Read Inside Job for Free Online

adrift. And unfortunately, Americans were not, at that moment, ready to be told that America’s easy domination of the world economy was over,
and that Americaneeded to refocus on saving, improved education, information technology, tougher antitrust policy, energy conservation, and greater understanding of other
nations.
    Or perhaps, actually, Americans would have listened, if their political leaders had told them the truth. But they didn’t. They lied, and with occasional exceptions they have
continued to lie ever since. By 1980 America was ripe for a simplistic, reassuring story about how everything would be better if only taxes were lower, government regulation scaled back, and the
American military strengthened.
    With those crude ideas Ronald Reagan sailed into office, on little more than his grin and his optimism, in part because President Jimmy Carter did not offer a coherent alternative. Carter was
sincere, but he seemed ineffectual and timid. In contrast, and to the surprise of many, Reagan proved a strong president who accomplished much of his agenda—sometimes for good, often for ill.
Tax cuts and deregulation became the order of the day. Even from the start, though, there was a big element of dishonesty in Reagan’s strategy. He cut taxes, but not government
spending, so America’s economic recovery came in part from unsustainable deficits. Government officials claimed that tax cuts would pay for themselves, which they knew was a lie. And what
they called “deregulation” was often simply political corruption. Lobbyists and industry executives were appointed to run government agencies, and several industries sharply increased
their spending on political donations, lobbying, and revolving-door hiring.
    Nowhere was this clearer than in finance. It was in financial services that the Reagan administration initiated America’s descent into criminality, financial crisis, political corruption,
inequality, and decline.
    Banking in 1980
    WHEN REAGAN TOOK office, the American financial sector was still organized according to laws enacted in response to the Great Depression—the
so-called “New Deal”.
    Banks and bankers had compiled a terrible record in the 1920s—creating financial bubbles, misdirecting deposits for their own personal benefit, and off-loading bad
loans onto their customers in the form of fraudulent investment funds. 1 Excessive leverage, fraud, and Ponzi-like behaviour were widely regarded as having
contributed to the 1920s bubble and the Great Depression.
    The New Deal laws were intended to remove such temptations, or at least limit their damage. The 1933 Glass-Steagall Act forbade any bank accepting customer deposits to also underwrite or sell
any kind of financial securities. 2 The Securities Act of 1933 and the Securities Exchange Act of 1934 required extensive financial disclosure by
publicly-held companies and investment banks, and created the US Securities and Exchange Commission to police them. Also in response to the Depression, in 1938 the US government created Fannie Mae
to purchase and insure mortgages issued by banks and savings and loan institutions (S&Ls), once again under strict regulation. The Investment Company Act of 1940 regulated asset managers such
as mutual funds.
    As late as 1980, this structure remained in place. Commercial banking, investment banking, residential mortgage lending, and insurance were distinct industries, tightly regulated at both the
national and local levels, and also very fragmented, with no single firm or even group of firms dominating any sector. Commercial banking was a stable, dull industry. Most bank branches closed at 3
p.m.; “banker’s hours” allowed for lots of time on the golf course. There were strict limits on branches outside a bank’s home state; interest rates were tightly regulated.
The industry was divided roughly between a few big “money centre” banks, headquartered primarily in New York City and Chicago,