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It took two more decades, but the Wall Street money culture is in the process of being discredited. Americans are slowly coming to the realization that unbridled greed is not the same as capitalism.
Jim Quin June 30, 2010 Prudent Bear
To explain our current plight, I use the terminology of The Fourth Turning (1997) by Strauss and Howe. This twenty-year Crisis phase began during 2005 – 2008 with the collapse of the housing bubble and subsequent repercussions on the worldwide financial system.
The progression from High to Awakening through the Unraveling took from 1946 until 2006. The intensity of a Crisis is very much dependent upon how a country and its citizens prepare for the Crisis during the final years of the Unraveling. The last Unraveling period in U.S. history from 1984 through 2005 was symbolized by Boomer greed, materialism, debt and selfishness.
Deregulation Decade
The Unraveling began during the second Reagan term with the "Morning in America" landslide re-election. The Dow Jones Industrial Average on January 1, 1984 was 1,259. The national debt was $1.6 trillion. This generation of 76 million over-indulged spoiled social activists is the proverbial pig in a python. Whatever path this generation chooses to take transforms the country for better or worse.
The term Yuppie was coined in the early 1980s as the egocentric Boomers poured onto Wall Street. The country was exhausted from the 1960s turmoil and the depressing 1970s. Failed presidencies, oil shortages, raging inflation, and American hostages had left an America that was looking for a renaissance. Reagan's first term required extreme measures by Federal Reserve Chairman Paul Volcker to break the back of inflation. By raising interest rates to 18%, Volcker set the stage for a 20-year bull market in stocks and bonds. Reagan survived an assassination attempt, the U.S. military conducted a successful operation in Grenada, Reagan fired 11,000 air traffic controllers, and an unprecedented peacetime military buildup was initiated. This created an atmosphere for economic revival, led by the Boomers.
The new laissez faire era was based on Reagan's belief that government was the problem, not the solution. His goal was to cut the size of government while slashing taxes and unleashing the animal spirits of the free market. Reagan was a rhetorical genius. It is a shame his soaring rhetoric did not match what actually ensued. Corporate tax rates were decreased from 50% to 38% by the end of Reagan's term. Corporate America was delighted. The tax savings permitted profits to soar. This additional capital could have been used to invest in the business. The Harvard-trained CEOs decided it was more beneficial to pay them outrageously high compensation and to buy back their own stock in order to inflate earnings per share.
The tone for the next twenty years was set. Reagan's policies did reignite the animal spirits of America. Reagan's defense buildup increased annual spending from $303 billion in 1980 to $426 billion in 1988, a 40% surge. This most certainly contributed to the collapse of the Soviet Union. They were a hollowed out oak tree and Reagan's defense buildup was the gust of wind that blew the rotting tree over. His achievements were great, but his failure to reduce government spending will haunt the country for decades and planted the seeds of economic disaster. The federal government spent $590 billion in 1980. In 1988, federal spending had grown to $1.064 trillion. Rhetoric did not translate into action. Politicians have always been good at following through on promises that buy them votes. The tough stuff can be pushed off to the next guy.
The 1980s proved to be a confidence-building decade after two decades of tumult. With the most egocentric self-centered generation in history entering the prime of their careers, a double shot of renewed confidence and debt accumulation began a cycle of unprecedented greed and hubris.
Fragmenting Culture
The self-absorbed yuppies' pursuit of wealth, power, and material possessions was captured accurately in the 1987 movie Wall Street and Tom Wolfe's fantastic 1987 novel Bonfire of the Vanities.
More Wall Street "inventions" like program trading, portfolio insurance, and arbitrage combined with hype and hubris to cause a 508-point crash on October 19, 1987. This 22.6% one-day drop was the largest percentage decline in history. This scared the average investor out of the market for years. It also unleashed a 20-year reign of banking terror, as the Greenspan Put was born. Alan Greenspan became Federal Reserve Chairman in August 1987. His first major act was to pour billions of liquidity into the market after the Crash. This was the first of his many risk-enhancing acts over the next two decades.
As the Boomers grew rich and cynical on the street of dreams, moralistic charlatans like Jesse Jackson and Al Sharpton exacted profits for themselves and their constituents. The working middle class sank deeper into despair as their wages continued a two decade long stagnation. Real hourly earnings were the same in 2005 as they were in 1984, and 10% below the level of 1972.
The appearance of progress on some issues overshadowed the underlying deterioration of societal institutions and practices. Social Security was "saved" by Alan Greenspan and his commission. Essentially he manipulated the CPI calculation downward, screwing future generations of seniors out of their rightful payouts. Politically difficult decisions regarding Medicare and Medicaid were deferred to sometime in the distant future. With oil prices averaging $20 per barrel through the 1980s and 1990s, a coherent long-term energy strategy seemed unnecessary to the next-election-cycle politicians. The deregulation of the savings & loan industry gave them many of the capabilities of banks, without the same regulations as banks. Imprudent real estate lending, fraud and insider transactions by S&L executives, protected by Washington politicians, led to the first financial crisis. The failure of 747 thrifts and losses of $160 billion to the taxpayer can be attributed to lax oversight and fraud.
