadays, the demands that follow will be the opposite of those of the striking farmers of 1932. What makes the rebel’s blood boil today is not the plight of the debtor but the possibility that such “losers” might escape their predicament—that government might step in and do the things those Iowa farmers wanted it to do eighty years ago.
That seven lean years must follow seven fat years seems like a fair deal nowadays. What burns these modern-day populists is that anyone has the arrogance to think that human affairs might be arranged any other way; that government might allow our neighbor to evade his part of the common disaster; that some mortgage remediation scheme or farm bill might let him out of the hard-times punishment that he clearly deserves. The ones moved to protest in 2009 were all “liquidationists,” as old Herbert Hoover used to call them. What they needed the world to understand was that, to quote the words I saw printed on a sign at one of the first Tea Party protests, “Your Mortgage Is Not My Problem.”
CHAPTER 2
1929: The Sequel
Seventy-nine years after the Great Crash, we got our own economic calamity, a crushing bust to put the exclamation point on the end of an anemic boom. As a lesson in the built-in treachery of the system, the collapse was unexcelled in living memory. As an indictment of official America’s consensus economic doctrine, it surpassed any plaint about NAFTA, any righteous editorializing about the payday loan industry, any fretting about the concentration of wealth into ever-fewer hands. If you had brought the world’s teenaged anarchists together in some great international congress and asked them to design an ideal crisis, they could not have discredited market-based civilization more completely than did the crash of 2008.
Committee to Give the Huge Middle Finger
It happened, to begin with, on the watch of president George W. Bush, whose faith in the prevailing economic creed was as close to perfect as any chief executive’s is likely to come. The creed itself, though, transcended the partisan divide; its merry assumptions chirped forth from the opinion pages of the Washington Post and the research papers of the Cato Institute. Its holy trinity of deregulation, privatization, and free trade were the accepted policy mandates of that age, and only the crustiest sort of Luddite doubted their benevolence when applied to financial services.
Over the years, visionary, tech-friendly Democrats had joined with stern, patriarchal Republicans to circumvent the country’s banking rules and to mute its supervisory agencies. The winds of history were at their back, as were the gales of dollars blowing in from the private sector, and in the noblest spirit of bipartisanship they repealed what remained of the nation’s basic banking laws in 1999. When market-displeasing laws remained on the books, the practice of “desupervision” ensured that they were not enforced. Enlightened governance in our advanced age meant counting on industries to comply voluntarily. Self-interest is what would make bankers play fairly and oil companies drill safely.
Do you remember the smugness, reader? The sheer complacency with which the free-market catechism would be pronounced? Then surely you will permit me to include the following memorable passage from a 1999 issue of Time magazine whose cover hailed Alan Greenspan, Robert Rubin, and Larry Summers as the “Committee to Save the World.” The magazine observed, dispassionately, that “Rubin, Greenspan, and Summers have outgrown ideology.” What it meant by this was that “their faith is in the markets and in their own ability to analyze them.” This faith beyond ideology
recalls nothing so much as the objectivist philosophy of the novelist and social critic Ayn Rand.… During long nights at Rand’s apartment and through her articles and letters, Greenspan found in objectivism a sense that markets are an expression of the deepest truths about human nature and that, as a result, they will ultimately be correct.
His reverence for markets forged in the searing fire of Objectivism, Greenspan was prepared to lead his two colleagues and the nation into a new, enlightened age. All three of them “agree that trying to defy global market forces is in the end futile. That imposes a limit on how much they will permit ideology to intrude on their actions.”1
; To insist that the free-market creed is beyond ideology might sound like the baldest sort of propaganda today, but all through the eighties, the nineties, and the zeroes our leaders whistled that happy tune, congratulating themselves for figuring it all out. Those were the golden years of libertarianism, a time when our choice and master spirits agreed on the uselessness of big government and took the benevolent rationality of markets for granted. And while they did so, the American financial establishment proceeded to cheat the world to the very edge of the abyss. Indeed, what brought the nation down were the very aspects of business practice that our choice and master spirits admired the most—the financial innovation and risk-taking that were routinely described as America’s unique offerings to the world.
