Thursday, October 23, 2008

Plea for comments

I need to submit a proposal to a major publication tomorrow. I have had to rush it off. Any comments would be appreciated.

How is it that the American dream suddenly morphed into a nightmare? The subprime crisis is a symptom of something larger and far more dangerous. Even the meltdown of Wall Street is a symptom of something larger and even more threatening. Without extreme care, the intended cure is likely to make matters worse. Papering over a crisis, even with a trillion dollar bailout, may temporarily eliminate the symptoms, perhaps even making the economy look healthy again, but the underlying problems are almost certain to break out again in a more virulent form.

A rational response to the crisis requires recognizing the deeper, systemic dimensions of the problem. On the most superficial level, the public face of problem was a group of people buying houses they could not afford. This perspective is misleading, especially because many of the loans were to people who were already homeowners or small-time speculators who were looking to flip houses.

Like a Russian nesting doll, another face is below the surface: predatory lenders, who were pushing deceptive loans that could never be repaid. Pulling away these predatory lenders exposes a more complex presence: the great banking institutions now on the public dole. These supposedly respectable businesses, protective of their public face, do not allow their corporate names to be used by the predatory lenders, but they represent a very profitable component of their businesses. At the next levels, first a dysfunctional financial system appears and, then, something more abstract -- a political movement fanatically committed to deregulation, which allowed the whole financial system to go haywire.

Recent scrutiny has exposed most of these actors, but even deeper forces have gone unnoticed. To get a handle of these forces requires looking back at the pattern of crisis and response over many decades. Since comparisons of the current crisis with the Great Depression have become commonplace, that period may be a good place to start.

The Depression of the 1930s had disastrous human consequences, but it made the economy stronger in the long run. In effect, the depression drew much of the poison from the system. It swept away outdated, inefficient, and obsolete businesses, plant, and equipment. Under extraordinary market pressure, business found ways to improve efficiency. Finally, the Depression wiped out a great deal of debt, while New Deal legislation allowed unions to lift wages. The World War II economy built up considerable wealth in the U.S. while the economies of international competitors were left in ruins. This constellation of forces left business and the public able to purchase goods and services once employment recovered.

Shortly after the war ended, the U.S. enjoyed what economists call the Golden Age, because of the extraordinary economic performance of the time. Business came to expect that the experience of the Depression had taught government how to make those good times last forever. Obviously, they did not.

By the late 1960s, falling profits created enormous dissatisfaction for business. Both business and the public tended to hold the Democrats responsible for the faltering economy. In the decades that followed, the Democrats managed to elect only two presidents, both of whom governed like traditional Republicans, while the Republicans became increasingly ruthless about promoting business interests. The underlying obsession of both parties was to resurrect the profitability of the Golden Age.

I will tell the story of the people and policies that set out to recreate the economic performance of the Golden Age. The reader will see how, instead of a Golden Age, they gave the world a jerry-rigged Gilded Age -- one in which the gilding covered up an increasingly dilapidated economy. Profits still rose, approaching their pre-Depression peak, but their recovery marked deeper problems.

Normally, one would expect healthy profits to be a payoff from a productive economic structure, based on intelligent investments in plant, equipment, and a well-trained workforce. Instead, the improvement in profits reflected a combination of cheap labor (real hourly wages peaked in 1972), deregulation, low interest rates, and financial manipulation. The driving force of this new Gilded Age was credit rather than income for the majority of workers. Recurrent crises should have signaled the need for fundamental change. Instead, government and business chose to treat the symptoms.

12 comments:

Simon Halliday said...

It seems as though you carefully avoid saying what you mean by fundamental change. Additionally, you only annunciate what the specific problems (Instead, the improvement in profits reflected a combination of cheap labor (real hourly wages peaked in 1972), deregulation, low interest rates, and financial manipulation) are in the final paragraph. This doesn't make sense to me. Maybe they would be better located in your third paragraph as an indicator of what you are alluding to (because initially it does seem like an allusion rather than an exact depiction).