The Berlin Wall fell as communism collapsed under the weight of central planning, corruption, and fraud. By 1991, the U.S. was again at war. The first Gulf War was considered a moral war as the United States came to the rescue of Kuwait and Saudi Arabia. Using traditional military maneuvers, General Schwarzkopf obliterated Sadaam Hussein's Republican Guard, but there was no consensus to follow through and eliminate Hussein.
The United States has experienced a three-decade-long "expenditure cascade." The cascade begins among top earners, which encourages the middle class to spend more which, in turn, encourages the lower class to spend more. Ultimately, these expenditures reduce the amount each family saves. This is a dangerous reaction for those at the bottom who have little disposable income originally and even less after they attempt to keep up with others' spending habits. The personal savings rate was 12% in the early 1980s and declined to negative 1% by 2005. The expenditure cascade couldn't have occurred without easy access to debt. The question that must be asked is, who benefits from debt and who pays?
Without the corporate consumerism marketing machine, an unlimited amount of credit provided by bankers, and ultra-low interest rates supplied by the Federal Reserve, the delusions of grandeur could not have been realized. Credit cards didn't even exist until 1968. Until the 1990s mortgage lenders followed the 28/36 rule. Your mortgage payment, including taxes and insurance, couldn't exceed 28% of your monthly gross income. All of your debt payments couldn't exceed 36% of your monthly gross income. Homebuyers rarely put down less than 10% of the home's value. Home equity loans were virtually non-existent. The subprime loan market for homes and automobiles was miniscule. In the early 1980s auto loans averaged 45 months and buyers put 12% down on the purchase. By the mid 2000s auto loans averaged 64 months with only 5% down on the purchase. By 1999, 40% of all cars on the highway were leased. The proliferation of easy credit allowed average people to live a life of excessive opulence, occupying 7,000-sq-ft McMansions, driving BMWs, and wearing Rolex watches. Americans bought so much stuff on credit they couldn't fit it all in their oversized abodes, so they rented outside storage. In 1984 there were 6,601 facilities with 290 million square feet of rentable self storage in the U.S. In 2009, there were 46,000 self-storage facilities with 2.21 billion square feet, a 762% increase.
Delusional middle and lower class Boomers believed they were equal to the top 1% of ultra-wealthy because they were living like them. As Orwell noted, "All animals are equal, but some animals are more equal than others." Those that were "more equal" worked on Wall Street. The repeal of the Glass-Steagall Act in 1999 with overwhelming majorities in both Houses of Congress and cheered on by Wall Street-groomed Secretary of the Treasury Robert Rubin, opened Pandora's Box. Bank holding companies started dealing in mortgage-backed securities, credit default swaps, and structured investment vehicles. A blizzard of products solely designed to generate fees while ignoring the banks' fiduciary duty to their clients was unleashed. Subprime mortgages surged from 5% of all mortgages to 30% by 2008, as issuing the mortgage became detached from the risk of the mortgage. The issuer of the loan had no risk, since the mortgages were immediately bundled and sold off to investors (suckers).
Charles Mackay in his book Extraordinary Popular Delusions and the Madness of Crowds , written in 1841, captures the essence of what has happened:
"Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper."
The nation had an opportunity to come to its senses with the election of George Bush in 2000. The gravity of the coming Saecular Winter could have been moderated through prudent actions taken on the fiscal, political, and defense fronts. The autumnal Unraveling is a time of foreboding and a brooding pessimism. As a howling wind begins to blow, leaves turn brown and wither, determined squirrels scurry around collecting acorns in preparation for the bitter snowy Winter ahead. The opportunity to judiciously prepare was wasted after the September 11, 2001 terrorist attack on America. The result was that the Crisis that arrived in 2005-2008 will be more painful and possibly fatal for the United States. The multiple wars of choice, immense housing bubble, stunning government deficits and unaddressed unfunded liabilities have created a nation weakened and unprepared for the harsh reality ahead. The Empire of Debt has reached epic proportions.
It took two more decades, but the Wall Street money culture is in the process of being discredited. Americans are slowly coming to the realization that unbridled greed is not the same as capitalism. Excessively low interest rates punish savers and senior citizens, while benefitting borrowers, risk takers and Wall Street. Savings leads to investment, while borrowing leads to impoverishment. The actions taken thus far by politicians, government bureaucrats, and the Federal Reserve are the exact opposite of what was required. The next leg down in this Greater Depression will thoroughly discredit those who have promoted a money culture over those virtues that will benefit society in the long run. The current Crisis will require personal sacrifice, renewed community spirit, public consensus, and truth. Failure could prove fatal for our nation. The best of human nature must win out over greed, ignorance, and love of power. Our future hangs in the balance.
"It has always seemed strange to me… the things we admire in men, kindness and generosity, openness, honesty, understanding and feeling, are the concomitants of failure in our system. And those traits we detest, sharpness, greed, acquisitiveness, meanness, egotism and self-interest, are the traits of success. And while men admire the quality of the first they love the produce of the second." – John Steinbeck
Jim Quinn is a senior director of strategic planning for a major university.
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The self-absorbed yuppies' pursuit of wealth, power, and material possessions was captured accurately in the 1987 movie Wall Street and Tom Wolfe's fantastic 1987 novel Bonfire of the Vanities.
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