We didn’t manufacture much anymore, but we could sure dream up awesome ways to securitize debt and slice up the risk in every imaginable situation. One testament to the zesty innovativeness of markets was the industry that had sprung up to supply credit to “subprime” borrowers, selling off the loans thus made to the investment banking industry on Wall Street. Then there were the geniuses at the next few steps of the process, who bundled those subprime mortgages into bonds and those bonds into collateralized debt obligations—and then sold credit default swaps to insure against the possibility of their failure.2
The gospel of deregulation, meanwhile, had become such an irresistible ideological juggernaut that no amount of real-world failure could call it into question. Under the guidance of this doctrine, our leaders removed certain derivatives from regulatory oversight; they watered down requirements that banks balance their risk with safe assets; they exempted credit default swaps from regulation as insurance products; they dialed back the Federal Reserve’s regulatory powers; and they struck down a rule that required hedge-fund advisers to register with the Securities and Exchange Commission. All these examples come from the first few chapters of a single investigative report;3 further illustrations of the rollback of the regulatory state could be piled up by the hundreds.
Meanwhile, anyone who knew anything about markets genuflected before the great god bonus, the pay-for-performance doctrine that was being triumphantly extended to every aspect of enterprise. Lavish incentives, the theory went, would coax superhuman labors from management and bring fantastic wealth to shareholders. In reality, as we now know, what bonuses inspired were superhuman efforts to game the system, to collect those rewards regardless of what the gaming did to stockholders, customers, or even the long-term health of the company.
Let us recall what it all looked like at its moment of supreme triumph. In the Year of Our Market 2006, it was reported that Goldman Sachs distributed some $16.5 billion in bonuses to its employees, enriching them in a way that is probably capable of overpowering all other forms of human motivation—faith, love, duty, ethics, patriotism, the law. And in such circumstances it was understandable that the bonus would become the object of a sort of cult. The high priest of the sect—or, rather, the leader of the ravening pack—was a magazine called Trader Monthly, which existed not to offer economic conjecture or stock tips, but merely to drool over the bonus-driven lifestyle. “See It, Make It, Spend It” was the publication’s slogan, and it stood ready to help the rising Wall Street star blow his share of the loot conspicuously, flamboyantly. Oh, there were cars: Lamborghinis, Maybachs, Ferraris, Maseratis, described in the magazine’s characteristic tone of flippant indulgence. There were airplanes, reviewed and rated in a column specifically dedicated to that purpose. There were Scotches, including, in the “Bonus Guide” for 2008, a $20,000 bottle of Johnnie Walker.
One definitely did not get the sense that traders aspired to live this way because they were jolly bon vivants. Quite the opposite. At one point in its intermittent pursuit of the best possible record player, for example, Trader Monthly described what it claimed to be a $300,000 turntable as “a huge middle finger to everyone who enters your home.”
If you didn’t understand why someone would want to greet his guests in such a way, you didn’t understand what made the Bush era go. But Trader Monthly did, and it suffused its protagonist in golden light so that all might behold his glory. A trader was not just an überconsumer but a bullying, self-maximizing, wealth-extracting he-man: a lout in full. The magazine’s panting worship of the truculent personality culminated in a bizarre spectacle it arranged in November of 2007: trader boxing. Before an audience chewing steak and guzzling luxury vodka, the furious fists of junk bond specialists would connect with the jaws of private equity managers, and the world would enjoy a graphic representation of the primal drama of capitalism.
I bring up this forgotten catalog of crassness not merely because its pages are such an amusing trove of bull-market ephemera but because the attitude it celebrated was instrumental in bringing disaster down on the nation. Those turntables and cars and jets were not just evidence of wastefulness at the top; they were pretty much all that Americans got in exchange for the decades of regulatory rollback. Professionals did OK during the Bush years; hourly wage earners gradually lost ground during the boom; but traders got to shop for private jets. Economists can talk in their abstract way about incentives and self-correcting markets, but this is what the free-market faith looks like in concrete reality. These tacky souvenirs were the reason for the whole mortgage catastrophe, the rewards that caused so many to cut corners and break rules and hire lobbyists and palm it all off on the next guy downstream. Not so you could prosper; so they could.
