[DEBATE] : (Fwd) Henwood on the 'crisis'
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Sun Sep 28 05:32:17 BST 2008
The Nation September 24, 2008
Crisis of a Gilded Age
By Doug Henwood
For the past two or three decades skeptics watched as deregulated finance
got ever more reckless, as the gap between rich and poor widened to a chasm
not seen since the turn of the last century, and they said, "Someday there's
going to be hell to pay for all this." But despite a few nasty hiccups every
few years -- the 1987 stock market crash, the savings and loan debacle of
the late 1980s, the Mexican and Asian financial crises of the mid-1990s, the
dot-com bust of the early 2000s -- somehow the economy regained its footing
for another game of chicken. Has its luck finally run out?
It might seem odd to link the current financial crisis with the long-term
polarization of incomes, but in fact the two are deeply connected. During
the housing bubble, people borrowed heavily not only to buy houses (whose
prices were rising out of reach of their incomes) but also to compensate for
the weakest job and income growth of any expansion since the end of World
War II. Between 2001 and 2007, homeowners withdrew almost $5 trillion in
cash from their houses, either by borrowing against their equity or
pocketing the proceeds of sales; such equity withdrawals, as they're called,
accounted for 30 percent of the growth in consumption over that six-year
period. That extra lift disguised the labor market's underlying weakness;
without it, the 2001 recession might never have ended.
But that round of borrowing only extended one that had begun in the early
1980s. At first it was credit cards, but when the housing boom really got
going around 2001, the mortgage market took the lead. Now households are up
to their ears in debt, and the credit markets are broken.
Borrowing is only one side of the story. As incomes polarized, America's
rich and the financial institutions that serve them found their portfolios
bulging with cash in need of a profitable investment outlet, and one of the
outlets they found was lending to those below them on the income ladder.
(That's one of several places where all the cash that funded the credit card
and mortgage borrowing came from.) They also poured their money into hedge
funds, private equity funds and just plain old stocks and bonds. That
twenty-five-year gusher of cash led to an enormous expansion in the
financial markets. Total financial assets of all kinds (stocks, bonds,
everything) averaged around 440 percent of GDP from the early 1950s through
the late 1970s. They grew steadily, breaking 600 percent in 1990 and 1,000
percent by 2007. With a few notorious interruptions, it looked like Wall
Street had entered a utopia: an eternal bull market. Regulators stopped
regulating and auditors looked the other way as financial practices lost all
traces of prudence. No figure embodies that negligence better than Alan
Greenspan, who as chair of the Federal Reserve dropped the propensity to
caution and worry characteristic of the central banking profession and
instead cheered the markets onward. As he said many times in the 1990s and
early 2000s, who was he, a mere mortal, to second-guess the collective
wisdom of the markets? He seemed to have no sense that markets embody no
collective wisdom and often act with all the careful consideration of a mob.
So while the proximate cause, as the lawyers say, of the current financial
crisis is the bursting of the housing bubble and the souring of so much of
the mortgage debt that financed it, that's really only part of a much larger
story. And while it's inevitable that the government is going to have to
spend hundreds of billions to repair the damage over the next few years,
there's a lot more that needs to be done over the longer term.
This is the point where it's irresistibly tempting to call for a
re-regulation of finance. And that is sorely needed. But we also need to
remember why finance, like many other areas of economic life, was
deregulated starting in the 1970s. From the point of view of the elite,
corporate profits were too low, workers were too demanding and the hand of
government was too heavy. Deregulation was part of a broad assault to make
the economy more "flexible," which translated into stagnant to declining
wages and rising job insecurity for most Americans. And the medicine worked,
from the elites' point of view. Corporate profitability rose dramatically
from the early 1980s until sometime last year. The polarization of incomes
wasn't an unwanted side effect of the medicine -- it was part of the cure.
Although we're hearing a lot now about how the Reagan era is over and the
era of big government is back, an expanded government isn't likely to do
much more than rescue a failing financial system (in addition to the more
familiar pursuits of waging war and jailing people). Nothing more humane
will be pursued without a far more energized populace than we have. After
this financial crisis and the likely bailout, it looks impossible to go back
to the status quo ante -- but we don't seem ready to move on to something
appealingly new yet, either.
This article appeared in the October 13, 2008 edition of The Nation.
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