On Oct. 15, 1982, President Reagan beamed as his audience of 200 guests happily chatted in anticipation in the Rose Garden. The president was about to sign the Garn-St. Germain Act that deregulated the savings and loan banks. At the conclusion of the ceremonies, Reagan unwittingly made a profound utterance: “All in all, I think we hit the jackpot.” This gambling term is a symbolically accurate characterization of what followed.
The savings and loan debacle ended in the ruin of more than 500 federally insured S&Ls and the near death of another 500. In 1989, the elder President Bush presented a plan to close all insolvent S&L firms at an estimated cost of $206 billion. The sordid and tangled story of this 1980s financial horror is well covered in “Inside Job,” a best seller by three investigative reporters. The subtitle, “The Looting of America's Savings and Loans,” is enough to suggest the extent of the fraud, crime, deceit and dirty politics that were exposed.
In December 2010, another “Inside Job” was made public in the form of a documentary film. Again, investigative reporters uncovered the ugly, unsavory facts about another financial catastrophe precipitated by the greed and avarice of the investment bankers and other financial giants. And, as before, this same pattern of a virtual “looting” was made possible by the deregulation of banking by the repeal of the Glass-Steagall Act and other deregulation that separated savings banks from investment banks.
Several features of both of these financial crises deserve special attention because we do not seem to learn from these cyclical disasters. One repetitive feature is the tenacious resistance of the financial elite to any regulatory restraints to protect society from their excesses. They suppose that the magic words “free markets” cover up all sins. Then, too, they revert to the same behavior as soon as possible after public funds have saved their hides.
Scenes of interviews with academicians from the most-prestigious business schools revealed an alarming coziness with huge business and investment firms. Professors were the recipients of funds as advisers, lecturers and other contacts that literally shouted “conflict of interest.” When directly asked if they had any qualms about their close relationship, each professor crisply said, “None whatsoever.”
Another significant similarity was the lifestyle of the elites in both of these financial catastrophes. This pattern of social display was the focus of a now-famous study of class behavior more than 100 years ago. In 1899, Thorstein Veblen authored “The Theory Of The Leisure Class,” a book that irritated a considerable number of people. According to Veblen, the powerful and wealthy captains of industry were not the “fittest” in economic affairs — they were moral delinquents who exploited others in order to show off their material success.
Veblen saw modern capitalism as a money economy dominated by a leisure class whose goal was “conspicuous consumption,” “conspicuous leisure” and “conspicuous waste.” Social status was awarded according to one's ability to show material evidence of these three desirable goals. In Veblen's day and in all of the financial crises that followed, there was a predictable evidence of conspicuous consumption.
The latest proofs of arrival included super-sized yachts, penthouses, second or third homes in Florida and on one of the Caribbean Islands, corporate and private jets, huge art collections and automobiles. Many other lesser trinkets were useful in reinforcing the imagery of being on top.
We have never really taken seriously the warning offered 50 years ago by President Eisenhower about the dangers of permitting a “military-industrial complex” in a democratic society. It is no surprise, then, that we are not disturbed about an additional threat — the military, industrial-financial complex. As we now say, “they are too big to let fail.” The most recent reports about the efforts to reform the abuses of the financial elite show that they have the power to frustrate all attempts to get adequate reforms. They want the public to ignore the fact that deregulation was the primary cause of the need for the $800 billion to restore an economy damaged by the deregulation and failed monitoring of the financial institutions.
Those who want an adequate degree of social accountability understand that accountability is only possible with adequate regulation and enforcement. They must be prepared to be promptly resisted with shouts of “socialist.” However, it is clear that regulation is not ownership and that social responsibility is the goal — not ownership. A study of two cases of “Inside Jobs” could give us the wisdom to avoid a third.
Allan Powell is a professor emeritus of philosophy at Hagerstown Community College.