This comment, left at Robert Reich's blog in response to this post, is about the best description of how we got here, and where we are headed if we don't do something drastic:
Jennifer said...Reich gets some pretty smart comments on his blog. Many of the commenters there praised Jennifer for this comment, and posted it on their blogs. I am doing it too. She's a smart cookie!
Funny, the one observation I don't see anyone in the media or government making is this one: when you get to a certain level of wealth disparity, consumer economies cease to function. I'm not an economist, so maybe I'm just naive, but it appears to me that the reason for both the mortgage mess and the resultant mortgage-backed securities mess has the same proximate cause: gross maldistribution of wealth. By 1998, the wealthiest 10% of Americans owned 70% of the nation's wealth, while the poorest 40% owned 2/10ths of 1% of the nation's wealth. That should have been a red flag - when almost half of the people in the country have no wealth (discretionary income), you aren't going to have the level of discretionary spending necessary to keep a consumer economy moving. This could have been addressed by smart policy. Instead, we got the Bush administration, whose answer to the problem was to shift even more wealth to that top 10%, via income and estate and various other tax cuts. From the time the recession started in early 2001, there was no action to move the needle back in the other direction to stimulate consumer demand. Meanwhile, while US productivity rose by some 20% from 2000 - 2007, the workers responsible for those gains got none of them. Their wages remained stagnant as gas rose by 300%, health insurance by 100%, food by 50%, home heating by 100%...people were going into debt just to keep up with paying for the bare necessities of living, not for profligate consumer spending. As noted, consumer spending remained rather flat throughout the period. How many times did we hear that "housing is the engine driving the economy!!!"? That was the case because every other sector wasn't gaining ground at all. The question that a lot of us ordinary folks were asking at the time - not the finacial "experts" at the WSJ or on CNBC - was "how is this possible"? How could people so maxed out in consumer debt that they couldn't afford to buy more cheap Chinese crap at Wal-Mart afford to buy $300,000 houses?
The answer is, obviously, they couldn't.
Here's where the wealth maldistribution enters into the picture. If you think of the economy as a poker game, where one guy is sitting on all the chips, the only way the game can keep going is if he loans some of his chips to the other players. This is what was going on in the mortgage lending boom. The few guys who had all the money were finding problems with where to put all that money where it would earn a return. With consumer sectors of the economy remaining flat...well, you can't earn a return in manufacturing or retail when everyone is too maxed out in debt to buy your product. So, they threw that money into the mortgage market instead, on the theory that real estate is always a "safe" investment, since it is a tangible asset that "always" increases or holds its value. Unless, of course, the people to whom you're loaning money to buy that asset can't afford it and default. Even then, it's not a problem if the default rate stays low - you can just re-sell the asset. But when everyone has the same idea, the demand for borrowers exerts downward pressure on lending standards, more and more of the borrowers are bad risks, and when they default, there's no one remaining who's qualified for buying the asset - and certainly not at the current inflated value.
I suspect the same thing happened with the mortgage-backed securities boom - the few people who have all the money couldn't find any better place to put it to generate a return, so they threw it into an investment backed by a house of cards - or in this case, backed by a lot of houses of cards.
Bottom line: too few people have too much of the money, and it's stifling the economy for all of us. The maddening thing is that policy implemented thus far seems geared over all else towards making sure they don't lose any of that money, which is not going to do diddly-squat to get things moving again. Loaning more money to people who can't afford to pay off what they owe now is a joke. Levelling the playing field is what's required. Unless, of course, we're content to become a second- or third-world nation in terms of wealth distribution. I don't know about the rest of you, but living in a cardboard shack beside an open running sewer in a shantytown, so that a handful of billionaires and multi-millionaires can sit on piles of money so large they'll never be able to possibly spend it all, has never been my idea of the American dream. The irony is that if their vision of the American dream were ever fulfilled, those piles of money they're sitting on would be very much smaller. I suppose that's not a problem, as long as they continue to have a lot more than everyone else has.