Hope this helps.

Anonymous said...

Couldn't one argue that American post-war Golden Age was mostly a consequence of the devastation of Europe, and thus was merely an aberration? The way the system works now is how it's supposed to work, the only way it can work.

reason said...

abb1
you seem to be assuming Michael's conclusion. Maybe he thinks differently. I assume this introduction is supposed to make the reader want to read further. It works for me.

Myrtle Blackwood said...

...The Depression of the 1930s ... made the [US] economy stronger in the long run.

I can't agree with this claim. the post-war 'recovery' in the US depended very much on the wiping-out of national economies elsewhere and the Marshall plan (for US to benefit from the rebuilding of infrastructure in those other destroyed overseas economies). Then add the important US-Saudi Arabian deal of 1948 to trade oil in US dollars exclusively, the usurious oil deals in ME countries, US wars of imperialism. The enculturation of consumerism in France and other places. (The Marshall Plan included a requirement for France to show American movies as a proviso of aid, etc).

"the depression drew much of the poison from the system. "

The Great Depression resulted in even greater links between industry and government that resulted in more and more economic concentration in general through the growth and 'development' of the multinational corporation.

It swept away outdated, inefficient, and obsolete businesses, plant, and equipment. Under extraordinary market pressure, business found ways to improve efficiency.

Business found ways to be 'efficient' in very narrow and extremely dangerous ways. Intensive government lobbying and underhanded political manipulations. The accelerated rape of the global environment using modern industrial technologies and successful pushes for regulators to look the other way or legalise the unnacceptable (eg the onus of proof of harm from the use of dangerous and untested pesticides).

Myrtle Blackwood said...

correction: eg the onus of proof of harm from the use of dangerous and untested pesticides) being placed on the general public rather than the distributors and users of these toxins.

Anonymous said...

The post seems to be attributing the post-war performance mainly to invigorating shock of the Depression and to the New Deal; that's the impression I get.

If that is not the main storyline, maybe he should make it more clear that it isn't.

Anonymous said...

...eh, that was my response to reason, I didn't see Brenda's comments.

Myrtle Blackwood said...

"Instead, the improvement in profits reflected a combination of cheap labor (real hourly wages peaked in 1972), deregulation, low interest rates, and financial manipulation. . .

Interest rates were much higher than in my parents generation. My father obtained a housing loan at 2.5% interest. The cheapest mortgage rate I and my husband have ever had was something like 7.5% and this rate was enjoyed for a short time only in comparison with much higher rates we were subjected to generally. Admittedly this was in Australia but I believe a similar experience was shared by many Americans for most of the baby-boomer generation. My sister and her husband almost lost their house when mortgage interest rose to 18% in 1984 (or 5?).

In the late 1960s Wall Street banks started to borrow funds to loan out (instead of relying merely on deposits). US banks had also previously done this, I believe. (Although I'm not sure exactly when; does anyone know?)

Anonymous said...

"something more abstract -- a political movement fanatically committed to deregulation, which allowed the whole financial system to go haywire."

Doug Henwood is working on a new book on changes in the American Ruling class. You might touch base with him on this aspect of the topic.

Anonymous said...

There is an aspect of the realty flip phenomenon that I don't think anyone has looked at closely. Say a mortgage broker in conjunction with a realtor, they are sometimes one in the same business, sells a property to a cohort. A mortgage is obtained for $250,000, the selling price. The broker's piece of the mortgage is maybe .015. Broker earns $3,750. Realtor earns 6% on the sale price, $15,000. The first seller may be legit. The seller gets $235,000, the approximate marcket value at the time. Now, however, a cohort "owns" the property. A second cohort "buys" the same property for $275,000 and the broker obtains a mortgage for that
buyer. The first mortgage is paid off and there is now $25,000 profit
to the combined efforts. There is another .015 to the mortgage broker
increasing the take by $4,125. Just two sales of a single property and the group has earned
$47,875. At the same time the process establishes the rising value of property in the area being worked. Repeating this scenario several times per month can become very lucrative. The last mortgage pays the previous mortgage so there is no red flag. The mortgage broker "earns" that 1.5% vig, it's customary in the industry. Would it be too difficult for an industrious mortgage broker/realtor to play out this process manth after month, year after year until the bubble bursts? For a well oiled operation there should be several million per year available for the taking in a rising real estate market fueled by banks anxious to buy those originating mortgage loans. The broker/realtor may not even be doing anything illegal.

