Solving the Crisis

It’s been a while since the events of 2007-2008 unfolded, ending in the thunderclap of lost houses and broken dreams, of sluggish economic performance to date. In many ways what happened was just another wave in a cycle of waves like it, most of them smaller, a few bigger. In many ways it wasn’t either. In many ways this one was personal. It threatened, and still does, to take out the whole post Cold War roiling capitalist victory. It threatened to end the groundwork that had made it possible for so many to enjoy prosperity in the wake of other historical capitalist trends, namely too slowly rising wages in respect to the pace of growth of the rest of the economy. Such a thing was very valuable to many and they will stop at practically nothing in their panic over their futures to try and set it right again. Deep down they know they have always been vulnerable, so they are wasting no time reacting in whatever way makes sense to them personally. Many have already decided that their once cherished relationship with their country and their government has got to go. They are prepared to jettison their president and all those who stand in the gap with him against what evils may come in order to express their collective fear that it may be over for them economically. They are prepared for finger pointing and scape goating, dejected howling and the retransmission of vile libelous emails. Some may even become active politically!

A few days ago I got into it with a right winger at work. He was all over how it was ‘all those minorities who the government forced the lenders to loan to’ who brought this upon us. He was convinced it was that kind of affirmative action that brought this era upon us. To tell you the truth, I can’t say how much of this was or wasn’t due to that. Some part of it has to be since it was sub-prime loan failure in the first place that kicked the props out from beneath the wheels. In my conversation with him I tried to go back a little farther than that, though. My counter point to him was that since the 70’s real wages in the US have not kept pace with costs and this has helped bring in an age of borrowing unlike past ages. Further, the attitudes underlying the lower wages have also ushered in a  time of executive suite compensation in relation to the average worker not seen since probably the robber barons of the 19th century.

Let me just say, borrowing is not all wrong. Borrowing is actually how the money supply grows. The more economic activity related to borrowing, generally the better off an economy is. Generally.

I think what happened here was due to a little more than general borrowing. Too few of us seem to be able to recall the shenanigans that took place in loan origination offices all over the country in the years leading up to the crisis. It has become very fashionable to accuse bankers who lent money to people who they should perfectly well have known would never be able to pay it back, and then packaged those loans together into instruments they also sold only now painted over with AAA credit ratings, of being responsible for the mess. It has become fashionable to look for conspiracies in high places, to see ill intent in every office and every seat of power. It has not become fashionable to look at ourselves.

Speaking as someone who used to work in a payroll office I can speak first hand about the kinds of shenanigans that took place that helped set the mess up. They weren’t the kinds of mass market, conspiracy theory things. They were the acts of desperate people to catch up with the perception they had of where the rest of the country was going. In their desire to keep up they made the kind of open faced lies overstating their incomes (or understating them for tax purposes) that people do sometimes in order to qualify, lies that are never found out right away because everybody is making them. The entire system looked the other way at those lies. When I tried to say something about them, I was told to shut up and comply with the wishes of the people.

This isn’t to say that corruption didn’t extend to the top. Credit default swaps are not made by the little people. In fact, those who made them also put in place the bonus structures which provided incentive for sales, but didn’t differentiate between sales that bring in a profit and those that bring in a loss. They built the structure under which loan originators in the field suggested to people that they ought to do certain things in order to get a loan, or to borrow more rather than less, and got paid better for doing so.

In short, the way of Corporate America became the way of the short sighted. Executives started thinking more about bonus money too, rather than the state of their workforces. The average wage only suffered more as time went by. It got worse once the level of investment reached places like China in full force rather than as more of an idea. People said for years the sleeping giant would one day awaken. People were right. There was no more slack for going back at some point. Then it became really serious to keep up.

Housing was really hot. It was the central driver where people who didn’t have high tech enough qualifications could hide. Then $5 a gallon gas struck. All of a sudden those who lied a little too much couldn’t find the money in their monthly budget to drive that big F350(what a manly American thing) and make their house payment(which was probably too much anyway), and cellphone payment(which was also probably too much), and cable payment(again way too much), and buy groceries(the cheapest of the overpriced things people buy every month). Something had to give. Naturally, people let their mortgage payments slide, thinking they would catch up. After things got really bad that may have turned out to have been a bad choice, but all of those $200 a month cell phones on the new skid row were now suddenly indispensable. They were the only way to find work. Funny that. Tech is now a part of reality. It wasn’t so much before. Borrowing more rationally might also be a part of the new reality, but the jury is really still out on that one.

 

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