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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.
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The reality is that government debt as a % of GDP was on a downward trajectory for 30 years, bottoming in the late 1970s at 45%. Reagan cut taxes and doubled spending during his eight year reign. This initiated the launch procedure for a US government debt rocket. It sent a message to the world and to its citizens that debt was not a bad thing. Interest rates were in the midst of a quarter century long decline, so the debt became more serviceable as time progressed. There was no reason to save and invest when government and consumers could borrow and buy what they wanted today. This was the attitude that began to emanate during the early 1980s. Total government debt as a % of GDP skyrocketed from 45% to 80% during Reagan's eight year presidency. The National Debt grew from $908 billion to $2.6 trillion, a 286% increase. The massive increase in debt without apparent negative consequences gave politicians and Baby Boomers the green light to live it up today and not worry about tomorrow.
The 1980's proved to be a confidence building decade after two decades of tumult. With the most egocentric self centered generation in the history of the world entering the prime of their careers, a double shot of renewed confidence and debt accumulation began a cycle of greed and hubris like none ever seen on earth.
Fragmenting Culture
"I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA" Michael Douglas as Gordon Gekko
The self-absorbed yuppies' goal of wealth, power, and material possessions was captured accurately in the 1987 movie Wall Street and Thomas Wolfe's fantastic 1987 novel Bonfire of the Vanities. It seems that 1987 marked the high point of the Unraveling period. The Dow Jones Industrial Average had grown from 824 at the beginning of the decade to 2,700 by September 1987. The Boomer heroes of unbridled greed were Michael Milken, Ivan Boesky, Carl Icahn and Boone Pickens. Leveraged buyouts, where corporate raiders used huge amounts of debt to takeover companies, taking them private, firing thousands of workers, spinning it off as an IPO, and reaping enormous profits, were hailed as the savior of free markets by Wall Street. These deals generated gigantic fees for the firms advising on the LBOs. This Boomer led societal mood of wealth accumulation at the cost of gutting corporations and screwing the working class became ingrained in the fabric of America.
More Wall Street "inventions" like program trading, portfolio insurance, and arbitrage combined with hype and hubris to cause a 508 point crash on October 19, 1987. This 22.6% one day drop was the largest percentage decline in history. This once in a lifetime event scared the average investor out of the market for years. This event also unleashed a 20 year reign of banking terror, as the Greenspan Put was born. Alan Greenspan became Federal Reserve Chairman in August 1987. His 1st major act was to pour billions of liquidity into the market after the Crash. This was the 1st of many risk enhancing acts by Greenspan over the next two decades.
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Oliver Stone completed his film Wall Street before the crash. He captured the battle between Boomer gluttony and the work ethic of the average American worker. It was essentially a morality play between the slick oily Gordon Gekko and the old union leader looking out for the best interests of his fellow workers. They battle for the soul of Charlie Sheen's Bud Fox character. The film goes in depth into the immoral culture of Wall Street. Inside trading on non-public information is business as usual. Companies aren't seen as a productive part of society, but as pawns in a giant game of chess played by the "Big Swinging Dicks" on Wall Street. The workers are seen as liabilities that can be shed in order to boost short-term profits. Maximizing returns as soon as possible was all that mattered to Gekko and real life sharks on Wall Street. The movie's message was clear. Unrestrained free-market capitalism with no principles is destructive for society. The movie isn't anti-capitalism. It distinguishes between the cynical, quick buck culture of the Boomers and the moral hard working culture which had built America. Both Oliver Stone and Michael Lewis thought that their works of art would deter young people from vapid careers on Wall Street. Instead, young MBA students saw these stories of greed as an exciting beckoning to riches, morality be damned.
