I think I know what caused the financial collapse and inherent in the causes lie the solutions to our economic woes.
Long before the financial collapse, many made dire warnings because of the huge extension of credit in all contexts: federal government, states, corporations and individuals all were deeply in hock.
They were going into debt at unprecedented rates, but it wasn't really because people were so greedy, greedy at a rate never before experienced. The creation of unnecessary needs through advertising did play a part, but until the 1980's that combination was essentially working. People were making money and buying goods, and making money because they were making goods.
You hear people say it all the time now: "Oh, we don't make anything, anymore." This is hyperbole, but there is a basic truth to it; we import much more than we export, and many of our exports are intangibles.
|
Well, how are we buying things, then? People lost their well-paying factory jobs, or back-office jobs, or tech jobs and were reduced to low paying service jobs, because that was all there was. Was that the cause of the financial collapse?
It's true that huge financial empires, built on creating credit, grew out of the laissez-faire policies towards all business since 1980. Those houses of cards were not the reason for the financial collapse, either, but they were pretty flimsy.
No, the real reason for the financial collapse is the 28-year ascendancy of conservative politics and economics in the US, and especially its economic policy. The US has been the engine of the world economy since World War II. When we emerged from that war, unions were strong, taxes were steeply progressive, and we were producing everything for ourselves and everyone else. American industry was the most advanced in the world, but so were American workers: the healthiest, the best educated, the most productive and the best paid.
What happened in the 28-year conservative dominance was that while American workers were still the most productive, businesses decided that they cost too much. So, they set up factories abroad, or purchased more abroad, or eventually even outsourced white collar jobs like data analysis. Thomson-Reuters (a British-Swiss company), just closed down a whole section of their New York office, to transfer all their data analysis--for Latin American businesses, for example--to Poland.
That wasn't because Poles worked better, quite the contrary. New Yorkers worked longer hours, and processed the data in a much more timely fashion. The Poles were lagging way behind in the data they were analyzing and the quality of analysis even before T-R transferred the rest of the New York office's work to them. There was only one reason for the transfer: they could be paid one-fourth the New York wage.
This kind of outsourcing has been going on for years, which, you'll see, is directly related to the financial collapse.
And it hasn't just been going on in the US, this constant search by large corporations to find cheaper labor; as one country emerges from poverty and raises its pay-scale, corporations transfer their most labor intensive work to even poorer countries.
Therefore, American workers in order to survive, must compete with workers in Mexico, or China, or Vietnam, or Poland. That's one of the reasons why unions have gotten so weak; the other reason is government hostility, beginning with Reagan. The result is: American wages lag way behind productivity, but American workers still live in America on an American standard of living.
The explosion of credit was the financial system's response to Americans' distress at their falling standard of living. It filled a huge market need, which was why the financial system grew so large, and why financial creations became more and more imaginative--and more removed from reality.
Basically, the problem was that Reaganomics, Clintonomics, Bushonomics, enabled large corporations to take increasing percentages of the wealth they and their workers created. So, less and less of the value people created was left in their hands. While needs escalated, because of technology and increasing population density, most workers, hourly or salaried, were earning less (in buying power)--even though they were producing much more, and working longer hours.
Yes, the
financial collapse
really was caused because Americans were underpaid. Trying desperately to maintain their American standard of living--especially since TV so effectively pushed it--Americans borrowed big time. Credit has been our most expansive market for years. Wall Street saw a way to make even more money on this expanding credit market. What were investment banks trading, but derivatives of loans, mostly to homeowners in the form of mortgages. A "mortgage-based derivative" is a share in a large bundle of mortgages. Second generation derivatives might take bundles of bundles, with a mix of different kinds of mortgages, or mortgages of varying yields (interest paid), or different dates of maturation. As it became more complicated, this burgeoning market was built on increasingly flimsy foundations: a house of cards. No wonder there was a financial collapse.
|
But credit continued to expand, as people refinanced their homes because property kept on increasing in value, so they could borrow against that increase and still have both more wealth and more money. It was a way to adjust to their lagging pay, made possible by foreign competition (encouraged by tax policy) and weak unions.
Government policy made this all possible: it did away with regulations, such as the strict separation between commercial and investment banking established in the New Deal, or any kind of meaningful oversight. The Fed and the Treasury played a loose money policy: moderate inflation was good for the economy, i.e. good for the credit market. "Free" trade deals, at the same time, made it increasingly difficult for workers to unionize, or to demand higher wages, ergo a perfect climate for business.
Capital was in the driver's seat, because the government was bought and paid for. CEO earnings went through the roof, billionaires proliferated, corporate profits were high, even when they demanded that their unionized workers "give back" higher wages, so they wouldn't relocate to Tennessee--or Mexico, or China.
The sub-prime defaults were the jolt that began the financial collapse, but they weren't the cause. They were only the trigger. The housing depression is a rolling deflation, triggered by the fall off of markets that were only supposed to expand and increase in value; it is exacerbated by defaults next door. That's why the financial collapse is so hard to contain. When a couple of houses default in a neighborhood that brings down the value of all the surrounding homes, and people may default when they realize that their mortgage balance is for more than the house is worth, and they struggle to pay their premiums every month. Declining values escalate, affecting other neighborhoods, and so on.
But the financial collapse is really because the laissez-faire model is not sustainable. If you impoverish people in the largest consumer market in the world, so that you can produce goods or services more cheaply, who, eventually is going to be able to buy them? The credit market was spun on the transition from affluence to poverty. The financial collapse happened because people weren't getting better off; their incomes were declining, not increasing.
Between 73% and 82% of Americans, depending upon the poll, feel that the US is heading in the wrong direction. What the right direction is, they don't know.
The right direction is the opposite one from the one we've been traveling: the US should re-regulate businesses, strengthen unions and raise taxes on the wealthiest, while lowering them for the rest. The right direction to climb out from the financial collapse is to put money into tangibles, increase overall demand and the supply of money. Creativity will have to be curtailed in the financial system, which will have to get smaller, although my fellow New Yorkers might not want to hear that. The right direction is to invest in people: health care and education, and in leading technologies, especially in the energy sector--wind, solar, etc.--and in rebuilding crumbling infrastructure. The right direction does not include an even more expensive military.
Perhaps $850 billion isn't really enough. It might take that just to rebuild our bridges, roads, airports and water and sewer systems.
In the New Deal, FDR spent more on recovery programs than anyone had ever spent before, and the US climbed slowly out of the Great Depression, but the US didn't leave it behind entirely until the even more massive spending during World War II.
The amount of money the US is going to have to shell out now already dwarfs our World War II expenditures, but the economy is many times larger. The real question will be: how much can we borrow, or create, without completely destroying the credibility of the dollar. We could think of the money as 'investment.' It would be, in America's future, and probably the world's. Without massive amounts of money, well spent, the whole world will be impoverished for a long time to come.
With this investment, we could enter a whole new world, with environmentally friendly energy, with workers empowered, with inequality receding, and with a new, more sustainable prosperity shared by all.
The above is an outline of what I hope Obama can be pressured to do, if he's elected.
If McCain is elected (or, as looks more likely, steals the election), we will be in a deep depression for many years to come, because there is no possible way that he would repudiate
his class
and his politics, especially after he "won." We would truly follow the precedent of the Roman Empire in the fifth century, when Senators kept all the wealth during their long-lasting depression, until their Empire crumbled. After the empire fell, the Roman depression lasted until the Renaissance, a thousand years later.
Let's not repeat history!
