The “dismal science” is producing some real doomsayers these days. Doomsayer-ness is, of course, directly proportional to the amount of personal income (including stock options, executive jets and golden parachutes for bailing out of them) of the so-called “masters of the universe” who play with our currency, jobs, banks and pensions as though it were their personal Monopoly game.
They, guys like Bernake and Paulson and the ever-lurking in the background Mr. Greenbacks Greenspan, are doing a lot of doomsaying of late. They have invoked Code Red for of their economic version of 911 to scare the bejeesus out of us into sheepishly giving them $700,000,000,000 of our tax money with as few strings attached as possible.
Way back in 1962 I received a bachelor’s degree in Economics. A few years later, a third of my Ph.D. was devoted to urban economic and political economy. Those achievements don’t quite make me an “economist,” since I never really “did” economics beyond some economic base reports as a planning consultant. But I am much more of an economist than some of he right-wing clods and Libertarians from Mars who go to (anti) taxpayer meetings and think they know what the hell they are talking about. The supply of economic idiots well exceeds the demand. There is also a guy named Bush who reputedly has an M.A. from the Harvard Business School. I will put my B.A. up against that dolt any day.
Bush not only has batted 1000 in his personal business failures in oil drilling and baseball teams, he is the CEO of the biggest economic meltdown since the Great Depression. But we can’t put all of the blame on Georgie. No, his party shares that with him. He had help from his fellow Republicans.
Now the Repubs are between a rock (their contributors from Wall Street who want a bailout), and a hard place (their ideological aversion to what they see as impending “socialism”) and can’t seem to figure out, Harvard M.A.s, or not, what the hell to do. Bush has cajoled Republican congressmen (who would like to get re-elected) to go along with his Treasury Secretary (who owns millions of Goldman-Sachs stock), and acts like this was a crisis that sort of just came along, just now that it’s here—like his war in Iraq and hurricane Katrina—we must deal with it.
Well, here the B.A. in Econ from Le Moyne must instruct the (reputed) M.A. from Harvard in a little Econ 101. Here is how we got here, Georgie. So listen up, doofuss.
1. Your hero, Ronnie Reagan famously said in his first inaugural address, that “government is not the solution to our problem; government is the problem.” From that simple-minded base he started four processes—never levying new taxes and changing the tax code to favor the rich because he believed, as you do, in “trickle-down economics.” By the way, your father called it “voodoo economics.” Then he started the practice of “de-regulation” of everything he could, including the financial sector because, remember now, “government is the problem.” This did not stop him from creating the largest public debt (on behalf mostly of his defense contractor friends) until you bettered him. But then “supply-side” economics was illustrated for him on the back of a napkin. Ronnie was about as good an economist as he was an actor. But he became the “hero” of the Republicans.
2. This set up the preconditions for the perfect storm new are in now. Wealth was moved from the lowest to the richest, who now began using their credit cards with wild abandon, for everything. They built the largest private debt in the universe. The banks got rich on them. They were encouraged to keep buying what they don’t really need—big houses with three-car garages, SUVs as big as houses, expensive recreational toys, etc. The Chinese produced cheap crap from Wal Mart, television created a dozen “shopping channels,” and even when 911 happened the second thing out of Bush’s mouth was that we should “go shopping.” And when we were finished shopping we could continue spending money “on the tab” at the “tables.” Local governments (remember, all governments are evil) were fiscally hamstrung because the right wing “never raise a tax” mantra was extended to municipalities and school districts, but local government couldn’t raise debt the way the Fed does. So casinos and lotteries popped up everywhere, trickling down a bit of the take to hook the local governments.
3. Meanwhile, Reagan created the atmosphere that the rich deserved to be rich. The people, he workers, who he Republicans call the “strong fundamentals of the American economy,” were becoming convinced that there was “easy money” out there. They could play the stock market, too, buy junk bonds, maybe become a master of the universe themselves. Or, if that’s too complicated, they could (but you have op be a Filipino postal worker) hit the big Lotto by just scratching some numbers on a card. That usually didn’t work out, so both parents could go to work to keep up the consumption. But meanwhile the “deserved rich” were doing much better. They were arbitraging companies, outsourcing jobs, raiding pension plans, all under the non-watchful eyes of the de-regulated regulators. CEO’s were paying themselves in the hundreds of millions in salaries and stock options, but as long as gas was cheap and inflation was in check American workers were like the proverbial frogs in the pot of slowly boiling water. The Reagan financial legacy was that—as Dick Cheney has now famously said: “deficits don’t matter”—and regulations do matter either. So, we got the S & L Crisis of the late 1980s (with Neil Bush of Silverado in the middle of it and John McCain taking 200K in campaign contributions from Keating) and the idea that bailing out reckless financial institutions is OK, too.
