[Peace-discuss] Context and contradiction

[C. G. Estabrook]

	Crisis of a Gilded Age
	By Doug Henwood

It looks like someday finally arrived.

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.

http://www.thenation.com/doc/20081013/henwood