Matt Stoller: Greta Krippner’s “Capitalizing on Crisis” Describes Real Origins of Financial Deregulation

Yves here. Having lived through some of these developments, I concur with Krippner’s observation that financial deregulation was well underway prior to the Reagan era and the most important driver was interest rate volatility, which wreaked havoc with interest rate caps and other policies that made sense only if inflation stayed within a limited and not all that high range. But similar deregulatory forces were underway in the securities industry side as well. The New York Stock Exchange dropped its requirement that NYSE firms be partnerships in 1980. Partners in general partnerships are exposed to unlimited liability, which produced a generally conservative, long-term perspective towards managing their firms. Another sea-change was the deregulation of fixed commissions on stock trades in 1975, which greatly thinned the ranks of brokerage firms and accelerated the rise of integrated securities firms (ones that participated in stock and bond underwriting, trading, and sales).

By Matt Stoller, who writes for Salon and has contributed to Politico, Alternet, Salon, The Nation and Reuters. You can reach him at stoller (at) or follow him on Twitter at @matthewstoller. Originally published at Observations on Credit and Surveillance

I just got done reading the wonderful book Capitalizing on Crisis: The Political Origins of the Rise of Financeby University of Michigan historical sociologist Greta Krippner. I say wonderful for a reason – Krippner brings enormous and very necessary depth to the financialization of America, a subject which has been treated with far too much superficiality since the financial crisis of 2007-2009. 

To understand why this is such an important book, it’s useful to start with how our understanding of deregulation informs today’s political debates on finance. The financial crisis was such a momentous event, and the various blame games going around among politically interested parties, left a vacuum for a historical narrative. There are several popular theories about why the crisis happened. Most start with this undefined thing called financial deregulation. There’s a right-wing argument about the Community Reinvestment Act and how the crisis began with Fannie and Freddie, but there’s no empirical basis for that thesis, so I won’t touch it in this review.

So let’s start with deregulation. Krippner in her account really defines her terms and brings us through the narrative step-by-step. Her attentive account shows how financial deregulation – the removal of laws key to the New Deal system of political economy – started in the late 1960s. Much of the architecture of the political economy of financialization, the decision-making that would or could take place when credit markets were ascendant – was in place by 1980. She shows howthis architecture was designed by state actors, with a meticulous grounding in original sources.

According to Krippner, deregulation wasn’t a nefarious set of choices by Reagan and his Republican banking cronies, it was a response by a policymakers (a Democratic Congress and Democratic President) to the failures of the liberal state. After it was put in place, Reagan of course was a key player in setting its direction. Along with Paul Volcker and Alan Greenspan, Reagan took financialization in unexpected directions, but the basic contours were clear before Reagan came to power.

In my conversations with policymakers who were working at the time, such as Jane D’Arista, and in my readings of 1960s and 1970s Congressional hearings, the timing seems accurate. For example, long before usury caps were removed in 1980, Nixon pushed for their removal and Congressmen like Wright Patman complained about how credit cards were making usury caps obsolete. The Supreme Court’s 1978 Marquette decision, which helped deliver the death knell to the old regulatory model, was a move by the judicial branch, not regulators or politicians. And the plaintiff, Marquette bank, sued as far back as the early 1970s. Change to the New Deal political economy was in the air, due to inflation. Perhaps a President less conservative than Carter would have wrought a different kind of change, and Carter did face a Kennedy primary in 1980. But Krippner’s book is the first account of changes in our political economy that actually explains the roots of financialization in terms of the inflationary periods of the 1960s and 1970s.

This is in slight, though not entire, contrast, to several other strains of thought. The argument popularized by Inside Job filmmaker Charles Ferguson and Roosevelt Institute fellow Jeff Madrick in his book Age of Greed is that financialization occurred because of a nefarious set of players who sought to reorganize society on a social darwinian model. This is the Gordon Gecko narrative, that greed is good. Another argument, broached by Tom Ferguson and Sidney Blumenthal in the 1980s, and then popularized in the 2000s, is that the conservative movement was the result of a group of far-sighted and well-funded businessmen who saw in the 1970s rise of Ralph Nader politics an implacable set of enemies who needed to be defeated in the realm of ideas. But this isn’t entirely fair – one thing I learned from Krippner’s book is that Ralph Nader, among other consumer advocates, supported financial deregulation, specifically the end of Regulation Q, which capped interest on savings accounts.

A simple way to state Krippner’s thesis is follows. In the 1970s, politicians got tired of fighting over who would get what, and just turned those decisions over to the depoliticized market. This is known as ‘financialization’. Then political leaders didn’t have to say “no” anymore to any constituency group, they could just say “blame the market”. It’s very much akin to the rationalization for inequality one hears from elites these days, that it’s globalization and technology, as if those are just natural trends with no human agency or decision-making involved.

To state her thesis in a less glib manner, it is as follows. The state, in the 1960s, was confronted with three interrelated problems – social, fiscal, and legitimacy crises – and that financialization provided an inadvertent mechanism to deal with them. After World War II, the United States was the only industrial base standing, so its corporations had pricing power and could pass on labor costs to the rest of the world. Social problems could be solved with the standard American lubricant of growth and then dividing the spoils among the groups grasping for them. But as American competitiveness declined in the 1950s and 1960s, and due to the “guns and butter” strategy of LBJ’s financing of the Vietnam War, this growth model began failing. The result was that inflation kicked up, and inflation provided the means by which the state could effectively deny resources to constituency groups without explicitly doing so. In other words, dealing with fewer resources created severe pressure on the New Deal liberal architecture of decision-making, which first revealed itself as inflation.

Krippner is careful with definitions, and she’s interested in financialization – or as she puts it, “the growing importance of financial profits in the economy.” She first establishes that this is a real trend. Financialization is not just the rise of the mega-banks, or private equity firms, but the increasing importance of financial profits to non-financial firms. Ford and GM in 2006 made more money on auto lending than making cars, which is an example of financialization. It’s a clear trend, and one she establishes persuasively. Not only did American financial corporations take in 40% of all aggregate profits in 2006, but finance is a critical profit source for many other firms like GE.

Her story accords with what many of us now know. Firms like Google and Apple aren’t just technology firms, they are also financial, and use sophisticated money management techniques to manage large cash hoards. I once asked the President of Darden Restaurants whether his firm used derivatives, and he told me, of course. It turns out his background was in investment banking, not restaurants. As Barry Lynn once told me, American companies used to be managed by engineers, today they are managed by bankers. That is the story of modern corporate America, but it wasn’t the story before the 1980s.

Krippner goes on to describe why the old financial system fell apart. The New Deal system of finance had a series of speed bumps and firewalls across it, so that credit for certain activities had to come from certain institutions. The most well-known of these firewalls was the split between investment and commercial banks, or Glass-Steagall. But there was a far more comprehensive structure involved, which set in place interest rate caps on savings accounts (Regulation Q), deposit insurance, centralized monetary policy in the Federal Reserve Board of Governors, and implemented a slew of disclosures in the securities market. The net effect of this was a heavily partitioned and regulated financial sector. If you wanted a mortgage, you got it from a savings and loan, or thrift. Businesses borrowed from commercial banks, companies underwrote securities and bonds through investment banks. Finance companies delivered consumer credit, retailers offered installment loans, and so forth. There was some blurring of lines, but not much.

Regulation Q, or the cap on interest on savings accounts, was, as Krippner put it, “at the heart” of the system. By prohibiting banks from bidding for deposits, Regulation Q prevented the creation of a credit market, where supply and demand determined the interest rate. What Krippner doesn’t mention, but should have, is that this was due to how the banking system collapsed in the run-up to the 1929 crash. Banks at the time were parking their excess funds in high-yielding accounts of New York banks that were in turn making call loans to stock market speculators. This daisy-chaining of the banking system allowed the stock market crash to cascade throughout the entire system, leading to runs on banks as depositors feared their money had been lost. It was the 1929 version of systemic risk, and paralleled what happened in 2008 with mortgage-backed securities and money market funds. Regulation Q was designed to prevent this from ever happening again.

What Regulation Q also did, according to Krippner, is that it provided a ‘balance wheel’ for the economy. When the economy did well and interest rates went above Regulation Q caps, people withdrew deposits from savings accounts and put them in Treasury and corporate bonds. As deposits fled thrifts and banks, credit to the consumer economy was shut off. This could work in reverse as well, savings returned when interest rates dropped. 

Inflation, however, destroyed this system. Inflation caused credit crunches routinely. Savers were getting wrecked as their savings yielded less than inflation, prompting anger. Consumer borrowers were also angry when they couldn’t get credit at any price, simply because they were trying to borrow off-cycle. Similarly, state and local finances were hamstrung because they couldn’t borrow at particularly high rates, so capital to those entities dried up even when riots and violence were routine.

There were serious problems on the supply side as well. With inflationary-induced instability in the credit markets, banks and financial institutions innovated to get around Reg Q to fund lending. They used the Eurodollar market, commercial paper, and certificates of deposit. The government tried to stabilize the mortgage market by creating Freddie Mac and mortgage securitization in 1968, the first in a series of attempt to help the less-nimble thrifts that had long-term mortgages on their books. But with high inflation, financial institutions kept finding new ways of bidding for credit, and policymakers were continually forced to decide on whether to bring those new instruments into the regulated financial sector or allow the creation of a national free credit market. There were abortive attempts at a variable mortgage, an early precursor to the adjustable rate mortgage (ARM), but these brought fierce consumer opposition.

