Beautiful credit! The foundation of modern society. . . . “I wasn’t worth a cent two years ago, and now I owe two millions of dollars.” (Mark Twain, The Gilded Age)
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In a recent article at MRzine, economist William Tabb details the roots of the current global economic crisis. He sees this crisis as simply the most recent in a long line of capitalist crises, a predictable and integral part of the workings of the system. Here’s how he traces what has happened:
In the late 1990s, as you may remember, the economy expanded thanks to the Internet and the high tech boom as investors made money on this new technology, which led others to float the stock of new companies that promised to do the same. Many had no business plan, no chance of ever making money, but the animal spirits of investor/speculators, greed, and the herd mentality bid up prices of such stock until they reached such unrealistic levels that in 2000-2001 the stock market came crashing down. To address the crisis, the Federal Reserve lowered interest rates and kept lowering them. This made it cheaper for companies and individuals to borrow and helped people pay off debt and borrow more. One area that was particularly impacted was real estate: because it is not so much the cost of a home as how much must be paid each month to stay in it that matters, low-interest mortgages made ownership cheaper. As housing prices rose and kept rising, mortgage originators grew lax in their standards. Ninja (no income, no job) loans and little or no down payment became common. To keep the bubble going, low teaser-rate loans which would reset in the future were offered, and interest-only mortgages were popularized; by 2005, adjustable-rate mortgages allowing borrowers to make very low initial payments for the first years were the norm in more than half of new home loans. By 2006, the most popular mortgage option included paying less than the amount due each month, the difference being added to the principal and subject to dramatically higher monthly payments in the future.
Even if you were a banker who saw where all this was heading, you could not refuse to play. If you did, your bank would earn less than its competitors, your stockholders would wonder why they shouldn’t get someone else who could increase the profits, and you would be out of a job. If you were the person handing out the loans and interviewing people, your income depended on how many loans you originated. What happened to them after that was not your problem. You will have earned your bonus. The banks learned to securitize these loans — that is, to gather a bunch of them, some millions of dollars worth, and sell these collateralized debt obligations to someone else who would receive the income. You would get paid up-front with money you could lend to still more borrowers. Since the values kept rising and defaults for years were very low, the rating agencies thought these were safe instruments. Government regulators saw nothing wrong. They mostly came from the banking industry, at least the political appointees at the top did, and they laid down policy. Between mid-2000 and 2004, American households took on three trillion dollars in mortgages. Interestingly, during these same years, the U.S. private sector borrowed what BusinessWeek calls “an astonishing $3 trillion” from the rest of the world — astonishing because that is a lot of money. Between a third and half of the mortgages were financed with foreign money. Banks, especially in Europe, hold a lot of the toxic securitized debt. Some of their banks are in more trouble than ours thanks to these unwise purchases of presumably “safe” assets.
The creation of these bubbles was necessary to maintain economic growth in the United States during this time because labor – as a political and social force – had been so severely weakened and on a steady decline since the early 1970s. In the years following WWII strong industrial unionism played a crucial role in fueling consumerism. It was an arrangement in which the working class shared in the prosperity of growth to an unprecedented degree. But these boom years were short-lived. As Dee Hon wrote a year ago concerning the growth of US debt:
In 1972, wages reached their peak. According to the US department of Labor Statistics, workers earned $331 a week, in inflation-adjusted 1982 dollars. Since then, it’s been a downward slide. Today, real wages are nearly one-fifth lower – this, despite real GDP per capita doubling over the same period.
This marks the beginning of the triumph of neoliberalism in American domestic life and the death of Keynesian economics. Yet, consumer spending remained essential to keeping the entire system afloat. How was this accomplished with a broken labor force? Debt. As Hon continues:
Even as wages fell, consumerism was encouraged to continue soaring to unprecedented heights. Buying stuff became a patriotic duty that distinguished citizens from their communist Cold War enemies. In the eighties, consumers’ growing fearlessness towards debt and their hunger for goods were met with Ronald Reagan’s deregulation the [sic] lending industry. Credit not only became more easily attainable, it became heavily marketed. Credit card debt, at $880 billion, is now triple what it was in 1988, after adjusting for inflation. Barbecues and TV screens are now the size of small cars. So much the better to fill the average new home, which in 2005 was more than 50 percent larger than the average home in 1973.
This is all great news for the corporate sector, which both earns money from loans to consumers, and profits from their spending. Better still, lower wages means lower costs and higher profits. These factors helped the stock market begin a record boom in the early ’80s that has continued almost unabated until today.
Unsurprisingly, the Financial industry has become a more important factor in the US economy during this time. NY Times columnist David Leonhardt recently pointed out, “Of every dollar paid to the American work force in 2008, almost 10 cents went to people working at investment banks and other finance companies, up from about 6 cents or 7 cents throughout the 1970s and ’80s.” In addition to this important rise, most recently financial markets account for 30 percent of total corporate profits.
Financial bubbles like the dotcom and housing bubbles have always been products of capitalism. It’s just that the two most recent ones simply helped continue the consumerist trend and thus keep the entire global economic system going. (Do not doubt the importance of consumerism, recall president Bush pleading with Americans to do their patriotic duty and go shopping following 9-11.) This is the inevitable product of financial globalization: its accompanying off-shoring of jobs and exploitation of cheap labor, inexpensive energy supplies that kept the cost of moving products vast distances low, and an unquestioned ideology that said markets are the most efficient instruments for organizing the resources of society while never taking into account the true cost of economic activity, the so-called “externalities” like the environment and public health.
In response to the crisis the American taxpayer comes in to save the day, proving once again the so-called free market system is one of socialized cost and privatized profit, those massive externalities to be paid for by the rest of us. This financial debt bubble has all been little more than an insane fraud, destined to collapse – a true laissez-fairy tale economy if ever there was one.
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