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.As William Greider noted in his book on the FederalReserve (Secrets of the Temple, Simon & Schuster, 1987), the Democ-rats were so demoralized by the high inflation of the Jimmy Carterpresidency that they supported the deregulation of banking in 1980.Greider says rightly that the Depository Institutions and MonetaryControl Act proved to be an appropriate prelude to the 1980s.Thepolitics of deregulation accurately forecast the political preferencesthat would prevail in the new decade, which interests would be servedand which would be pushed aside.The free-market terms establishedby the measure cleared the way for finance; unregulated interest ratesallowed an era of unprecedented prosperity to unfold for the ownersof financial wealth.Other sectors, the ones most dependent on bor-rowed money, housing agriculture, industrial production and labor,consumers, would absorb the consequences. Shiller notes that the scrapping of state usury laws in 1980s madeeffective oversight over the subprime market crucial, since it was nowpossible for the originators of loans to charge high enough interestrates to cover the increase in defaults and foreclosures made in-evitable by looser lending standards. Yet the expanded regulationnever came, and over time during the 1990s and into the 2000s, a shadow banking system of nonbank mortgage originators was al-lowed to develop without anything like the regulation to which banksare subject (Subprime Solution).For a time, this did not seem to matter.In America, the baby boomergeneration bought the liberation mantra peddled by a troika of policymakers, Wall Street, and bubblevision TV stations such as CNBC,where bulls were twenty times as likely to be invited to air their viewsas were bears.Technology also played its part, since the new breed ofday traders could sit hunched over their computer screens, confident the odd couple 149in the belief that they were fully in command of their own financialdestiny.There was a cauldron of bubbling ingredients ready to cometo the boil.William McChesney Martin, one of Greenspan s prede-cessors as Fed chairman in the 1950s and 1960s, once argued that itwas the duty of the central bank to take away the punch bowl just atthe moment the party was starting to swing; Greenspan s approachwas to add a few extra jiggers of high-grade hooch and give the punchbowl a vigorous stir.Fleckenstein is particularly scathing about the emergency cut ininterest rates in October 1998.This was a period when Russia s debtdefault had led to the enforced Fed-orchestrated bailout of the hedgefund Long Term Capital Management.The Fed had already cutrates by a quarter point the previous month and the stock market,despite its declines since July, was up on the year by 3.5 percent.Theminutes of the meeting show that no convincing case was put for ac-tion, but at Greenspan s behest the FOMC cut rates anyway.The Greenspan put, the notion that the Fed would place a floor underthe stock market whenever it ran into trouble, was born.Flecksteincalls this decision one of the most irresponsible acts in the historyof the Federal Reserve. Greenspan ruled out actions by the Fed that might have stoppedthe bubble inflating.The Fed had the power, under the 1934 Securi-ties and Exchange Act, to regulate broker loans or margin debtthat were used to buy shares.Speculators were able to borrow up to50 percent of the value of their stock purchases, and by early 2000 itstood at $265 billion an increase of 45 percent in four months andits highest since the Wall Street crash of 1929.Greenspan insisted intestimony to Congress that tightening margin requirements wouldhave no impact on share prices.Such masterly inactivity was, of course, entirely consistent withGreenspan s lop-sided logic that nothing could or should be done todampen Wall Street s spirits in the good times, but it was then theduty of the central bank to act as a grand soup kitchen to high financewhen the bubbles burst.The stock market collapse of 2000 broughtinflation down sharply and the Fed, fearing that America faced a pe-riod of deflation similar to that seen in Japan in the 1990s, panicked. 150 the gods that failedIt cut interest rates a total of thirteen times, bringing them down insuccessive steps from 6.5 percent to 1 percent.Even The Economist,the house journal of the New Olympians, was censorious
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