The Roots of Financial Crisis

via Mark Thoma, Paul Krugman and Robin Wells review Age of Greed: The Triumph of Greed and the Decline of America, 1970 to the Present, by Jeff Madrick:

The first thing you need to know about the cycle of financial overreach, crisis, and bailout is that it was not always thus. The United States emerged from the Great Depression with a tightly regulated financial sector, and for about forty years those regulations were enough to keep banking both safe and boring. And for a while—with memories of the bank failures of the 1930s still fresh—most people liked it that way. Over the course of the 1970s and 1980s, however, both the political consensus in favor of boring banking and the structure of regulations that kept banking safe unraveled. The first half of Age of Greed describes how this happened through a series of personal profiles.
To some extent Madrick covers familiar ground here. He recounts the economic turmoil of the 1970s, as the country was caught in the grip of stagflation. And as he points out, Nixon and Ford—like today’s Republicans—blamed the economy’s troubles not on the true culprits but on big government. Madrick stresses a key point that is often forgotten or misunderstood to this day: the surging inflation of the 1970s had its roots not in some general problem of “big government” but in largely temporary events—the oil price shock and disappointing crop yields—whose effects were magnified throughout the economy by wage-price indexation. Yet constant policy shifts by the Treasury and the Federal Reserve (remember wage-price controls?) under Nixon, Ford, and Carter, Madrick argues, made the American public lose faith in government effectiveness, creating within it a ready acceptance of the antigovernment messages of Milton Friedman and Ronald Reagan.
While we believe that there were deeper reasons for Reagan’s rise, Madrick is right that the economic malaise of the 1970s gave Reagan his big opening. As Madrick describes, Reagan’s enormous capacity for doublethink and convenient untruths enabled him, the front man for business interests, to convince a credulous public that “government had become the principal obstacle to their personal fulfillment.” In possibly the best chapter of the book, Madrick recounts the irony of how Reagan, the great moralizer, made unchecked greed and runaway individualism not only acceptable, but lauded, in the American psyche.
Madrick also does an especially persuasive job of demythologizing Milton Friedman, who provided intellectual heft for the antigovernment movement. As Madrick points out, although Friedman offered some important economic insights, he often shoehorned real-life data to fit into a one-sided narrative, gaining his theories wider acceptance than was ultimately justified. And Friedman, like Reagan, preferred “overly simple assertions of free market claims,” discarding the caveats.

The whole review is worth a read, and the book sounds like it will be worthwhile too.  This is a pretty good summary of the big changes which took place beginning in the turmoil of the seventies, but really taking root in the eighties and have grown monstrously since.  The transfer of the banker from staid conservative to freewheeling gambler is at the heart of the crisis, along with the ever more endebted consumer, trying to hold on to an assumed standard-of-living which is increasingly outside of his means.  These forces have combined to place us in a no-win situation, with pain and negative consequences in every direction.  So far, we have bailed out the wealthy at the expense of everyone else.  Now, I think the least damaging outcome is to have the wealthy join in sharing the pain, to mitigate the suffering of the many. What are the odds of that outcome coming to fruition?