As this struggle continued throughout the 1970s, consumers began taking up a larger and larger role in the struggle for deregulation. The Consumer Federation of America, Public Citizen, and the AARP argued that with inflation over 10% a year, the public was losing money on deposits, and would gladly accept higher borrowing costs in return for higher savings rates. So in 1980, Jimmy Carter was persuaded to simply gradually eliminate Regulation Q in the The Depository Institutions Deregulation and Monetary Control Act. This was also the bill that formally ended usury caps.

The debates and fights in the 1970s were the most interesting part of the book to me, since no one has really covered them comprehensively. Krippner effectively tells a (slightly) more well-understood story of finance in the 1980s. Reagan cut deficits and raised defense spending, which Paul Volcker feared as inflationary. So Volcker slammed on the monetary brakes, pushing interest rates to nearly 20% to crimp inflation. With no regulatory firewalls or speed bumps, it was all up to monetary policy. Policymakers feared that high government deficits would lead to massive inflation, because Reagan was even more than his predecessors not making choices about social priorities. But high interest rates, plus the recent deregulation of the Japanese financial system, led to a massive inflow of capital into the United States from Japan. This meant that Americans could buy credit in any amount they wanted, even though it would be quite expensive. There would be no more credit crunches, just high interest rates.

Of course, the international capital flows and high interest rates had other consequences. The dollar spiked as the Japanese bought dollars, leading to the destruction of American manufacturing. And companies could make more by putting dollars into financial instruments than investing in their businesses. American finance profited, and non-finance companies like Sears tried to become finance giants. Credit was big business again.

Aside from these trenchant observations about the Reagan economy, Krippner also analyzes decision-making at the post-1970s Federal Reserve. She notes that Paul Volcker disingenuously adopted ‘monetarism’ as a method of shielding the Fed from political blowback from its induced harsh recession of the early 1980s. This kind of avoidance of explicit responsibility continued during the Greenspan era, as Greenspan sought to position the Fed as ‘following’ the markets rather than leading them. One gem in a footnote is a Krippner interview with Janet Yellen, in which Yellen says she heard Robert Rubin in the 1990s arguing the Fed was irrelevant. 

The era of financialization was not letting the market decide, it was, as Krippner argues, a specific form of ‘neoliberal statecraft’. It was governing without consent of the governed, by depolitizing decisions to a state-constructed market. And for a time, it did defray the social, fiscal, and legitimacy crises that politicians in the 1960s and 1970s couldn’t solve. But that time, as our episode of bubbles and crashes and frauds suggest, is over. We will have to create an architecture of decision-making once again, to solve the problems earlier politicians wouldn’t and couldn’t. The fight over resources, as Occupy Wall Street reminded us for a time, is perennial.

Sociologists at their best are detail-oriented scholars of technocracy, people who can play in the sandbox that economists set up but explicitly choose to recognize modern economics as the giant power-ignorant witch-doctor con that it is. Krippner is polite about this, but she’s also clear that politics and not efficiency was the motivating factor behind the rise of finance in America (and the global) political architecture since the 1970s. But for all her superb work, which includes reading every single public meeting of the Federal Open Market Committee and it seems like every single hearing in Congress in the 1960s and 1970s, I found myself unconvinced on two fronts.

One, as Jeff Madrick noted in The Age of Greed, the era of financial deregulation started with National City’s development of the CD in the 1950s, and the Eurodollar market at roughly the same time. The regulators allowed these ‘innovations’, but they didn’t have to let these first cracks in the dam to remain un-repaired. Similarly, one could note the same thing about the explosion of bank cards in the 1960s, which the bank regulators ardently defended throughout the era. It’s obvious they wanted a national credit market, and they wanted their banks to control it.

And two, Krippner argues that the shift to finance as dominant was an inadvertent response by policymakers to a difficult set of circumstances. Surely, pushing inflation into the financial architecture of the 1960s and 1970s caused massive problems, and created the preconditions for inevitable reform. But she doesn’t prove that financialization was inadvertent.

People like Citibank’s Walter Wriston were empire builders and had been working at financialization for decades, and organizers in the industry like Andrew Kahr (who invited credit card data mining) were intent on tearing down financial regulations for ideological reasons. Perhaps some of the politicians that made these decisions didn’t know what they were doing, but that doesn’t mean that all residual memory of the 1920s and 1930s was gone. It wasn’t. And it certainly didn’t mean that the traditional American suspicion of the banking industry just ended in the 1970s. Finally, it’s not like people didn’t know that Alan Greenspan was involved in overlooking accounting fraud during the Savings and Loan scandal, before he was appointed Fed Chair. He was a well-known social climber and charlatan in DC.  To believe that financialization was inadvertent is to take the same leap of faith required when asked to believe the financial crisis was due to a lot of greedy lenders and borrowers all getting greedy at the same time instead of recognizing manipulation in the capital markets.

Nonetheless, this book is a spectacular achievement, empirically grounded and remarkable in its depth and historical scope. Capitalizing on Crisis, is a discussion of the rise of finance in America since the 1970s, and is one of the first satisfying accounts I’ve read of why it happened. I enjoyed it immensely and learned a great deal. Congrats to Professor Krippner.

Print Friendly
Tweet about this on Twitter27Digg thisShare on Reddit0Share on StumbleUpon0Share on Facebook43Share on LinkedIn1Share on Google+1Buffer this pageEmail this to someone


    1. diptherio

      Pretty good, although I’d replace the “entrepreneurs” with “citizens,” to make clear that this isn’t just bad for small business people.

  1. Paul Tioxon

    I haven’t read Krippner’s book yet, but it seems from your precis, the neglect of S&Ls CDs is glaring. Money stayed in the S&Ls, at high interest rates. This caused the whip sawing tension between income from 30 year mortgages originated at low interest rates from the 1950s at about 5%, and paying interest on CDs at 7, then 10, 15%. The mismatch in paying interest in these certificates of deposit came home to roost not when they were simply rolled over, but cashed out. The smaller S&Ls simply could not keep up and were absorbed into larger entities by the eventual suicide pill of carrying the “good will” of the failed entity as asset in lieu of capital requirements. This was also a change in the banking regs, not so much a fiendlishly diabolical plan but a technocratic fix to pay the larger banks to take over the portfolio of the failed ones without having to raise more capital. The law which allowed “good will”, the brand name of the failed bank and all that it meant over decades of service to the local community was legally allowed to be monetize and carried on the banks balance sheets so real dollars would not have to be raised in order to meet federal capital requirements.

    Then, within a few years, this deregulation was re-regulated causing a capital crisis and setting off a cascading meltdown of banks, including one of them most notorious, the collapse of the former PSFS, The Philadelphia Savings Fund Society, which was at the time a financial behemoth in the state and a thorn in the side of Mellon Bank from Pittsburgh. PSFS morphed into Meritor Savings assembled from the failed S&Ls solely with “good will” capital and when the law was rescinded, banks had to raise capital or face the music. Without going into a long tale of Meritor, the situation was caused by promoting consolidation with a loop hole by passing capital requirements and then when many banks went on this empire building spree, the law was pulled from the books stranding them with deals that would have never happened in the first place without de-regulation.

    This is a critical, but certainly not the only contributing factor to the mess of the 1980s, but it needs to be acknowledged for the build up of non-fraudulent activity, that coupled with control fraud Bill Black lays out in his book, gives a more complete picture of financializtion.

    However, it still does not look at why financialization would occur to be the profit center overtaking industrial capitalism. With all of the money to made by the purchase of cars, homes, appliances and gadgets for the all of the new homes being built, how did manufacturing get displaced as the source of the majority of profits around the industrialized world? How did finance work to insinuate itself to grab this opportunity to make more money with money than with making things to sell? Capitalism always needed profits, but it also needed someTHING to sell. At first food, then manufactured goods. How could you sell money to people in order for them to buy more finished goods, foods stuff and services such as vacations to Disney or Europe and not have those sectors still pull in more profits than the stuff bought with all of the debt?

    I have my answers, but the question really speaks to the whole narrative about who is the bad guy making decisions to elevate fiance over industry when there are profits to be made in both arenas? The obvious answer is that from the end of WWII til about the mid 1960s, the US could make anything cheaper in America and then ship to anyone and sell it to them cheaper in there country, including Germany, France or England for almost 2 decades. But when the heart of the American profit machine in manufacturing faced serious competition from foreign manufacturers who could make autos, electronics, clothing in their countries and sell them cheaper here, that is when the return on capital had to look for other investments to make the profits that would soon diminish in the face of Japanese, then Korean, then Chinese manufacturing, then etc etc.

    Financialization can then be seen as an alternative place for capital to be invested when the returns of monopoly pricing from manufacturing were gone with the wind. Couple that with wage stagnation and selling manufactured consumer goods to make profits becomes an exercise in diminishing returns. Instead of capital being deployed into fixed investments in order to make something to be sold for a profit, turning your capital into some sort of good to be sold in order to turn it back into a larger quantity of capital you invested to begin with, you skip MISTER IN BETWEEN. They used to talk about financial intermediation being eliminated. Well now, money was all you needed to make even more money. What was eliminated was going into business to make things or even deliver services. Simply trading financial instruments back and forth in newly engineered markets for just this purpose was all you need. Capital would simply reproduce itself into more capital without any intermediary process such growing a crop for sale or making a useful or at lest entertaining physical item. This explains the need for financialization from a deliberate decision making outcome. De-industrialzation resulting from the loss of monopoly pricing power that killed profits, and lowering wages to compete with foreign competition, so people would buy less consumer goods drove capital to greener pastures. And what could be greener than the US Dollar?

