|HOW IS IT THAT the American dream suddenly morphed into like 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 blow 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
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 It swept away outdated, inefficient, and obsolete businesses, plant,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. 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 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
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.
-- Michael Perelman Economics Department California State University Chico