The absence of war and the economic boost of the IT revolution kept the incipient drains of rising heath care costs, the elderly living longer, rising energy costs and lurking dangers of environmental ignorance in the background. But when the Bush administration came on more were slipping below the poverty line, more jobs were outsourced, and more companies were screwing their workers out of the pensions and other benefits.
4. Bush was the catalyst—the perfect combination of ideological stupidity to compliment corporate cupidity. We may never know whether it was uncanny prescience or dumb luck that caused Osama bin Laden to select his moment, but Bush was he perfect “target,” someone who would under-estimate a threat and over-react to its results. All that was needed was to light the fuse and Bush would destroy the American economy in a war of choice. The destruction of the American international reputation was a bonus. The war bled $10 billion/month into the Iraqi sand, allowed the Taliban back into Afghanistan, pushed inflation in America, sold of hundreds of billions of American debt to China and Japan. But never would a tax increase to pay for it would be levied so that Americans would know the true cost. Never would a draft be levied to show the true human cost. We have become a people who know the price of everything, and the value of nothing.
5. Americans, a people badly in need of an Econ 101 class, just didn’t get it. Frightened that they just might be forced to go to mosques and wear burkhas to the mall the bought four more years of Bush and his war and his de-regulation of Wall Street. The debt continued to be outsourced to China (along with more jobs) and he was the first president not to raise taxes during wartime (our longest wartime).
But Americans had money to keep up acting like the “richest country in the world.” Wall Street knew where that money was—in the very place that most Americans have most of their personal wealth—their houses. Enter the sub-prime bomb. Here’s how it works. First, tell Americans that their houses are worth a lot more than they are. Worth is tricky in economics, but this is no place to get into the territory of “value in use” and “value in exchange.” Suffice to say that inflated home prices (hence, inflated equity) would allow Americans to tap into all that “wealth” via the mortgage re-fi. Wow! Take that cruise, buy that boat, head for Vegas! Moreover, there was money to be made in commissions: get an adjustable rate mortgage for some guy who is unemployed and has alimony payments and a drug problem. No problem—until the Fed nudged its prime rate up a touch. Just wrap that crappy future default in with some other securities and sell the package everywhere you can, from Boise to Beijing. Nobody’s looking, nobody’s checking, everybody’s on he take, digging the delusion.
6. It couldn’t last. The metaphors abound—the bubble burst, the house of cards came down, the credit tsunami rolled over the banks and securities industry—things weren’t worth what they needed to be worth. The Fed had been pumping money into the bloated credit market for years, and a virtual Ponzi was in the making. Wall Street couldn’t resist getting into the mortgage game and “securitizing” it, hence infecting themselves with bad debt. Everybody borrowed from everybody, every body owed everybody. Things are fine if nobody calls in their debt, or gets nervous and goes to the bank and fills out a withdrawal slip. Into the bargain America, which has pissed off much of he world dues to the preemptive war Bush Doctrine (are you listening Sarah?), and the Gitmo and Abu Ghraib gulags, has now pissed off much of the world by doing what is tantamount to spitting in their soup.
7. Bailout time. Now politics, the realm of the possible, not the calculable, takes over. The very people who contributed most to the credit crisis are the ones pushing to take charge of its solution. Now the rotten mortgages will be dumped back on the shoulders of the very public they were sold to. For the Republicans every principle has its price—the free market, anti-de-reg, socialist practices, you name it, goes out the window. Just today and email was sent to me with an old NYTimes clipping where Democrats objected to Bush creating a new regulatory agency for Fannie Mae and Freddie Mac—answerable only to the Executive Branch—as “evidence” that Democrats are—can you believe this!—anti-regulation! So now they are scaring us with the “D” word, people will be out on “Main Street” without jobs and food.
Maybe we need a good economic depression, sort of a cleansing, so we can create a new New Deal. First requirement of a new New Deal—an Econ 101 course, for everybody, Wall Street, too.
© 2008, James A. Clapp (UrbisMedia Ltd. Pub. 10.1.2008)