    1. Dan B

      Paul writes: ” With all of the money to made by the purchase of cars, homes, appliances and gadgets for the all of the new homes being built, how did manufacturing get displaced as the source of the majority of profits around the industrialized world? How did finance work to insinuate itself to grab this opportunity to make more money with money than with making things to sell?” Simplified elliptical answer: money making money is abstract, and of no genuine social value; rather it’s a great harm; making goods/delivering services requires energy. Oil production in the lower 48 peaked in 1970, leaving America no longer the swing extractor (or producer) of modern society’s most necessary natural resource.

    2. susan the other

      Thank you PaulT, this was as good as the post. What happens when your country’s trade profits face no-nonsense foreign competition. They disappear without a credit trap. “How could you sell money to people in order for them to buy (goods) and not have those (financial) sectors pull in more profits than the stuff bought with all that debt.” I’m gonna frame this quote. Here is the nutshell for me (carrying this thought out to a stopping point): International trade doesn’t help the economy here or anywhere else. It should be limited to only essential commodities and strictly controlled. Because any country in today’s technological world – from Zimbabwe to Germany – can set up and manufacture anything domestically, keeping their own economies in balance.

      1. susan the other

        I wish you would explain why my comment is awaiting moderation. Is it stupid or is it verboten to criticize international trade?

    3. j gibbs

      Paul says “when the heart of the American profit machine in manufacturing faced serious competition from foreign manufacturers who could make autos, electronics, clothing in their countries and sell them cheaper here, that is when the return on capital had to look for other investments to make the profits that would soon diminish in the face of Japanese, then Korean, then Chinese manufacturing, then etc etc.”

      This ignores the important role played by technology transfers by US corporations in creating the foreign competition.

      In the words of Pogo, ‘we have met the enemy, and he is us”.

    4. Tim

      I’ve seen references to diminished investment in capital goods by American manufacturers starting in the 1960s, with the implication being that a lot of machine tool investment was driven by the federal government during WWII. As those tools wore out and were not replaced, finance became the place to make money. Makes me wonder if in fact it was the massive deficit spend of WWII that funded the rise of postwar manufacturing.

      1. Banger

        1932 to 1974 was the era of government intervention in the U.S. economy. WWII indeed did fuel growth and similar investments would do it again if properly targeted, but alas, our political system is broken and I don’t think it can be put together again.

    5. Jessica

      In between manufacturing profits running into a crisis and financialization being turned to as the solution is one missing step. The economy at point needed to shift to being knowledge driven rather than capital (plant, equipment, infrastructure) driven. But that would require a different form of social organization. Financialization is the knowledge-driven economy that we never got to have shrunk down and warped to fit within the limits of monopoly capital.
      Just as industrial capitalism created artificial scarcity of goods, the current system creates artificial scarcity of knowledge, in many different forms.

      1. j gibbs

        The knowledge driven economy turned out to be (mostly) people buying and selling real estate to one another at ever increasing prices, and people setting up web sites to retail everything imaginable, on which they could seduce advertisers into paying them by the click. People definitely need goods. I am not certain how badly they need this other stuff.

        Sometimes I think the global economy is just a cabal of Chinese swallowing T Bills in order to busy their billion people in the production of toxic dreck they can dump over here. Everything else is electrons pumping through the Fed computers. Musical chairs on steroids.

        1. Jessica

          Well, there have been genuine advances in computers and communications hardware and software, but yes, what we have now is a pale shadow of what would be possible if as a society we put it to full use. Of course, that might not be compatible with our current oligarchy.

    6. Matt Stoller

      With all of the money to made by the purchase of cars, homes, appliances and gadgets for the all of the new homes being built, how did manufacturing get displaced as the source of the majority of profits around the industrialized world? How did finance work to insinuate itself to grab this opportunity to make more money with money than with making things to sell?

      Krippner explains this as the Reagan twist on deregulation. In fighting with Volcker over the direction of the economy, his administration basically figured out that Japan could export capital to pay for the US budget deficit. This spiked the dollar and destroyed the manufacturing sector, turning even non-financial companies into financial companies.

      While the broad argument about multinationals losing their monopoly edge is fair, the timing of the shift is explained by the first post-war massive wave of international capital that flooded into the US. What Volcker didn’t realize – but people like D’Arista did – is that these flows would blunt the Fed’s policy tools.

      1. john c. halasz

        “Covered interest rate parity”. A standard explanation of FX rates. Volcker knew full well what he was doing. And the implications of a “high” dollar.

      2. different clue

        Didn’t a lot of manufacturing remain up to the election of Bill Clinton? Didn’t Bill Clinton’s
        NAFTA/WTO/MFN for China destroy a lot of what was left?

      3. WorldisMorphing

        Jane D’Arista’s interviews by Paul Jay for the Real News, on Bretton Woods and the Dollar’s status as reserve currency are absolutely exquisite. I envy you for having had the opportunity to have a little chat with her.
        I like that woman. For some reason, I find listening to her quite …appeasing. I think, should she be willing and able to free up some of her time, she could provide quite a gold mine of content for a savvy journalist with the wisdom and flair to appreciate it…

  2. Calgacus

    According to Krippner, deregulation wasn’t a nefarious set of choices by Reagan and his Republican banking cronies, it was a response by a policymakers (a Democratic Congress and Democratic President) to the failures of the liberal state. Sounds like a book worth reading, but – Meh. This is more or less the standard story.

    I wish we had a liberal state that failed like it did in the 60s and 70s. To almost all, continuation of such failure would be a great improvement, and utopia compared to the hell that neoliberalism made for so many.

    In the 1970s, politicians got tired of fighting over who would get what, and just turned those decisions over to the depoliticized market. The point is there is no and can be no such thing. The market is a government intervention. And not just because of regulation and laws and enforcement. It is a government intervention the way ranks in the army are a government intervention into society. The decision was to obscure government intervention – which was to be – surprise, surprise, “give to the rich and take from the poor”.The inflation of the 70s was just an excuse to chip away at the New Deal structures, which embodied a great deal of careful thought, and did, would have done and still do a much better job than their idiotic replacements.

    I think Stoller’s critique is basically right. The idea that financialization and decades of stagnation were not a conscious decision is insupportable. Look at Victor Quirk’s work. How was it that there were clear-eyed people – at least 2 – the philosopher Herbert Marcuse and the economist Josef Steindl who pegged it just right at the time – both saying around 1972 that “the decision for stagnation has been taken”, both using words almost identical to that. One might throw in Galbraith too for someone who saw very early what was happening. And one cannot omit the effect of decades of standard academic economics turning from the basically correct and reliable discipline of 1950 to the 99% pure shit it became in/by the 70s and has remained.

    1. Expat

      To restate your point, our elected representatives did this to us. And the majority of voters (or votes counted) were unable to stop their actions.

  3. j gibbs

    This piece doesn’t go back far enough. Start with the Kennedy assassination. Move on to the golden handshake between the banks and the oil sheiks, engineered by Kissinger on behalf of David Rockefeller. The deal was cinched by Nixon closing the gold window and collapsing the remains of Bretton Woods. Meanwhile, business was busy exporting technology and creating the ‘foreign competition’ that would justify the anti-labor governments of Carter and Reagan.

    The perceived problem was that Americans were losing interest in work. Things were too cheap; dropping out was too easy. The young no longer wanted to fight in pointless wars, sit still for school bullshit. I had two friends, each under thirty, who walked away from Wall Street law firms in 1969 and moved to Vermont to milk cows. They didn’t even know one another!

    Quadrupling the price of oil solved everything. That’s why they did it.

    1. j gibbs

      Stooler tells us:

      Krippner argues that the shift to finance as dominant was an inadvertent response by policymakers to a difficult set of circumstances.

      This is all I need to know to be pretty sure the book is bullshit and platitudes, but I could be wrong.

    2. Banger

      Indeed, the counter-culture movement scared the sh*t out of the oligarchs! The whole work-ethic was being questioned, and it was being questioned by the sons and daughters of the power-elite from finance capitalists to police chiefs. Now we are back to the same questions that were asked back in the 60s. We can’t escape them.

      1. montanamaven

        So true. I have several neighbors who came to Montana to ranch who were sons and daughters of Wall Streeters. They wanted know part of that life. But they had the seed money to buy land. They are the only Democrats in the county. By the way, the latest edition of “The Baffler” is dedicated to “play”. It is about real play versus games. It is about our life consumed by competition. David Graeber and Barbara Ehrenreich have articles.

  4. Teejay

    Yves, what drove the increase in income inequality in the mid to late 70’s that show up in all the graphs I’ve seen? Well before Ronnie showed up. Unions were still strong and the PC revolution had yet to take hold.

    1. Banger

      Many things came together by the late seventies–after some years of instability during the sixties in particular, after the elimination of real opposition (the Assassinations) the oligarch class was able to re-establish unity and control through the usual Machiavellian maneuvers and using misdirection (Watergate). Illegal immigration and foreign competition and advocating for “free” trade put downward pressure on wages. Tight-control over the political process, a dramatic rise in credit-card use (to finance the American Dream for workers) all contributed to the emergent TINA consensus that deracinated the left.

