Transaction Man by Nicholas Lemann

Transaction Man by Nicholas Lemann

Author:Nicholas Lemann
Language: eng
Format: epub
Publisher: Farrar, Straus and Giroux


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In the 1980s it was becoming clear that the steady upward economic progress of the American middle class—which began with the New Deal and continued for almost half a century—was ending. Economic inequality began to increase; the idea had disappeared that, as a kind of truism, children would do better than their parents; the rewards of economic growth were going disproportionately to the people at the top.

These developments coincided with the great shift from an institution-based to a transaction-based society, which was making itself felt not just at Morgan Stanley but practically everywhere in the country. Just as politics had created the economic order that was passing, politics—by undoing many of the rules and arrangements the New Deal had created—was now assisting at the birth of the new order that was beginning. And soon politics would have to respond to the dislocations and discontents that the new order was generating.

The financial system, now roaring to life, had been essentially crisis-free for decades: low risk, low return. The failure of significant financial institutions, something that had been a constant in American history before the New Deal, was almost unheard-of. In the late 1980s that began to change. On October 19, 1987, financial markets around the world plunged more in one day than they ever had before, even during the crash of 1929, at least partly because large institutional investors had adopted some of the techniques of financial economics, such as automated, computerized trading that proceeded almost instantly in response to complex calculations about the direction of the markets, without any human participation in the decisions to buy or sell. During the same period, more than a thousand savings and loans—a third of the total number in the country—failed, substantially because the deregulation of a few years earlier had permitted them to make highly risky investments that had gone sour. Because the savings and loans had managed to keep their federal deposit insurance through deregulation, their failure became the government’s problem, and it wound up costing taxpayers well over $100 billion.

Back in 1984, a former aide to Ronald Reagan named Edwin Gray, who was the head of the federal agency that regulated savings and loans, had begun warning publicly that deregulation had gone too far and was introducing too much risk into the system. This got him treated as an unreliable, misguided, disloyal eccentric, especially by members of his own party. Alan Greenspan, then a paid consultant to one of the most aggressive savings and loans, who was soon appointed chairman of the Federal Reserve Board, the most powerful job in financial regulation, wrote Gray a long, admonishing letter, pointing out that many savings and loans were posting record profits. (Of the seventeen savings and loans Greenspan mentioned by name in his letter, fifteen were out of business four years later.) Gray resigned in 1987, just before savings and loans started failing en masse, and he was replaced by a savings and loan lobbyist.

One of the few members of Congress



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