Two Decades of Greed - The Unraveling

The following article originally appeared on OpEdNews.com.

We are currently in the midst of a Fourth Turning. This twenty year Crisis began during the 2005-2008 timeframe with the collapse of the housing bubble and subsequent repercussions on the worldwide financial system. It is progressing as expected, with the financial crisis deepening and leading to tensions across the world. It will eventually morph into military conflict, as all prior Fourth Turnings have. The progression from High to Awakening through the Unraveling took from 1946 until 2006. The most treacherous period of the Saeculm is upon us. The intensity of a Crisis is very much dependent upon how a country and its citizens prepare for the Crisis during the final years of the Unraveling. The last Unraveling period in U.S. history from 1984 through 2005 was symbolized by Boomer greed, materialism, debt and selfishness. When Michael Lewis graduated from Princeton University in 1985 and joined Salomon Brothers, I'm sure he didn't realize that he would end up book-ending the Unraveling period in his two best-selling books about Wall Street.

In his latest book, The Big Short: Inside the Doomsday Machine, Lewis seems bewildered by the fact that his first book Liar's Poker, written in 1989, didn't dissuade college students from pursuing careers on Wall Street. If Lewis had read The Fourth Turning by Strauss & Howe when it was published in 1997, he would have understood why the people on Wall Street couldn't change. The generations were just acting out their part in a grand never ending cycle. Lewis explains what he thought would happen:

"I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous--which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people's money, would be expelled from finance."

Michael Lewis was a 24 year old Generation X Ivy League graduate who ended up on Wall Street at the outset of the Unraveling. He was flabbergasted by how clueless youngsters could pretend to know what they were doing while taking home phenomenal amounts of money. He was sure it would end in short order. But he was wrong. It built to a decadent crescendo two decades later. It took longer than he expected, but the rebellion is beginning now:

"I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents' world when you can buy it, slice it up into tranches, and sell off the pieces? At some point, I gave up waiting for the end. There was no scandal or reversal, I assumed, that could sink the system."

The period from 1984 until 2005 was classified by Strauss & Howe as the Third Turning Culture Wars. They describe this period in the following terms:

"The Unraveling opened with triumphant "Morning in America" individualism, and slowly drifted toward pessimism. Personal confidence remained high, and few national problems demanded immediate action. But the public reflected darkly on growing violence and incivility, widening inequality, pervasive distrust of institutions and leaders, and a debased popular culture. National consensus split into competing "values" camps."

Deregulation Decade

"The crew of the space shuttle Challenger honored us by the manner in which they lived their lives. We will never forget them, nor the last time we saw them, this morning, as they prepared for their journey and waved goodbye and slipped the surly bonds of earth to touch the face of God." Ronald Reagan

The Unraveling began during the 2nd Reagan term with the "Morning in America" feel good landslide re-election campaign. The Dow Jones Average on January 1,1984 was 1,259. The National Debt was $1.6 trillion. The oldest Baby Boomer turned forty-one in 1984, with the youngest just twenty-four years old. This generation of 76 million over-indulged spoiled social activists is the proverbial pig in a python. Whatever path this generation chooses to take transforms the country for better or worse. The term Yuppie was coined in the early 1980's as the egocentric Boomers poured onto Wall Street beginning their upwardly mobile perfectionist careers. The country was exhausted from the 1960s turmoil and the depressing 1970s. Failed presidencies, oil shortages, raging inflation, and American hostages had left an America that was looking for a renaissance. Ronald Reagan's first term required extreme measures by Federal Reserve Chairman Paul Volcker to break the back of inflation. By raising interest rates to 18 percent, Volcker set the stage for a 20 year bull market in stocks and bonds. Reagan survived an assassination attempt, the U.S. military conducted a successful operation in Grenada, Reagan fired 11,000 air traffic controllers, and an unprecedented peace time military buildup was initiated. This created an atmosphere for economic revival, led by the Boomers.

A new laissez faire era heralded by Ronald Reagan was based on his belief that government was the problem, not the solution. His goal was to cut the size of government while slashing taxes and unleashing the animal spirits of the free market. Reagan was a rhetorical genius. It is a shame that his soaring rhetoric did not match what actually ensued. The basis of Reaganomics was:

1. Reduce government spending,
2. Reduce income and capital gains marginal tax rates,
3. Reduce government regulation of the economy,
4. Control the money supply to reduce inflation.

Reagan undoubtedly succeeded in radically cutting the top rates on individuals from 70 percent to 28 percent. Of course, the only people affected by the top marginal rates are the rich. These tax cuts did not benefit the middle and lower classes. The benefits were supposed to trickle down to these people.

Corporate tax rates were decreased from 50% to 38% by the end of Reagan's term. Corporate America was delighted. The tax savings permitted profits to soar. This additional capital could have been used to invest in the business. The Harvard trained CEOs decided it was more beneficial to pay them outrageously high compensation and to buy back their own stock in order to inflate EPS.

http://dontmesswithtaxes.typepad.com/photos/uncategorized/2008/08/22/oec...

The tone for the next twenty years had been set. Reagan's policies did reignite the animal spirits of America. Reagan's defense buildup increased annual spending from $303 billion in 1980 to $426 billion in 1988, a 40% surge. This most certainly contributed to the collapse of the Soviet Union. They were a hollowed out oak tree and Reagan's defense buildup was the gust of wind that blew the rotting tree over. His achievements were great, but his failure to reduce government spending will haunt the country for decades and planted the seeds of economic disaster. The Federal Government spent $590 billion in 1980. In 1988, Federal Spending had grown to $1.064 trillion. Rhetoric did not translate into action. Politicians have always been good at following through on promises that buy them votes. The tough stuff can be pushed off to the next guy.

Click here to read the article in its entirety