      Reagan’s popular fight against the unions was only a matter of form–by then unions had lost the propaganda battle and the reformed press acted, again, with one voice as can be seen by the withdrawal of reporters from El Salvador who were reporting on the death squad activity by orders from the administration. By the middle of the 80’s, taxes on the rich were being cut and workers had lost most of the power they had a few decades before. We often underappreciate the power of propaganda because we believe it is something only done in totalitarian states–no, it is being done everywhere at all times. Any intelligent reading of the mainstream media whether Fox or NPR shows that, if you parse the stories, they are mainly propaganda for one faction or another of the oligarchy and seldom what they claim, objective and dispassionate accounts (even though such accounts are not even remotely possible). By the Clinton years the stage was set for the emergence of “globalization” and World Empire.

  5. Hugh

    Inadvertent vs. nefarious plot is a common strawman. A class analysis is vastly superior. It explains how members of a group can act together without specific and continuous guidance, that is with only general and intermittent points of contact. In other words, you don’t need smoked filled rooms and finely plotted conspiracies to get the result we see (which by the way is not to deny there can be a few smoked filled rooms here and there). The basic point is that while members of the rich and elites may jockey for position and sometimes work against each others’ interests (giving the appearance of lack of uniformity and coordination) they work against our interests virtually all the time.

    I am not Marxist or even Marxian but it is hard not to view events from the 70s as anything other than the opening shots in a class war of capital against labor. Deregulation did not happen just on the financial side. Both trucking and airlines were deregulated under Carter. This kind of deregulation was deeply anti-union, i.e. anti-labor. The same can be said for Volcker’s policies. From Volcker on, increases in workers’ wages were treated as “inflationary” and to be combatted by Fed policies. As a result, real wages went flat at this time and have remained flat for the last 35 years. This flat line marked a huge transfer of wealth to capital, i.e. the rich and elites, as all the gains in productivity over this period went to it.

    Like much of what Obama does today, Carter’s anti-unionism legitimized, institutionalized, gave a stamp of bipartisan approval to the weakening and dismantling of the American union movement. In a historical context, Carter’s anti-unionism was the second act. Unionism and labor had been mortally wounded sixty years earlier when pre-World War I the liberal government of Wilson declared war on the more radical social movements out of which unions grew. These efforts were largely successful, but nearly derailed by the Great Depression. Indeed the New Deal can be seen as a necessary/desperate effort by the Establishment (the elites) and capital (the rich) to head off a resurgence in social movements and their radicalization of labor. Despite the veneration of FDR and the New Deal, this was very much a poisoned chalice for unions and workers. Big labor was given a seat at the table. It became institutional, respectable, but also ossified and increasingly isolated. It no longer represented the goals of the wider American public but the parochial aims of its members, and even more so of its leaders. It was set and set up to take a fall, and this is what began to happen during the Carter years and has continued to the present. It is easy to make fun of unions as they exist now, little more than lapdogs of a political process controlled by two corporate parties. But we should remember what they were and what they still might be.

    1. j gibbs

      I agree with you, and I think Marx would agree with you, too. Marx is unfortunately identified with Marxists and too much dialectical baggage (mostly wishful thinking IMHO), but, fundamentally, class interests divide those who must sell labor time in order to live on the one hand, and those who live off (surplus) work, which is captured from workers compelled to sell their labor time to buyers enjoying monopolistic privilege, capital legacies, and other advantages, including luck.

      What is particularly striking is how much surplus work is available for investment in initiatives aimed at preventing workers from understanding their position and improving it. This includes just about all schooling, media, and government activities.

    2. Dan Kervick

      A class analysis is vastly superior. It explains how members of a group can act together without specific and continuous guidance, that is with only general and intermittent points of contact. In other words, you don’t need smoked filled rooms and finely plotted conspiracies to get the result we see (which by the way is not to deny there can be a few smoked filled rooms here and there).

      I think this is very true, and it has been something very evident since 2008. I say this as a person who never gave a great deal of thought to class struggle before the crisis. But clearly when major threats to economic interests emerge, birds of a feather flock together. Sometimes they do form organizations of various kinds – like “Fix the Debt”. But often they just spontaneously flock and cooperate to defend easily perceived common interests. The obvious coalition-building among the privileged since 2008, and the open use of shamelessly elitist and aggressive plutocratic rhetoric that used to be suppressed and unspoken, has been completely obvious.

      I will say, though, that I suspect that there are more formal and secret organizations operating than we know, and more smoke-filled room pow-wows – although without the smoke these days. One of the things the powerful learned as a result of the Iraq War was that it is a mistake to spread your agenda – as PNAC did – all over the internet. It was very easy for the opposition to learn what they were up to and to counteract it. The opposition couldn’t stop the war, but they did put a monkey wrench in some of the grander plans. Whatever the powerful are cooking up these days, it has gone back behind the wall of secrecy.

      1. James Levy

        C. Wright Mills made the same point: a commonality of conscious interests leads to a commonality of actions. Or, as Chomsky said in perhaps the one irrefutable statement of his career–under capitalism, there is no conspiracy to make profits; it’s what the system does.

    3. Yves Smith Post author

      You don’t have the causality right. I researched this and wrote it up in ECONNED, from sources 20-30 years old (as in not seeing that period through our current biases).

      Carter would not have gone down this path had the economy not sucked and he was willing to try anything out of desperation. I’m not a Carter fan but events are path dependent.

      1. Hugh

        How was attacking unions going to improve the economy and help American workers?

        The Carter record:

        1978 Airline Deregulation Act deregulating the airlines
        1978 Civil Service Reform Act set up the Federal Labor Relations Authority to oversee collective bargaining with federal workers. It was this entity which Reagan used to decertify Patco in 1981
        1980 The Depository Institutions Deregulation and Monetary Control Act repealed usury limits on what banks could charge in interest
        Motor Carrier Act of 1980: deregulated trucking

    4. H. Alexander Ivey


      Very good comment – ” But we should remember what they were and what they still might be.”

      I’m not blue collar guy, I respect them but don’t want to join them. But I agree, unions – collective action – it ain’t pretty, but unbridled capitalism ain’t pretty either – is the way for a large segment of a society to get reasonable and equitable treatment. Thanks for getting me to be optimistic about what unions could be.

  6. allcoppedout

    The book is loitering in our bathroom. I may not finish reading it. The story is old in social economics and amongst those of us who remember terms like ‘the Gnomes of Zurich’ or think of the US military funded by petro-dollars. I guess we can go back at least to Knapp and Weber. One might even see financialisation as an exercise of charismatic power – the elements of gifts to followers and booty remain.

    I’ve noticed manages seem to love getting rid of responsibility in such matters as bringing in outside caterers and any manner of weird consultants. Politicians like arm’s length management organisation (ALMOs). Financialisation seems part of this to me, even if high frequency, insider knowledge, prop-trading theft seems different. The idea is to evade responsibility by being able to say you handed the job over to people in the scientific know. The result is you soon can’t find any meat in the pie and lots of alternatives with fancy names that amount to rotting fish with rice.

    Weber stressed the legal-rational, but in fact very little is. The underlying problem is that we can debunk but do little in practical challenge. We want transparency but this is easily faked and will even lead to liquidity crises. We can show courtrooms little more than Oedipal triangles of Freudian rationalisation through precedent, yet fear we should leave well alone in order to have any criminal justice system at all. I see finance as little more than joint stock ventures to send ships off to do piracy, or the old price-fixing of manufactures in markets controlled by gunboats.

    What we need is a plan to survive and rebuild after the bubble is pricked, and the cunning of financialisation is that it tells us even to build such a plan will bring the plague of anarchy or Soviet government. In politics it is always the demon beyond the city gates. We can’t build green energy capacity (etc.) because others will compete us to death burning coal and oil.

    The first few pages of this book put it firmly in an old line of argument, even if it starts without crass assumptions of economics as separate from power as a science or collectivity of the rational-legal. Meh … as said above.

  7. arby

    Having worked in the Senate in the Carter, Reagan and Bush I years, my recollection is that the policy direction among both parties was towards deregulation and away from what many perceived as an ossified regulatory system unable to cope with rising inflation and rising unemployment. The debate was over how far to go or which elements of the regulatory structure to loosen. These financial issues were discussed as ‘modernization’ and ‘reform’ and responded to the prevailing theory that the archaic nature of financial regulation begun in the 30s was somehow a defining problem. Most members were quite concerned about how far down this path to go in the st. Germaine Bill. Treasury Secretary Don Regan did put repeal of glass-stegall on the table, but this was seen as a step way beyond rational by senators of both parties. It took another 12 years to lay the groundwork for that little idea to take root and they still had to rush it through before the non banking committee members could figure out what was going on.

    1. j gibbs

      The only thing missing in those caucuses was a chorus of “Send in the Clowns.” I bet they really agonized over turning those S&Ls over to the looters.

      1. arby

        As to the S&Ls, my recollection is that they got the biggest dose of deregulation and freedom to expand well beyond their existing channels precisely because their situation was the most desperate. As to the Congress, the industry had not consolidated so that there was a lot of geographic based interest infighting .. wall street v. smaller stock exchanges v. Insurance v. Commercials v. Brokers v. Commodities, and the large corporate borrowers weighed in as well. The Committees split among largest employers/constituencies in their states or districts. Those geographic divisions are no longer pertinent as the 5 giant firms have swallowed all the small fry in all those different congressional districts.

  8. R Foreman

    So the debt merchants got what they wanted, a complete unfettered deregulation of lending/financing activities, only to run into the debt saturation brick wall at 300 miles per hour in 2007, and be forced into government subsistence or be run out of business due to massive debt destruction of defaulted loans.

