20th century US capitalism and regulation

Regardless of your opinion of how much regulation or how much intervention the government should have in markets, in capitalism generally, I think it's interesting to take a look at the various cycles that have happened in the United States, both from an economic point of view and also from a regulatory point of view. If we start in the late 1800s, in the late 1800s so we've had the Civil War, we've had Reconstruction. You actually have a crisis, kind of a depression after the Civil War, but then after that depression, at the end of the 1800s, the United States comes roaring back. It becomes a major industrialized nation. And part of that industrializing process, you have some gentlemen who become very, very, very wealthy. You have Cornelius Vanderbilt. His wealth was in the rail and in the steamboats. John D. Rockefeller known by some people as the wealthiest man in history. That may or may not be the case, but he was definitely the wealthiest man in American history. If you inflation-adjust so some accounts will say he had 1.5 billion dollars. You might say, "Wait, I know of people "who have more than 1.5 billion dollars." If you inflation-adjust the amount of money that John D. Rockefeller had at the turn of the century it comes out to 400 billion to 600 billion dollars. This is a lot more than anyone that we know of in present times. You have Andrew Carnegie in the steel business. His net worth, if you look at it in a present value basis, is approximately 300 billion. You have people like JP Morgan. Although is net worth also huge, huge amount, but where his power was really .... Since he was in control of the financial world at that time, his financial power was tremendous. Maybe more than the type of power that these gentleman could wield. The amount of power that him and his associates controlled through their various holdings, some have said amounted to the amount of wealth in all of the United States West of the Mississippi. These are hugely powerful, hugely wealthy men. The type of power and wealth that we actually have not seen since. You can decide what you think of these people. On some level all of these people, I'm sure they were good entrepreneurs. I'm sure they were hard working, I'm sure they innovated in their own way but they were also known for back then that this might be why it would have given fuel to someone like Marx who would look at people like this and say, "Look, these people have so much power. "Labor has no power compared to them. "Some of the employees in some of these "companies, it's hard to really say that they are "independent human beings. "They're almost like slave labor. "They live on the campus. They have no rights. "People are dying while they're working "for some of these organizations." So you can decide where you will, but the reality is that these people were hugely, hugely, hugely wealthy, hugely powerful. Now you fast forward to the early 1900s and you start having a little bit of a backlash against these ... I guess the system in which these type of people can thrive. You have Teddy Roosevelt comes to power in 1901. One of the things ... He's famous for many things, but one of the things he's famous for is being a trust buster. When he talks about trust, a trust is really just a large corporation. The idea is, is that, "Look Standard Oil, "you have essentially taken control of the "refining and the oil industry in America. "You have become a monopolist. "You need to be broken up." This is anti-competitive. Remember, capitalism for the capitalist sake, for capitalism sake is maybe not that good of an idea. What we want is competition. What we want is innovation. What we want is incentives. If you control everything and no one can compete that's not helping anyone. So Teddy Roosevelt, it didn't happen during his administration but he kind of started the trust busting process, and in the next administration, in Taft's administration, you actually have Standard Oil being broken up. Just to get an idea of how big Standard Oil was, if you take Exxon Mobil, Chevron, Conoco, and pretty much every other major US oil company, put them together. I'm not saying it's the equivalent of Standard Oil. That's actually what standard oil was. When Standard Oil was broken up during Taft's administration, it was actually broken up into all of these corporations. You can look into it more. You could imagine how much power someone like that would hold. So the pendulum swung in one extreme at the end of the 1800s. Roosevelt comes in, once again Republican President, Very strong President. But he said, "Look, enough is enough. "This is too much. "This is not in the best interest of the American people. "We need competition." Then you fast forward even more. In the 20s you have this huge boom. Things are looking well. Whenever there is a boom, people look the other way. People think, "Oh we don't need much regulation. "We don't need much government intervention." But then booms, many times, almost always lead to busts. Then you have the Great Crash of 29, leads into the Great Depression. People are unhappy with Herbert Hoover. FDR comes into power in kind of the heart of the Great Depression. He stays President until World War 2. In his attempts to take the country out of the Great Depression, he has this New Deal set of programs. Some of the New Deal programs were essentially to make use of all the labor and industrial capacity that was going unused during the Great Depression. It was kind of this Keynesian Philosophy that if no one else is going to supply the demand to use all of these factories and use all of these people, the government will. There were these huge public works projects but there was also regulation getting involved here to kind of stop some of the things that were perceived caused the boom and the bust. You have the Glass Steagall Act, which is most famous for separating investment banking from depository institutions. Essentially saying the same people who are taking your deposits can't on the other side take your deposits and gamble with them in the stock market. This is when Social Security passed, once again providing a safety net, going slightly in the Socialist direction. Saying, "Hey look, we can't have, if we're a civilized, rich country, "we can't have people going hungry in the streets. "We can't have older people who have done "their work, who have contributed to society, "now all of the sudden that we're in the middle "of a depression, we can't have them starving to death. "Or not having them at least having a basic "level of existence." You have Social Security. Safety net is coming into play. You have Fannie Mae being created, which the Fannie Mae narrative plays all the way into 2008 and continues to be a part of the story with the American housing situation. What this is, is an organization that essentially can buy mortgages. Buying mortgages is it's essentially lending money to people for mortgages. The reason why the government did this, is the government ... This is a separate organization that implicitly had the backing of the government, which says that Fannie Mae can borrow from people but if for whatever reason one day Fannie Mae can't pay back its loans, the government will back it up. It will make good