|The Cycles of Financial Scandal
by Kevin Phillips
New York Times
Wednesday, July 17, 2002
GOSHEN, Conn. -- America is at a turning point. Corporate scandals, the
fall of the stock markets, the sudden mobilizations in Washington of the
last few weeks to legislate against some of the more egregious corporate
abuses: they all indicate that the nation's attitude toward business is
changing. It is potentially a bigger change than many politicians
realize. What's unnerving them is that the payback from the market
bubble of the late 1990's is becoming apparent to Main Street. The
charts of the downside since March 2000 are starting to match the slope
of the earlier three-year upside.
Not that it's a new phenomenon. In the Gilded Age of the late 19th
century and again in the Roaring Twenties, wealth momentum surged, the
rich pulled away from everyone else and financial and technological
innovation built a boom. Then it went partially or largely bust in the
securities markets. Digging out is never easy. But this time, the
deep-rooted nature of "financialization" in the United States that
developed in the 1980's and 90's may make it even tougher.
Near the peak of the great booms, old economic cautions are dismissed,
financial and managerial operators sidestep increasingly inadequate
regulations and ethics surrender to greed. Then, after the collapse, the
dirty linen falls out of the closet. Public muttering usually swells
into a powerful chorus for reform =97 deep, systemic changes designed to
catch up with a whole new range and capacity for frauds and finagles and
bring them under regulatory control.
Even so, correction is difficult, in part because the big wealth
momentum booms leave behind a triple corruption: financial, political
and philosophic. Besides the swindles and frauds that crest with the
great speculative booms, historians have noted a parallel tendency: cash
moving into politics also rises with market fevers.
During the Gilded Age, the railroad barons bought legislatures and
business leaders bought seats in the United States Senate. In the last
years of the 19th century, one senator na=EFvely proposed a bill to unseat
those senators whose offices were found to have been purchased. This
prompted a colleague to reply, in all seriousness, "We might lose a
quorum here, waiting for the courts to act."
Over the last two decades, the cost of winning a seat in Congress has
more than quadrupled. Legislators casting votes on business or financial
regulation cannot forget the richest 1 percent of Americans, who make 40
percent of the individual federal campaign donations over $200. Money is
Speculative markets and growing wealth momentum also corrupt philosophy
and ideology, reshaping them toward familiar justifications of greed and
ruthlessness. The 1980's and 1990's have imitated the Gilded Age in
intellectual excesses of market worship, laissez-faire and social
Darwinism. Notions of commonwealth, civic purpose and fairness have been
crowded out of the public debate.
Part of the new clout and behavior of finance is so deep-rooted,
however, that it raises questions that go far beyond the excesses of the
bubble. In the last few decades, the United States economy has been
transformed through what I call financialization. The processes of money
movement, securities management, corporate reorganization,
securitization of assets, derivatives trading and other forms of
financial packaging are steadily replacing the act of making, growing
and transporting things.
That transformation has many roots. Finance surged in the 80's partly
because deregulation removed old ceilings on interest rates and let
financial institutions offer new services. The rising stock market, in
turn, drew money from savings accounts into money market funds and
mutual funds, turning the securities industry into a huge profit center.
Computers underpinned the expansion of everything from A.T.M.'s to
scores of new derivative instruments by which traders could gamble with
such dice as Treasury note futures or Eurodollar swaps. Meanwhile, the
Federal Reserve and Treasury Department proved during the 80's and 90's
that nothing too bad could happen in the financial sector, because
Washington was always ready with a bailout.
Supported so openly, rescued from the stupid decisions and market forces
that pulled down other industries, the finance, insurance and real
estate sector of the economy overtook manufacturing, pulling ahead in
the G.D.P. and national income charts in 1995. By 2000, this sector also
moved out front in profits. It also became the biggest federal elections
donor and the biggest spender on Washington lobbying.
The effects have been profoundly inegalitarian =97 and not just in the
loss of manufacturing's blue-collar middle class. In the last two
decades, as money shifted from savings accounts into mutual funds,
promoting the stock markets and the money culture, corporate executives
became preoccupied with stock options, compensation packages and golden
parachutes. "More" became the byword.
In the new management handbook as rewritten by finance, the concerns of
employees, shareholders and even communities could be jettisoned to
raise stock prices. Major companies could make (or fake) larger profits
by financial devices: writing futures contracts, investing in stocks,
juggling pension funds, moving low-return assets into separate
partnerships and substituting stock options for salary expenses. Enron
was only the well-publicized tip of a large iceberg.
A century ago, putting a new regulatory framework around abuses of the
emergent railroad and industrial sectors became a priority. This effort
largely succeeded. Whether another such framework must be put in place
around finance in order to safeguard household economic security is a
question that at the very least calls for a national debate. Whether the
current proposals are the beginnings of that debate or mere window
dressing remains to be seen.
Kevin Phillips is the author of "Wealth and Democracy: A Political
History of the American Rich."
Copyright 2002 The New York Times Company