Banks, Bubbles and Busts

The knowledge that the economy is broken crosses political lines, and the wide majority of people who don’t pay much attention to political news nonetheless understand that something is deeply wrong. Where there’s disagreement is how we got here. Is the problem somehow due, as mainstream pundits, corporate lobbyists and right-wing politicians will tell you, to deficits, public employes and regulations? Or is it the decline of the middle class and corporate misbehavior at work?

At one of today’s panels at the Take Back the American Dream conference, the answer is clear: the failure of the economy to work for anyone but the financial sector gave us our current crisis.

“Banks are front and center in the story,” said economist Dean Baker, “but there’s also an incredible failure of regulation. Regulators were out to lunch as the biggest asset bubble in the world grew.” The housing bubble that drove the economy (through construction jobs and rising home values) ended up driving the economy into the ground when it collapsed. “We’re up against trillions in lost demand.”

The crisis was due to rapid deregulation and to the failure of regulators to enforce existing laws. Big banks wound bankrupt, Baker said, because they had so much garbage debt on their books.

Robert Kuttner of the American Prospect noted that the collapse was made possible by what he called a decades-long “invisible depression.” A postwar boom that built the American middle class suddenly reversed in the 70s, thanks to weakening of unions and government, so that gains of productivity growth stopped going to workers and were captured by a shrinking slice of the very richest. “I’ve written about the ‘declining middle,’ and that’s not an abstraction,” Kuttner said. “Middle class and working class people are working harder and not getting ahead, and they’re substituting debt for income growth.”

For Kuttner, the failure to hold big banks accountable and honestly deal with their insolvency and the failures of their executives was a huge mistake. “You guaranteed a wounded financial system years into the future,” he noted. Even after the banks demanded bailouts, they went back to back to business as usual.

“We’ve lost the concept that having a strong middle class also creates a strong and stable economy,” noted economist Heather Boushey. People in the political system forgot this, Boushey said, and noted that the lack of a strong middle class creates bubbles, as people go into debt to sustain their standard of living and keep up with costs. The decline of working people’s power becomes self-fulfilling, Boushey said. “A strong middle class creates better governance and better institutions. what’s going on in our economy affects what goes on in our democracy.”

“We have to be aware of what we’re up against,” she added, noting that when you have 40% of corporate profits from the financial sector, that has a big effect on who has power in Washington, DC.

America’s overall wealth continues to grow, Boushey said, but Middle America doesn’t share in it. The wealth is going to the very top while scarcity and tightening is the rule for the middle. Middle-class and working-class people work more hours, have less flexibility, and are forced to take on too much debt. We have 14 million people out of work, and the crash stripped trillions of dollars from housing value, so there’s just less money flowing through and thus fewer jobs.

The first task is to get working people engaged with the political process again, Kuttner said. “Until we get the political imbalance changed we’re not going to fix this.” He noted that the political imbalance is leading to bad policies. “You can’t deflate your way out of a depression. Austerity makes a depression worse.”

One consequence of this imbalance of power is accountability, Kuttner said. “More people have gone to jail for peaceful protest on wall street than went to jail for systematic fraud through the financial system.” The shady mortgage industry and the investment firms who financed them, regulators, ratings agencies, the writers of credit default swaps – not one of them was punished.

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