The End of America’s Financial Contract

Ah, the 1980s. I feel bad for people who didn’t grow up during that decade.

America was the undisputed King of the World.

I watched Lawrence Taylor beat up opposing quarterbacks every autumnal Sunday of my youth. Joe Montana won four Super Bowls. Some guy named Bo Jackson was an All-Star in both football and baseball. Nolan Ryan, Roger Clemens, and Donnie Baseball were the diamond’s elite. Wayne Gretzky rewrote the record books in ice hockey. Magic and Larry dominated the NBA, soon to hand it over to Michael Jordan. Mike Tyson was a 22-year-old heavyweight champion. Ayrton Senna and Mario Andretti were racing royalty.

Not to mimic a certain Veep, but I was born in the middle of the middle class. And it was terrific. We had everything because most stuff was still affordable.

The 1980s was the decade of financial innovation. Moreover, Wall Street got Main Street to buy into those innovations. Anyone — everyone — could be the next George Soros or Julian Robertson.

The deal was, “Work your ass off. Deposit your savings into these new special accounts. Retire richer than you could ever imagine.” It wasn’t so much a “social contract” as a “financial contract.” It’s been 35 years since the end of the 1980s. Can we say things have worked out the way we imagined?

Yes… and no.

First, let’s look at the innovations. Next, we’ll see the results. Finally, we’ll attempt to see what may come next around the corner.

1980s: Financial Innovations

The 1980s saw several major financial innovations that reshaped markets, investing and corporate finance. Some of the most significant include:

401(k) Plans (Defined Contribution Plans)

Invented in the late 1970s but widely adopted in the 1980s, 401(k) plans shifted retirement savings from employer-managed pensions to employee-directed accounts. These plans allowed workers to defer income taxes on contributions, making them an attractive alternative to traditional pensions. This helped fuel the demand for mutual funds.

Mutual Fund Boom & Index Funds

Mutual funds existed before, but everyone started investing in index funds in the 1980s. John Bogle’s Vanguard championed the idea of low-cost index funds. Investors could get the same return cheaper if they avoided active management. Money market mutual funds also gained traction, offering a liquid alternative to traditional bank savings. ETFs would launch in 1993.

Stock Index Options & Futures

The Chicago Mercantile Exchange (CME) introduced the S&P 500 futures contract in 1982, which became a critical tool for portfolio management and institutional investors to hedge market risk. The Chicago Board Options Exchange (CBOE) launched stock index options in 1983, allowing investors to hedge or, more likely, speculate on market movements. These derivatives increased liquidity and contributed to market volatility, particularly during the 1987 crash.

Corporate Share Buybacks

The SEC’s 1982 Rule 10b-18 allowed companies to repurchase their shares for the first time in modern times. Since then, the surge in stock buybacks has acted as a bid under the S&P 500. This shift changed corporate finance, emphasizing shareholder returns over traditional reinvestment of profits into research and development or expansion.

Honorable Mention: Michael Milken invented junk bonds. KKR and Blackstone used leveraged buyouts (LBOs). Fannie Mae, Freddie Mac, and Ginnie Mae promoted mortgage-backed securities. Financial engineering, derivatives, and program trading were also widely used in the 1980s.

The Outcomes

The Overfinancialization of the Economy

The economy became increasingly dependent on financial markets, with corporate profits and GDP growth more closely tied to financial engineering (stock buybacks, mergers, derivatives) than to traditional business expansion (manufacturing, job creation, R&D). Short-term stock performance became the primary goal of many companies, rather than long-term investment in workers and productivity.

As a result, jobs became more unstable as companies focused on cost-cutting and efficiency (outsourcing, automation, and layoffs). Workers’ income gains stagnated, while executives and investors saw exponential wealth growth.

From Pensions to 401(k)s

Instead of guaranteed pensions, workers were responsible for their retirement savings through 401(k)s. This created a stock market boom as trillions of dollars flowed into mutual funds, but employers transferred investment risk to employees.