    Now the Fed is the last lender standing due to their ability to print unlimited quantities of fiat against the USGovt taxing ability 10 generations into the future. You can’t make this stuff up. I was thinking of buying some large capital items on credit, but now I think I’ll hold off because prices should come down over the next year.

  9. Dan Kervick

    I think one aspect of financialization that hasn’t been discussed yet is financialization as a national economic strategy. As the US economy evolved away from heavy industry in response to globalization, the question became what products were to serve as the foundation of the country’s international economic power. And perhaps what US leaders decided was that the US’s economic future depended on homecoming the world’s banker and chief global supplier of financial services. I would be interested in seeing a breakdown of the changes in the relative shares of financial sector profits derived from foreign investment and domestic investment during the past half century.

    1. Hugh

      Of course, the people who brought us financialization were the ones who brought us “globalization”. They were the ones who moved us away from manufacturing. I think they did so for maintenance and exploitation of empire. That is the empire could be maintained with the US as the world’s banker, and that this position could be maintained by the underlying maintenance of the US as first one of two and then sole military hegemon. In this view, manufacturing was largely superfluous to the dictates of empire. What was unforeseen but baked in were the limits of military power, the importance of manufacturing as a basis of state power and wealth, and the instability and destructiveness of financialization to that wealth and power. Once we realize that wealth and power come from the people, from their knowledge and labor, the sham and complete vacuousness of this enterprise become clear.

  10. montanamaven

    I’ve never read Marx. Don’t know too much about it. Have read a lot of books on the labor movement which ended a long time ago. I am reading “Mastering the Art of Soviet Cooking: A Memoir of Food and Longing” by Anya Von Bremzen. It’s a history of the Soviet Union as told through food and her Russian relatives relationship to it. She starts out with a pre-Soviet meal and works her way decade to decade to the present. I just finished the pre- Soviet aka Romanov era and am in the “War Communism” era of 1918-1921. Whoa! Doesn’t sound Marxist. Sounds like good intentions gone amok. They got rid of all the professional chefs and bakers and nobody seemed to know how to cook. Granted her mother was very anti-Soviet and they finally got to emigrate to the U.S. in 1974, but it’s a remarkable look at the U.S.S.R. from a non academic social observer.

  11. Susan the other

    This was a great post. And all the comments too. I especially liked Paul Tioxin’s comment. My reply to him got deleted for being immoderate. Not sure why. It would be nice if the censor would say the reason for the deletion. There is a fine line between viewpoint and agenda. But I’m paranoid now. I guess Matt’s book review could explain the phrases “supply side” and “trickle down” in terms of an irresponsible congress and Fed which simply passed the buck of government to the “market.” Let the market make all the decisions. Pretty shameless. Since markets have always been orchestrated by people with power. Heck of a job, congress!

    1. Yves Smith Post author

      We do explain our moderation policies (I see you missed we have a “Policies” link on every page on this site), and have repeatedly in comments, but you apparently can’t be bothered to pay attention.

  12. Dan Lynch

    Re: “dealing with fewer resources created severe pressure on the New Deal liberal architecture of decision-making, which first revealed itself as inflation.”

    True that Keynesian policies were *blamed* for 70’s inflation, but the truth is that 70’s inflation was caused by energy prices, not by domestic economic policies.

    Re: “When the economy did well and interest rates went above Regulation Q caps, people withdrew deposits from savings accounts and put them in Treasury and corporate bonds. As deposits fled thrifts and banks, credit to the consumer economy was shut off.”

    This assumes a “loanable funds” view of banking. Perhaps there was some truth to the loanable funds view during the gold standard, but since leaving the gold standard banks no longer lend deposits, in fact, loans *create* deposits.

    Inflation didn’t really kick in until the mid-70’s when OPEC raised the price of oil. There was some 5% – 6% inflation during the late 60’s which people complained about, but realistically 5% inflation is pretty reasonable, especially considering that unemployment was only 3.5% at the time.

    So …. I agree that Keynesian economics was *perceived* to be at fault for the 70’s inflation, leading to the shift away from Keynesian economics and the embrace of Neoliberalism, but for the record let’s note that the true cause of 70’s inflation was energy prices.

    1. j gibbs

      And the cause of the energy price escalation was the sweetheart deal with the Saudis engineered on behalf of the banks and the oil companies. Let’s see, can anyone spot the Rockefeller in the fuel supply?

      1. Gaianne

        “And the cause of the energy price escalation was the sweetheart deal with the Saudis . . . ”

        Only secondarily. The primary cause was the peak of US oil production. This is key. It is key because it meant that the US was no longer in control of its primary essential industrial resource. This in turn meant the US could no longer control prices. The secondary effect of this was that the Saudis gained real economic and political power.


        1. j gibbs

          The oil shortage of the Seventies was imaginary. What happened was the end of the Drain America First strategy of the US government and the oil industry. From 1930 to 1960, the problem was excessive oil, which made the price too low, both for the oil companies and the banks.

          Saudi Arabia restricted production and kept the price high for the banks, which applied the usury screws to the developing countries lacking oil of their own. Why do you suppose oil wasn’t a problem in the Eighties? Or in the Nineties? Or why the price threatened to collapse at the turn of the Century, when Iraq decided it needed more cash to spend on weapons and threatened to drive the price to $8 a barrel?

          The invasion of Iraq drove the oil price from $20 to nearly $100. More good news for the banks and the oil industry too. Notice any difficulty getting gas for your SUV these days? It’s always about the money. Always.

          1. Gaianne

            Oil was certainly a problem in the 1980s until Reagan cut a deal with the Saudis, which is precisely the point. Before the peak of North American production in the early 1970s the Saudis did not matter. In the 1990s the Alaskan North Shore came on line, as well as some lesser fields. By then production outside of North America was more important than in North America. Part of the Saudi deal–and this was essential–was pricing oil in dollars. This allowed the US to continue to capture the profits of oil production.

            Regardless of what bankers do or don’t want, a functioning industrial economy depends on the availability of real resources. When the those become difficult or disappear, the industrial economy falters. That is what is happening now. Financialization and ponzi schemes don’t fix anything–they can’t–but are intended to disguise the difficulties, which they do.

            You have the economy upside down: Physical possibilities of the geological and biological world come first, political and economic arrangements can do nothing without the support of physical possibilities.


  13. Dan Kervick

    A simple way to state Krippner’s thesis is follows. In the 1970s, politicians got tired of fighting over who would get what, and just turned those decisions over to the depoliticized market. This is known as ‘financialization’. Then political leaders didn’t have to say “no” anymore to any constituency group, they could just say “blame the market”.

    In itself, I don’t think that process explains financialization. Turning decisions over to the depoliticized market is more accurately termed “deregulation” or “liberalization”. That’s what neoliberalism was all about.

    But that process in itself isn’t an explanation of why the share of profits going to the financial sector grew. To explain that you need some kind of economic analysis. If you listen to the defenders of laissez faire capitalism, they would have you believe that deregulating and liberalizing some market sector should generally lead to lower profits in that sector. Laissez faire argues that high levels of profit are a by-product of insufficient competition and market inefficiency, and that when you liberalize the market you bring in competition, drive out waste and extravagant profit, and create a lean mean ecosystem of robust competitors earning very modest profits in a sustainable equilibrium. So on their account, there is no line from liberalized finance to an expanding financial sector.

    But they were wrong, weren’t they? Just as they have been wrong about so many other things in the past. The laissez faire theorists don’t understand the nature and growth of power; they don’t understand human nature; they don’t understand the processes tending to monopolies and oligarchies; they don’t understand the forces driving destabilization and economic self-destruction. They don’t understand that the natural ground state of an unregulated economic system is not a harmonious and self-sustaining “ecosystem”, but a riot of ravenous beasts with a systemic tendency toward concentration of power, domination and control in which the most successful agents suck everyone else dry and ultimately destroy the foundation of their own prosperity. Harmony can only be approximated with the application of effective governance, not its total withdrawal.

    The changes over the past 40 years that destroyed effective economic governance and gave us our insecure and stress-ridden capitalist jungle, where every single human is now supposed to think and act like his own private hedge fund in a sink-or-swim world, changes that ultimately crashed the whole economy, can’t be understood as just the result of this or that coterie of bad guys or predators, or of some specific act of bad government. It resulted from a massive cultural shift away from the postwar consensus that government was on the whole good, necessary and noble toward an across-the-spectrum assault on, and “reinvention” of, government. Remember all those books in the 90’s about how government was withering away in the face of globalization and that we were moving toward some globalized post-government order of networked private enterprises and cosmopolitan, de-nationalized individuals? This trend was celebrated by many, and still is. And not just by the corporate titans but by much of the left as well. Thomas Frank caught most of these trends in his book One Market Under God. This ceaseless hatred and repudiation of government is the chief seduction and corrosive solvent of our time, whether it is manifested in its rightward-oriented variant of Chamber of Commerce assaults on government regulators and tax collectors or Tea Party-style “don’t tread on me” right-libertarianism, in Silicon Valley techno-utopianism or its left-oriented variants of anarchism, “libertarian socialism” and other manifestations of the cult of personal liberty and autonomy. There seems to be something deep in the DNA of the American mind that tells us that the answer is always more personal and economic liberty, that the course of human existence should always be 100% voluntary and individually chosen, and that the path to a better life is always in the direction of detaching, withdrawing, escaping and liberating ourselves from other people, our obligations and our subjection to any kinds of rules and systems. This cult of endless individual “liberation”, and fear of being absorbed into the “collective”, the “Borg” or the “system”, is a virtual obsession in American cultural life and has been particularly powerful in recent decades.