If ever a financial order deserved a thirties-style repudiation, this one did. Its gods were false. Its taste was bad. Its heroes were oafs and brutes and thieves and bullies. And all of them failed, even on their own stunted terms: the “MBA president” and his “market-based” government; the “K Street Project” and the “superlobbyists” who epitomized it; the federal agencies that had learned to think of private industry as their “customers”; the sleepy regulators, ignoring that red telephone ringing in the next room; and our fleet of hedge-fund billionaires, chortling on their yachts, as they all steered toward the iceberg. All of it should by rights have met its end.
Crime Pays
Instead, it got a bailout. Having let the louts in the nation’s financial industry do as they chose for decades, Washington suddenly swung into action when it became clear that those selfsame louts had sold one another trillions of dollars of booby-trapped investments. In March of 2008, the Federal Reserve facilitated the takeover of Bear Stearns by JP Morgan. In September, after Lehman Brothers was allowed to fail and financial markets began to panic, the Fed and the Treasury Department began bailing with both hands. They put together an emergency package for AIG, an unregulated hedge fund grafted onto an insurance company; they took over Fannie Mae and Freddie Mac, the mortgage companies; they rode to the rescue of the nation’s money-market funds and organized the distress-takeover of the huge Wachovia bank. And then, having warmed themselves up with these exercises, they went to Congress and asked for that notorious intervention known as the Troubled Asset Relief Program (TARP): $700 billion as a generalized rescue fund for the nation’s banks, to be administered however the former Goldman Sachs chairman, Treasury Secretary Hank Paulson, saw fit.
The larger economy spun into the worst slump since the Depression. Over the next year, millions would lose their houses, millions more would lose their jobs, and countless small businesses would be wiped out. But the banks and brokerages and jerry-rigged venture capital concerns that had propelled the tainted boom—that had done everything wrong—these businesses could not be permitted to fail. They had to be recapitalized, propped up, dusted off, and sent back out into the world to swagger and bully and fly that huge middle finger all over again.
Drastic action was undoubtedly necessary. But the financial rescue could have taken any of a dozen different forms. It could have put the “zombie banks” into receivership and commenced an orderly bankruptcy process, with no one allowed to get out of it by gimmicking their accounting. It could have broken up
the banking industry and brought back strict regulation, along with a policy of zero tolerance for financial entities that are “too big to fail,” so that the temptation to rescue such institutions would disappear. Instead, our leaders allowed the biggest banks to get even bigger. They offered the banks an open-ended guarantee against failing without really restricting their activities—a guarantee that might well encourage them to bet on the riskiest propositions available, secure in the knowledge that the taxpayer would make good their losses.
The bailouts were one of those moments that crushes the faith of a nation. Wall Street had gambled with the world’s prosperity; Wall Street had brought about a financial catastrophe; and yet Wall Street was now to get the kind of government help that you and I would never receive. When you decided, reader, to spend your life making things/designing things/writing things instead of trading risky financial instruments, perhaps you thought that you were doing something productive, something our society valued. But here now was the truth, as revealed by Hank Paulson and Co.: In the land of the red, white, and blue, only one calling mattered. To go into any line of work other than finance was to confess yourself a fool. To play by the rules was a chump’s game.*
To believe in the fairness of the system was just as naive. The awful but unmistakable message of the bailouts was that the lords of Wall Street owned the government. Once they had got themselves in trouble, they simply whistled up the resources of the public treasury: our tax money. Federal agencies, we now learned, were honeycombed with alumni and future employees of the banks; Washington’s officials all bowed before Wall Street’s self-serving economic ideology; both parties were in on it. The feeling that arose from this awful enlightenment was one of almost physical nausea. It was like finding out that the CIA had murdered President Kennedy, or that President Eisenhower really was a communist agent, like the Birchers used to say.