Many workers didn’t contribute (and still don’t) or weren’t financially literate enough to manage retirement accounts effectively. Market crashes (the 2000 dot-com bubble and the 2008 financial crisis) wiped out savings for those who didn’t have the time, expertise to manage risk, and guts to get back in the market after the crashes. (Hindsight is 20/20.) Many low-income workers never participated in 401(k) plans due to low wages or a lack of employer matching.

The Rise of Index Funds & Passive Investing

Low-cost index funds helped investors achieve market returns without needing stock-picking skills. Institutions (hedge funds, pension funds, sovereign wealth funds) benefited the most from these funds by deploying massive capital.

While passive investing has been great for those who have money in the markets, most Americans have little or no exposure to equities. The median American household holds a small amount in stocks, meaning the wealth created in the markets is not evenly distributed.

Junk Bonds & Leveraged Buyouts (LBOs)

Junk bonds enabled corporate raiders to buy companies using debt, restructure them, and sell them at a profit. This led to corporate takeovers, consolidations, and cost-cutting measures prioritizing shareholder value over employees.

As firms laid off workers, closed factories, and restructured for quarterly gains rather than long-term wealth creation, wage stagnation increased. Companies focused on reducing labor costs to service debt. The rise of private equity firms (descendants of 1980s LBO firms) has further concentrated wealth among the financial elite.

Stock Buybacks & Executive Compensation Boom

The SEC’s 1982 ruling allowing stock buybacks led to companies using profits to repurchase shares rather than invest in workers or R&D. Executive compensation skyrocketed, with CEOs and upper management receiving stock-based pay.

Wages remained stagnant, while the wealthiest saw massive gains in stock-based compensation. “Trickle-down economics” gains didn’t happen, as wealth stayed at the top rather than being reinvested into broad-based economic growth.

Mortgage-Backed Securities (MBS) & Financial Engineering

The securitization of mortgages expanded homeownership temporarily but led to predatory lending practices and systemic financial risk. The 2008 financial crisis demonstrated how excessive debt, poor risk management, and reliance on complex financial products weren’t risk-free but “very risky” indeed.

Millions lost homes in the foreclosure crisis. Taxpayer bailouts saved the financial system, but ordinary people received little relief. Many working-class Americans never recovered the wealth lost during the Great Recession.

Automated & High-Frequency Trading

Program trading and high-frequency trading (HFT) made markets more efficient and volatile. By exploiting millisecond advantages, institutional investors gained an edge over retail investors.

Already at a disadvantage, retail investors faced even steeper odds of actively managing their investments. As a result, market crashes (like 1987’s Black Monday and the 2010 Flash Crash) became more extreme, wiping out small investors before they could react.

Why Most Americans Haven’t Benefited

The top 10% of Americans own 89% of all stocks and mutual funds, meaning most of the stock market’s growth over the past 40 years has benefited only the top 10% of the population.

Since the 1980s, real wages have barely increased, while financial assets (stocks, real estate) have skyrocketed. Those who don’t own assets (or entered the market late) missed out on the wealth boom.

Many Americans lack the financial literacy to fully take advantage of 401(k)s, investing strategies, or the tax benefits of compounding over time. High fees and bad financial advice often erode the returns for retail investors.

The transition from pensions to 401(k)s disproportionately affected lower-income workers, who lacked the disposable income to invest. Automation, outsourcing, and corporate restructurings driven by financial engineering also reduced job security.

Many Americans have been pushed into debt (student loans, credit cards, mortgages) rather than encouraged to build wealth through asset ownership. The rise of easy credit (another financial innovation) has burdened the working and middle class while enriching lenders.

What Might The Donald Do?

One thing’s sure: Americans have finally opted out of its “financial contract.”

It’s easy to see why. While financial innovations promised broader wealth creation, they ultimately widened economic inequality. Most benefits have flowed to those already with capital (the investor class), while the average American remains trapped in a cycle of debt, low wages, and market volatility. John Q. Public hasn’t been able to grow his assets like the Big Wigs promised him. As it’s evolved, the system rewards financial expertise and ownership rather than labor and savings. It’s made social mobility, a hallmark of the American Dream, harder.

If Donald wants to help his base, his policies must address wage growth, financial education, and the spread of easy-to-access wealth. I don’t envy him.