    The US got over some of these obsessions due to the double whammy of Gilded Age plutocracy and the Great Depression, as we brought in first the progressive movement and then the New Deal. But as a people we seem to have forgotten most of those old lesson reverted back to the radical individualism. That’s why we are still lacking a serious movement for progressive change, and why the forces of plutocratic power are still winning. Too many lefties are still wandering in the wilderness of goo-goo utopian silliness, thinking there is some apolitical, counter-cultural drop-out solution to the fight against domination by concentrated wealth. But it’s an illusion. There is no frontier any more. There is no New World to sail away to to escape the Old; there is no safe and protected rainforest village commune or land of happy treehouse people swinging on vines and “gifting” each other the means of sustaining their lives. There is one world. It is now small, cramped and stressed, and everyone it will be ruled by whomever own it and runs it. So time to turn and fight.

    It seems to me that we in the US, and others around the globe, are increasingly faced with an impending global struggle for the commanding heights of the 21st global order. It is a struggle between the ideal of democratic self-government government, where the political community and its rule of law are the dominant organizing force, and the ideal of a corporate future, where hierarchical private enterprises rule the roost and the only role for government is the protection of private property rights, where government itself is just department of corporate enterprise run to serve the interests of its owners, and where a ruling class of stockholder/rent-collectors live off the commanded labor of the many. If people think they can escape this war by wandering off into the fantasy land, then like sheep they will be captured and gobbled up by the leviathans they are unleashing and are unwilling to fight.

    1. j gibbs

      You are missing one important point: that most of what government has done since 1940 has been in the service of selected private interests. Only lip service has been paid to anything remotely resembling the public. This is the reason otherwise socially cooperative people see government as an enemy. It is an enemy for anyone who cannot afford to own enough Senators or Congressmen. And it has been a rewarding strategy to turn one’s back on political shenanigans for the past seventy years, and seek a niche in which to escape the consequences of oligarchic government. I don’t think it has made anything worse to refuse to vote for any of these charlatans who have one and all betrayed the confidence others vested in them.

      Politics isn’t going to accomplish anything until enough people understand they are being fed all bullshit all the time from both of the parties which somehow still manage to corral nearly all of the votes.

      1. Dan Kervick

        Not true at all. Government was powerfully engaged in education, public health, retirement, infrastructure development and basic scientific research and technological development. Most of it has been useful. Kneejerk cynicism about the role of government is why Americans are still busily handing over their country to private interests

        1. Banger

          Government was involved in all that but our culture changed and government is currently too corrupt and based on outdated models to do much good. The ideal would be to reboot the system somehow. I would start with a debt jubilee and go from there.

        2. j gibbs

          Yes, government was involved in the areas you mention. But what government has been doing mostly is regulating the lives of private citizens in a “father knows best” approach that identifies people as morons unable to govern their own affairs. They arrest you for not buckling your seatbelt; they moderate the water pressure in your faucet and toilet; they condemn your children to public education and micromanage what you teach them if you choose to educate them at home. They interfere with the practice of medicine to enrich drug cartels and scamming professionals. In the past thirty years they have institutionalized usury on credit cards and student loans. I could go on (and on and on and on), but the devil is always in the details. The best we have ever gotten is an even handed paper shuffling time serving bureaucracy in which the main effort expended was in showing up and cueing out. And, of course, the real problems: monopolization of land and intellectual property, are never addressed.

          1. montanamaven

            Hear! Hear! Especially education. The right wingers are not all wrong about getting rid of the Dept of Education. Our children are being stuck in boxes and force fed crap. If adults were making living wages, then a parent or relative would have more time to devote to “educating”. George Washington learned surveying and some rhetoric, I think. He wasn’t much of a reader. But made a bundle with the surveying skill. The national highway system screwed up the passenger rail system, so not all good there.
            And Banger is right too. It’s so corrupt now that “government” needs a reboot like a debt jubilee or a completely new operating system.

    2. James Levy

      Being an historian I can’t help but note that this same process of going from making to lending happened in Venice, Holland, and Britain. One of my old profs always would insist “America is different! America is different! Those older models don’t apply because of our vast market and internal access to resources.” But the pattern is too familiar to just ignore. There seems to be a point where it becomes easier and cheaper to plow past profits into financial activities rather than commodity production. America reached that point somewhere between Carter and Dubya. And the long-term implications are certainly a period of relative decline. Whether it becomes absolute decline is unclear, but my guess is it will.

      1. Dan Kervick

        Well, a lot of industrial labor gets exported to countries where people are poorer and willing to work very heard for what we would consider little reward. The same thing always happened during all earlier phases of globalization. Also, people prefer not to do back-breaking and physically draining and dangerous work if they can do something else, so they tend to educate themselves and then contract out the physical labor abroad.

        1. Dan Kervick

          I will just add that unions tend to be attached to particular industries and forms of work. As those forms of work decline, labor security and prosperity decline as well if the new forms of work are not unionized as they develop. That’s what seems to have happened here. There is nothing inherently wrong with changing the focus of our economy (although some of the particular choices made might have been bad ones). But when we did that we threw away a lot of hard-won labor protection and union membership declined precipitously. So with the general churn and entrepreneurial development and creative destruction, capitalists just did what capitalists always try to do: maximize the return to capital and minimize the return to labor, the latter of which is just a cost for them. The declining power of the labor side of the equation resulted in ever easier and greater victory for the capitalists. And the larger the percentage of the nation’s wealth they controlled, the bigger the share of the government they were able to buy, so that now the government works almost entirely for them too.

          It’s hard to imagine that there as once a time when there was a political force called Big Labor that everybody had to reckon with, that controlled the Democratic Party, and that the capitalist class had to suck up to.

          A large share of those college educated postwar children who thought “labor” and “union” were words for something that was beneath them, and applied only to the grubby fellows who did not work in offices and wear nice clothes like they did, now find that they are an insecure and disposable mass of unprotected and unorganized Dilberts, locked safely away from solidarity and economic power inside their isolating cubicles.

          1. j gibbs

            Labor started going into a swoon with the passage of Taft Hartley (1947). The big industrial unions became infested with gangsters who busily enriched themselves and practiced small time extortion on major industries that simply marked up the wage gains and passed them along in higher prices. Unorganized workers paid most of the freight.

            Union don’t accomplish anything important unless all workers are organized. Nobody after Debs even thought of doing that.

      2. j gibbs

        It is cheaper because there is always foreign labor somewhere which is easier to exploit. Do you really like buying the commodities of today? If so, which ones?

    3. Banger

      Very graceful and articulate comment, Dan.

      I will nitpick a little in defense of goo-goo. From a cultural perspective we have no choice but move into radical individualism. Why? Because with the extraordinary growth multi-culturalism, stunningly (literally) large amounts of information and data we have to process we cannot sanely align with some cohesive world view or mythic framework. We can make fun of gays a few years ago and hold our tongues today. We can see ourselves as men and women with certain roles and responsibilities when I grew up many decades back but I must live in at topsy-turkey world today. How the hell can we find our way in any logical and healthy manner? I would be glad to be less of a loner if there was somewhere I belonged and I think that feeling causes all kinds of problems.
      Unless you live in a stable culture with rules and rituals that change very little you are stuck in the modernist/post modernist dilemma.

      Our problem is not the oligarchs and corrupt politicians but our own incoherence and our lack of social “literacy.” Few of us can “read” people who are often filled with acquired gestures and into nations that are chiefly about misdirection, i.e., we don’t really want to be read, we don’t want people to know what we’re really like. We need to establish an understanding of just how lame we are and, also, how brave we are to be able to survive in a social milieu that is fundamentally hostile to human needs let alone social needs.

      Once we find a broader basis of connection than tribalism we will recover our balance. We are on the way–what appears to be mess is an opportunity to create a new more universal set of ethics that will allow us to relax and enjoy ourselves and each other.

      1. Dan Kervick

        Interesting thoughts, Banger. It seems to me that at some point we are just going to have to get our act together and choose solidarity and community, and overcome our highly cultivated alienation, individualism, paranoia, irony and distrust. Maybe that won’t happen until there is a critical mass of people with nothing left to lose. On the other hand, countries often undergo what can be either strictly or loosely termed “spiritual” movements as a response to social change.

        The US in the first half of the 20th century was also made up of people from many different corners of the world, and was thus no more inherently tribal than we are now. But those people managed to build themselves into something like a genuine nation, get control of capital, build an unprecedented middle class, win a global war and make themselves into an admired model of optimism, freedom and progress for the whole world. And they were pretty darn patriotic as I seem to recall from my youth. So I’m not convinced that multiculturalism dooms us to fragmentation and anti-social individualism.

        1. j gibbs

          In the first half of the Twentieth Century we were organized and substantially enriched by two global wars that destroyed all the overseas industrial competition, including infrastructure. I don’t know if the American population is entitled to all that much credit for what happened. Five guys in New Mexico deserve a lot of credit.

          1. Calgacus

            Other countries destroying their industries and infrastructure doesn’t enrich us. It makes us poorer. The condition for that sort of crazy competitiveness argument to make any sense is that complete incomprehension of basic economics be put into practice, as is the fashion nowadays. But back then, except under hapless Hoover, US economic policy was more pragmatic and effective, and not so ardently directed at creating poverty amidst plenty.