on those loans. What that allowed Fannie Mae to do is to borrow money at very low interest rates, essentially close to the rate that the US government could borrow at and then loan that money at very low interest rates to people who want to buy houses. So essentially subsidized home ownership. I should say not home ownership. Subsidized home borrowing. I want to make that clear because if everyone now has more borrowing power to buy a home, then most likely that will just increase the price of houses. So it's really not subsidizing home borrowing but that's a whole other topic. Once again the government is getting involved. Here they're trying to do a little bit of engineering. Once again this goes against letting the market do its thing. This is a distortion in the market. It's a distortion because once again it's anti-competitive. If someone else wanted to do what Fannie Mae did but didn't have the backing of the government it wouldn't be able to compete because it wouldn't be able to borrow money as cheaply. You keep fast forwarding. You get to Lyndon Johnson's Administration. Obviously there were other people in between. You get to Lyndon Johnson's administration and you have the Great Society. The Great Society, amongst other things, food stamps, war on poverty, Medicare, Medicaid, so once again saying, "Hey society needs "to have some base level of support for people." I'm not going to take sides one way or the other but the pendulum was definitely swinging in the direction of more social safety nets and more attempts to make kind of a level playing field and you can debate whether they were successful or not. The other thing, and this is completely unrelated to what this conversation is about but whenever someone learns about Teddy Roosevelt and Franklin Roosevelt in the same video it begs the question, "Were they related in some way?" It does turn out they were fifth cousins. Even more interesting, Eleanor Roosevelt, who was Franklin Roosevelt's wife, was Teddy Roosevelt's niece. There actually was a pretty close relationship between all of these Roosevelt's. Another interesting thing, I just found this on the Internet, Teddy Roosevelt was also the first President to ride in the open in an automobile. It's funny to see the secret service agents over here riding bicycles to keep up. Anyway, complete tangent. So you had, just to review where we are. End of 1800s you have what some people have called, if they want to be insulting of these people, the robber barrons. They have concentrated a huge amount of wealth. Then the pendulum starts swinging back with Teddy Roosevelt, Franklin Roosevelt and then Lyndon Johnson. Then you fast forward even through the 70s you still have kind of a fairly heavy regulation of many industries in the US. Jimmy Carter, who was considered quite liberal, you have to give him, if you are anti-regulation, give him some credit. He actually deregulated the airline industry and frankly that's why it's hard ... that's why airline tickets are actually fairly inexpensive if you look at them on an inflation-adjusted basis. Then the pendulum swings back again into less government, less regulation under Ronald Reagan. This is Ronald Reagan here. He is kind of most known amongst other things, I mean, some people think that he brought communism to the brink but he also was big on less government. From the story of the 1900s until then was kind of more and more regulation, more safety nets, more government, and then Ronald Reagan comes with less government and lower taxes, although he spent a ton on the military, and the military is government. What's interesting is in this period during the 80s you start having an economic boom. You could debate whether it's due to Ronald Reagan, or maybe it was due to things that were completely out of his control. Maybe it was due to automation and information technology starts becoming big and he has nothing to do with that but regardless to say, you do start having an economic boom in the 80s. Then the 90s it starts to accelerate under Bill Clinton. The interesting thing that you see is when things are good the temptation for government to regulate goes down and under Bill Clinton, who is a democratic, considered liberal, you have Welfare Reform, which does undo a lot of ... I guess it takes a more conservative take on welfare. It makes it harder to have welfare for longer periods of time. You also have the repeal of Glass Steagall, so the repeal of Glass Steagall. So even though Bill Clinton was considered liberal, maybe he would blame these things on having a republican congress, who forced him into it, or whatever else. The reality is it did happen under his administration. The government stepping out of welfare a little bit and allowing to or kind of a deregulation of banks. Allowing for investment banking and commercial banking to start getting comingled again. Then you keep forwarding through the Bush Administration once George W. Bush, I could put his dad in here in between. Actually he was forced to raise taxes so I can't really include him in the conversation of less government, and he would claim he was forced to do that because of democrats. All the way through all of these presidencies, while things were kind of on this upward march, you had this constant stream of deregulation and all the way until you get to 2008. You have a major, major financial crisis. Who knows, now sitting in 2011, where that pendulum will swing back, but there is a sense that maybe all of this went too far and probably the worst signs of this is this whole idea that emerged during the 2008 crisis of Too Big To Fail. Which is kind of the worst of Capitalism and Socialism. It's kind of like corporate welfare. It's like, not only are you not giving benefit to those who want to innovate or do well, you have these huge entities that control so much wealth, that control so much of the economy, and they get there by taking huge amounts of risks and as soon as they do incompetent stupid things that put all of us at risk, the government comes in to bail them out because essentially they are holding the economy hostage. If the government does not bail these characters out they might take the entire economy with them. My sense is that they tried to scare the government a little bit more to have the government believe that so they do get bailed. Regardless to say, it does leave kind of a moment in time where society, or at least American society, really the world, has to question how much regulation is appropriate? How much control over the financial system should private institutions be allowed to have? Fannie Mae is an interesting one. Because once again it's a government sponsored institution that was pseudo-private. It was kind of the worst of both worlds. Once again it's still being propped up by the government and it's a major distortion. It's a major distortion market but to some degree the government is afraid of letting it completely falter now because it would probably tank the economy to some degree. Anyway, hopefully you found that interesting. I just wanted to give you some perspective on the swinging of the pendulum between government regulation and more kind of capitalism without regulation that we've seen in the United States over roughly the last 100 or so years.