Is there a flaw in this description?

Anonymous said...

Just stop attacking the dirty capitalism that makes you live well and for many essentially more than this. It's certainly not ideal and periodic crises is its intrinsic feature (you need to re-read Karl Marx and others if you forgot it). These “difficult periods” is just a payment for “easy (Golden)” ones, and the net result (in “rich” countries) is strictly positive, while no better real system is known (at the dominating level of understanding). When there are huge, spectacular (and apparently sustainable) successes of Google (where we are now), Microsoft and others, nobody cries for “regulation” (and any serious regulation would make those cases impossible). Why not to understand that any given system has its limits of efficiency and yours, being a rather old one, has practically attained them, up to a subjectively preferred version (like more guarantees? - then opt for a “Scandinavian model” but then be ready to pay up to 70 percent of honestly earned income as taxes, just for “solidarity”: they like it and they pay it, but Google is still realised in the USA, not in Sweden...). The detailed mechanism of that prosperity-crisis sequence is evident (it's a general “self-organisation”, or pattern-creation, mechanism): prosperity gives rise to problem-creating “relaxation”, while the ensuing crisis gives rise to prosperity-creating “mobilisation”.

A “deeper level” does exist, but it involves a much more dramatic change of the entire life style, structure and quality if one wants to live with real progress but without usual crises (and of course, it has nothing to do with “communism” or any other “ism”!). It's not impossible that we are already within a much deeper civilisation crisis forcing us towards that greater change, so that the current economic crisis, being only the visible, small top of the “iceberg”, cannot be really healed any more (only mechanically “suppressed”, at best, at the expense of quasi-permanent degradation of life quality). But again, if you want either to look (really!) deeper, or start eventually the necessary greater change, you should be ready to forget about so many today's unmerited “privileges”, cherished “honours” and other quite pleasant “habits”... The new reality will certainly be much better than the best of these illusive treasures, but the forthcoming bliss only will be (even if one is sure about it!), while one should renounce one's quite real (and rarely truly fair!) advantages today. And such is the nature of all human attitudes underlying all versions of the same, unitary system of thinking and living dominating until now that there are too few of those who would be ready to really “look deeper” and opt for the necessary change. It will certainly be natural at the superior level, after the change, but not before it, which necessitates the “revolutionary”, dramatic transition and qualitative “jump” between now and then.

To begin with a very small (but relevant) example, are there many economists ready to unambiguously acknowledge, even today, after the “superficial”, economical part of the crisis has become evident (let alone before that!), that all they have been doing until now was at best useless and often practically harmful and that the genuine, “deeper” (and indispensable!) understanding of the world development needs quite another, superior kind of science and motivation? It's time, dear friends, to either acknowledge something like that and start practically supporting that (truly) “deeper” insight and change, or just shut up with all those imitations of “good intentions” (always referring to indefinite “future”) and grab the practically accessible cash, as usually. Accept the nature of the dirty capitalism if you profit from its best realisation, or change it for something essentially better if you can, but don't pretend you are really fighting with the only cow you can milk.

Myrtle Blackwood said...

"...the current economic crisis, being only the visible, small top of the “iceberg”, cannot be really healed any more (only mechanically “suppressed”, at best, at the expense of quasi-permanent degradation of life quality)...

Who would disagree with this?