        2. Banger

          Multi-culturalism takes time to mature and is much more in your face than it was back in the day–plus we can find out about almost anything in seconds through Google. Very, vey, very different situation tha what I experienced growing up I the 50s and 60s.

      2. skippy

        “From a cultural perspective we have no choice but move into radical individualism.” Banger

        This is completely contrary to our species evolution and sociopsychological baseline, biologically and environmentally. What do you think is Americas biggest issue, what do you think consumerism [cough… libertarianism] is all about and why is the American social fabric devolving so rapidly.

        Methinks you spent to much time in the ready room, have not debugged your self as much as you would like to think.

        skippy… “our own incoherence and our lack of social “literacy.” – Banger Yours is showing, we have more than enough data on it, the problem is who is using it, for what ends and why.

        1. Banger

          You miss my point. I am fully aware and have studied social science and recent neuro-science findings and have often said we are hard-wired for connection and cooperation. Radical individualism is, on balance a perversion. Next time read my comment.

          What I am trying to say is that this is a phase that we have to go through since we have no current basis for agreeing or cooperating nor do we have the social literacy to cooperate very well–this has to do with both the cultural situation of too much information and a certain amount of ruling-class brainwashing.

          I have been advocating, for decades, the fact we need to join together in communal action and I’ve gotten nothing but silence form people on the left.

          1. skippy

            Sadly we don’t have the time Banger and the left you speak of died along with the hard won and honed trade skills [bargaining power]. What has replaced it is a drug culture and assorted societal fringe dwellers.

            Anywho the clarion call of consumerism for consumerism’s sake amplified by the billions of dollars and full immersion cubed omnidirectional advertizing RF signal, over many generations – is – hard to grapple with… eh…. wadya expect… moral pleas to overwhelm all the conditioning? Seriously, if the military has figured out how to overcome one of the most basic instinct’s of our species in the name of efficiency, what do you think individuals or small groups have in flapping their wings and crowing morality! Mate all they have to do now is point at GDP and go row faster or you won’t get the cheese your condition to expect and be happy.

            We do have a current basis for agreeing or cooperating, its call the survival of our species and others, which would encourage social literacy and cooperate, tho there are those that are diametrically opposed to such for ideological reasons born out of antiquity.

            skippy… My favorite is the libertine synthetic a priori – desire equals all human action trope – meme. Something you seem to be advancing as a means to an end or something more nefarious.

      3. just_kate

        Very thought provoking comment Banger – going to spend some time letting those ideas rattle around in my head.

      4. lambert strether

        “Once we find a broader basis of connection than tribalism we will recover our balance.”

        Well put.

    4. MikeNY

      What Banger said: a very graceful and considered post. Thanks to you and Hugh for great posts in this thread.

    5. Hugh

      Eloquently stated.

      “There is no frontier any more. There is no New World to sail away to to escape the Old; there is no safe and protected rainforest village commune or land of happy treehouse people swinging on vines and “gifting” each other the means of sustaining their lives. There is one world. It is now small, cramped and stressed, and everyone it will be ruled by whomever own it and runs it. So time to turn and fight.”

      The way to resist is to resist. People keep expecting an opposition to appear miraculously fully formed and ready to go that they can sign on to. They rationalize their own lack of action because such an opposition has yet to spontaneously materialize. Things will start out small and messy but the important point is that they start. If not us, who? If not now, when? There is great power in simply asking people what they want, what they really want. And asking further if they see any way of getting there from here. Once you get to this point, it’s not that hard to get them to admit the necessity of committing, of working together to accomplish common goals. They may not follow you out in the streets tomorrow, but you have begun the process that will get them there. This is revolutionary thinking but it is not new. It is older than the country. It has been there at all the great changes in our society from the Founding to the Civil War, from the rise of the labor movement to civil rights. It is a lesson that we must, as a people, relearn every few generations as we are faced with new challenges. The place to begin is at the beginning. The time to start is now.

      1. j gibbs

        I think a better strategy would be organizing a handful of friends and opening a restaurant. If you can’t cook, make sandwiches. Exploit yourselves for a few years, retire and play golf. The whole &*^%*( planet doesn’t have more than thirty years anyhow.

    6. Wayne Reynolds

      “…the laissez faire theorists don’t understand the nature and growth of power” Dan Kervick. I think the events in Chile in the early 1970’s can bloody well put that assumption to rest.

  14. phichibe

    I haven’t read the book but based on the revue it’s going on my list. Matt Stoller’s review doesn’t mention one of the most important deregulatory moves in the late 70s/early 80s and I may be wronging the author o/t book but it was so pivotal and so often ignored that it merits a call-out. S.E.C. Rule 415 required a 20 day interval between registering corporate securities (stocks a/o bonds) and their sale. This was to assure some due dilgence by the investment bank(s) underwriting the offering. By 1982 the interest-rate volatility had caused bankers and the Fortune 500 to push for eliminating this interval.

    What this meant, however, was that firms like Drexel Burnham were able to build up ‘war chests’ to be drawn upon by the new generation of corporate raiders like Boesky, Pickens, and Icahn. Repealing SEC 415 was therefor CRITICAL to setting off the mid-80s era of green-mail, LBOs, etc. And what came of that? The critical lesson learned by the pirates of Wall Street was that it was a lot easier to co-opt incumbent management than to fight them (read “Barbarians at the Gate” or any of the other books on these battles). Armed with Michael Jensen’s studies arguing that management should be equity owners, the KKRs of the world were soon including incumbent executives in their deals, setting aside large tranches of stock for them. From this to the 1% (and even more the 1% o/t 1%) was a short step.

    All this is laid out in great detail in “The Takeover Game” (1987) by John Brooks, a finance writer for the New Yorker so you know the prose is intelligible. I know Yves was on Wall Street in those years so it would be interesting to get her take on this, but as far as I’m concerned the repeal of SEC 415 was one of the lynch-pin moments when we were put on the path to the 80s, 90s, and 00s.


    1. j gibbs

      I admire some of Brooks’ work, but I don’t even recall SEC Rule 415 and cannot imagine how or why it could have made any difference. All deals are presold and the pigeons cannot wait to get in on the action. Indeed, the clamoring always dwarfs the available supply. Due diligence is entirely imaginary. Papers are shuffled and dealt. Nobody reads a prospectus except the drone who writes it, and he just cribs from the latest similar deal.

      They should have saved the trouble and the trees.

    2. Yves Smith Post author

      No, you have Rule 415 all wrong. I was at Goldman when it was implemented and worked on Goldman’s first deal under Rule 415. I did deals before Rule 415 and there was NEVER a 20 day waiting period. And Rule 415 had nada to do with the process for IPOs (where the SEC would review the prospectus as it does now).

      Rule 415 allowed for shelf registrations. Rather than filing a prospectus for each and every deal, which then had to be approved by the SEC before securities were sold (six weeks for an IPO, within hours for a seasoned issuer, deals would be priced at the close of trading, the prospectus would be finalized and printed overnight, and the attorneys would file it with the SEC when it opened at 8:30 AM and the deal would usually be effective before trading opened, then at 10:00 AM.

      Shelf registrations allowed for deals to be priced intra-day. The issuer would file a master prospectus and the registrant would need only to file a pricing amendment with the SEC.

      No one in corporate finance or M&A in my era saw any connection between Drexel and Rule 415. Drexel’s innovation was its “highly confident” letter, that it would say it could raise the funds for takeovers. It could do that because it had a network of raiders that it required to raise MORE than they needed to make their acquisitions, typically 15% more. They were then expected to spend that dough funding other Drexel deals.

      And Jensen’s studies came LONG after the raiders were established. KKR was founded in 1976. Oil companies were doing hostile deals in the 1970s.

      Rule 415 was very significant, but not for the reasons you state.

      1. phichibe


        Well, as I said, you were there. Thanks for the correction. I bow to the voice of experience. I confess that it’s been many years since I read Brooks’ book in toto and definitely got the details of 415 wrong, but Brooks’ main point in devoting a whole chapter of his book to the promulgation of Rule 415 was that it helped fuel the takeover orgy of the 1980s by lessening due diligence and making shelf registration possible. Now I’ve got to re-read the book to (re-)follow his train of thought completely.

        BTW, here’s the passage from Brooks that cites the 20 day waiting period.

        ” The underwriting “revolution ” symbolized by the promulgation on a trial basis of SEC Rule 415 in March 1982 had actually been going on for some years before that. The precipitating factors were chiefly market conditions in the late 1970s. The basic law on the issuance of securities was (and still is) the Securities Acts of 1933 and 1934, which decree that underwriters shall conduct a “reasonable investigation” of the condition of the company being financed, and that a period of twenty days must pass between the filing of a registration statement and its effective date, when the securities may be issued.” (p.107)

        The balance of the chapter is devoted to the twin impacts of 415 in reducing investment bank fees and lowering quality of issues. He has numerous quotes from Samuel Hayes to these points. I will have to reserve judgment on the connection to fueling takeovers but I remember being very impressed with his argument when I read it at the time.

        I still stand by the point I made concerning the cooptation of corporate executives by the LBO firms and the role this played in the creation of the 1%. Here’s a relevant quote from “Barbarians”:

        “Once Kohlberg got his hands on a company, he ruthlessly cut costs and sold unwanted businesses, freeing up every dollar to pay debts. In most cases he gave management stock incentives, which he found did wonders for their ability to run businesses more efficiently. ,,,, In their most basic guise, LBOs have worked the same way ever since.”

