The Cycles of Financial Scandal

GOSHEN, Conn. — America is at a turning point. Corporate scandals, the fall of the stock markets, the sudden mobilizations in Washington of the last few weeks to legislate against some of the more egregious corporate abuses: they all indicate that the nation's attitude toward business is changing. It is potentially a bigger change than many politicians realize. What's unnerving them is that the payback from the market bubble of the late 1990's is becoming apparent to Main Street. The charts of the downside since March 2000 are starting to match the slope of the earlier three-year upside.

Not that it's a new phenomenon. In the Gilded Age of the late 19th century and again in the Roaring Twenties, wealth momentum surged, the rich pulled away from everyone else and financial and technological innovation built a boom. Then it went partially or largely bust in the securities markets. Digging out is never easy. But this time, the deep-rooted nature of "financialization" in the United States that developed in the 1980's and 90's may make it even tougher.

Near the peak of the great booms, old economic cautions are dismissed, financial and managerial operators sidestep increasingly inadequate regulations and ethics surrender to greed. Then, after the collapse, the dirty linen falls out of the closet. Public muttering usually swells into a powerful chorus for reform — deep, systemic changes designed to catch up with a whole new range and capacity for frauds and finagles and bring them under regulatory control.

Even so, correction is difficult, in part because the big wealth momentum booms leave behind a triple corruption: financial, political and philosophic. Besides the swindles and frauds that crest with the great speculative booms, historians have noted a parallel tendency: cash moving into politics also rises with market fevers.

During the Gilded Age, the railroad barons bought legislatures and business leaders bought seats in the United States Senate. In the last years of the 19th century, one senator naïvely proposed a bill to unseat those senators whose offices were found to have been purchased. This prompted a colleague to reply, in all seriousness, "We might lose a quorum here, waiting for the courts to act."