        Every study I’ve seen of the vertiginous growth of CEO compensation since then has focused precisely on this point: stock options, stock grants, etc that exploded after the LBO wave drove the ratio of CEO to average worker pay from the 30s in 1980 to 200-300+ today. I may have erred in citing Jensen’s role but I know that Graef Crystal has stated that the role he and his fellow executive compensation consultants played in “benchmarking” studies for the Fortune 500 played off this idea of “managers as co-owners” of the company. Once one CEO got a package that included a big equity stake, his peers in his industry sector were able to employ hired guns like Crystal to ratchet up their own pay packages to include similar compensation, whether or not there was an LBO involved.

        The results speak for themselves. Many years later Crystal repented his success in persuading boards of directors to restructure executive compensation packages to include huge equity elements but the damage was done and they’re still here.

        Again to quote from “Barbarians”, here is how Don Kelly, CEO of Beatrice (which KKR took private in an LBO in 1986) explained the LBO game to Ross Johnson of RJR Nabisco:

        “… Kelly talked about the incredible benefits of LBOs, especially one with Henry Kravis. “Ross” he said, “you’d be doing exactly what you’re doing as CEO, but you’re making a helluva lot more money.”

        And so it goes….


  15. bh2

    “[…] explains the roots of financialization in terms of the inflationary periods of the 1960s and 1970s.”

    It is inflation, not financialization, which therefore lies at the heart of the problem. Unlike rainstorms and earthquakes, inflation is not a phenomenon of nature. It is an intended and avoidable consequence following from intended and avoidable policies promoted or permitted by government.

    The FED promotes 2% “positive inflation” (an oxymoron if there ever was one) and no economist utters a word of objection. Indeed, when inflation declines to anywhere near zero, Keynsians raise an alarm like a flock of startled geese. Because the tenured class profoundly believe debt is (in Hamilton’s truncated phrase) “a public blessing”, they refuse to accept that it curses the public at large with perpetual interest payments and the necessity to assure lenders that no asset pledged to secure debt will be permitted to fall in nominal “value”, lest the banksters be caught with their balance sheets upside down. This assurance can only be accomplished by steady inflation. (Eliminate the debt and you eliminate the threat.)

    Inflation is the fundamentally corrupt “financialization” of the nation. Legislation only defines which manifestations of this corruption will be permitted and which other ones will be forbidden (at least in theory, but rarely in fact). Regulating the manifestations rather than eliminating the source is an academic folly which excuses government to continue spending money it does not have and cannot repay when borrowed (a proposition Hamilton did not endorse).

    1. j gibbs

      Inflation results from perpetual expansion of bank credit on the one hand, and monopoly pricing power on the other. The only available defenses are speculation in equities and real estate. Small fry generally get shaken out or liquidated in the periodic crashes engineered by frightened lenders. It’s a great game if you don’t mind living with the possibility of imminent extinction. I did it for twenty years, got out before the last crash and never got back in. I think I made about $14 per hour scouring financial reports.

      My plan is to jump in again after the next crash. Does anyone know when that will be?

  16. proximity1

    To be fair, I have to start by admitting that I haven’t read the book under consideration here. But I have read some comments here and elsewhere about it. First, I could not agree more with this, from the reviewing essay here:

    “…the financialization of America,” is, indeed, “a subject which has been treated with far too much superficiality since the financial crisis of 2007-2009.”

    But, when I read the following, by Frank Dobbin, in Harvard University’s Trajectories (Vol. 23. No. 2 / Spring 2012 / (The Newsletter of the ASA Comparative and Historical Sociology Section) )

    “Krippner…makes a sophisticated historical argument. The fact is, as Krippner shows, political expediency rather than power politics produced the key policy changes, and the effects of those changes were not anticipated by anyone.”

    I was moved to comment here that I question the validity of both these claims–first, that expediency rather than power politics best accounts for the policies being formulated and put into effect and second, that no one anticipated the effects of the changes. I have to ask: no one had anticipated the effects of the changes by what time? the 1970s? the 1980s? 90s? or later?

    I don’t know how an analyst of social and political affairs makes such fine distinctions as that between what is due to expediency versus power politics on one hand and, on the other, due to an ordinary work-a-day world resort to expedient means within what is and has persistently been the ordinary operations of power politics.

  17. Tony Wikrent

    It’s possible Mr. Stoller did not mention some things that are in the book – I have not read Ms. Krippner’s book, so I do not know. But there were other forces at work that also shaped the financialized future we now live in.

    First is the masterful political organizing done by the Mont Pelerin Society and the Chicago School. The history of this is well presented by Philip Mirowski and Dieter Plehwe, editors of the 2009 book The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective. It is fascinating, and more than a little discomfiting, to see how the Mont Pelerinites first debated, then selected, then promoted, various extremist ideas that today we now have to deal with as right-wing ideological dogma. One chapter that particularly comes to mind right now is Yves Steiner’s “The Neoliberals Confront the Trade Unions”:

    Hayek stressed the degree to which that question was important for the neoliberal movement at the founding meeting of the Society in April 1947. Indeed, after having deplored the “uncertainty and vagueness” of classical liberal ideas on union policy, Hayek delegated to the MPS the task of formulating “an appropriate program of labor or trade union
    policy.” As he insisted, “if there is to be any hope of a return to a free economy, the question of how the powers of trade-unions can be appropriately delimited by law as well as in fact is one of the most important of all the questions which we must give our attention” (Hayek 1949, 117).

    It is more than interesting to see these efforts by the Mont Pelerinites as the source of the intense antipathy to trade unions and organized labor that characterizes conservatives and neoliberals today.

    Second, and Stoller does mention him, and the general trend of profitability increasing for financial activities, but I think Numerian was correct in July 2008 to single out Walter Wriston and Citibank:

    How the system evolved into a debt trap for consumers is altogether different and relates entirely to the banking industry’s self-imposed pressures for profitability. The first ill-fated step in this development began over 25 years ago when Citibank under its chairman Walter Wriston set itself a target of an annual return on equity of 15%. This was a shock to its competitors, since most banks achieved ROE’s of 5% to 8%. But this was a Citibank that was the biggest and baddest bank anywhere, operating in over 100 countries, inventor of the ATM and the certificate of deposit, and altogether drunk on its superiority.

    It actually began achieving 15% returns, but only by pressuring managers to reach for profit in any way possible. The result was predictable. Profits collapsed when loans to Latin American borrowers, which were high yielding but poor risk, turned bad. Something else was needed to achieved superior returns.

    Third – and I continue to be amazed at how little discussion is devoted to this – is the role of organized crime and its process of “going legit.” I do not think anyone can fully understand current USA political economy until they have read Gus Russo’s 2008 tome Supermob: How Sidney Korshak and His Criminal Associates Became America’s Hidden Power Brokers. Russo’s book is crucial reading for anyone trying to understand why America’s ruling elites are, well, so bad.

    There once were, in most every American city, old labor and socialist organizers, veterans of the labor strife of the 1920s and 1930s, you could sit down with in a neighborhood tavern, and during the course of an evening, well lubricated by a few pitchers of beer, and who would tell you more than you really wanted to know about who was actually running your town. How the police chief’s kids got really good paying jobs because the chief would not make too many inquiries about the prostitution on the West Side; or the numbers racket along the riverfront; or the freight pilferage at the airport. How the mayor’s wife was able to drive around in a brand new Cadillac because a certain tract of land had been quietly rezoned, to the advantage a mayoral crony. Such petty corruption used to be the stock in trade of good local investigative reporters at big metropolitan newspapers, back in the 1960s and 1970s, a nearly forgotten era when FCC rules made it nearly impossible for one or two corporate behemoths to own every major newspaper, radio station, and television station in one city.

    The important thing to realize is the systemic impact of such criminal activity, as the massive amounts of loot it generated had to be “invested” somewhere and somehow. We got a glimpse of it when some official – I think it was the head of the European Union central bank – admitted in a rare moment of candor in 2009 or there abouts, that the world financial system really only survived because of the liquidity provided by the narcotics and arms trades. In other countries, such as India and Malaysia, there are some economists and economic historians who have actually discussed how the British opium trade and wars imparted a lasting sense of “freedom from moral considerations” on certain institutions that are still around today. In USA, we get the grand-daughter of Al Capone’s accountant becoming Secretary of Commerce, and hardly anyone blinks an eye.

    But I am deeply gratified to learn of Ms. Krippner’s book. I have argued for years that liberalism and the New Deal stumbled badly, and never really recovered, from the decision, against the advice of many senior military commanders such as Douglas MacArthur, to engage in a land war in Asia, and the refusal to fund that war with tax increases.

  18. proximity1

    further to my comment above—

    Having read more of the Trajectories article, mentioned above, I can add that the article reads, infra,

    “What made all this a great read in the fall of 2008 was not that it diagnosed the receent crisis, but that it detailed the conditions for the rise of that crisis, but stopped in 2001. Greta Krippner saw (NB: in 2008) the historical roots of this crisis before we knew there would be a crisis. She detailed the conditions that invited crises.”

    Very well. Now, let me explain my previous comments. As is made abundantly clear in his book, first published in 2001– a good six or seven years prior to Krippner– French economist, Pierre-Noël Giraud, did all this— “diagnosed the receent crisis, …detailed the conditions for the rise of that crisis” and “saw the historical roots of this crisis before we knew there would be a crisis.” … “detailed the conditions that invited crises,” —- and he did it from as early as 2001 in Le Commerce des Promesses , 2001, reprinted Oct. 2009, (Editons Point/Seuil, Paris).

Comments are closed.