Explaining What Happened
Years from now, when educators are writing textbooks trying to explain to children the events that led up to the Great Recession (hopefully not the Second Great Depression, but at this rate, who knows), the basic narrative will go something like this:
First, we allowed our banks to become too big. Too much of our depository savings was entrusted into too few hands. Next, we removed the restrictions on the kind of investments banks could make, opening the door for them to wager our collective savings on risky derivatives and other forms of gambling. The big banks then went to the dog track and managed to lose all of our money. When the world finally realized that all the money was gone, the financial system was thrown into chaos and the economy spiraled rapidly downward. The governments of the world were forced to step in and cover the losses, thereby saddling every major country of the world with a century's worth of debt.
When you boil it down, this is the basic plot, and it's one that our grandchildren and great-grandchildren will become very familiar with.
First, we allowed our banks to become too big. Too much of our depository savings was entrusted into too few hands. Next, we removed the restrictions on the kind of investments banks could make, opening the door for them to wager our collective savings on risky derivatives and other forms of gambling. The big banks then went to the dog track and managed to lose all of our money. When the world finally realized that all the money was gone, the financial system was thrown into chaos and the economy spiraled rapidly downward. The governments of the world were forced to step in and cover the losses, thereby saddling every major country of the world with a century's worth of debt.
When you boil it down, this is the basic plot, and it's one that our grandchildren and great-grandchildren will become very familiar with.
posted by A.L. at 11:34 AM
10 Comments:
I've read a lot of economic commentary since the crisis started, an dthis is the best summary by far.
The story needs to at least passing mentions of (a) Greenspan's attempt to bubble us out of a downturn with free money (in conjunction with Republican tax cuts for the rich), (b) banks making ludicrously leveraged side bets on the flows of all that free money.
It will be known as "The Death of Trickle Down Economics". We gave business everything they wanted, huge tax cuts to the rich, deregulated and privatized most things, pandered to the religious nuts ... and what was the result? All that trickled down were pink slips, foreclosure notices, and a bleak (if any) retirement for the Baby Boom generation.
Nicely done. I might add a central feature:
"Bank managers were paid according to the short term earnings of their banks. Naturally, they inflated these earnings as high as possible using a combination of taking on huge risks, postponing losses, and (probably) accounting fraud."
To expect them to act any other way would be crazy.
---It will be known as "The Death of Trickle Down Economics".---
It's fascinating to me to hear this statement made in left-leaning circles as a matter of fact, yet the overwhelming amount of economists and libertarians I read consistently uphold the notion that private markets and they innovations that they drive make life better for everyone and make everyone more productive. Yet, some on the left argue, with sincerity, that people were materially "better off" in, say, 1968, than 1995.
Chowda,
It's not just some people on the right who argue, with sincerity, that people were materially "better off" before the New Deal.
"Private markets" -- by which I assume you mean market capitalism -- is not synonymous with "trickle-down economics". In fact, I don't know of any liberal today who disagrees with properly regulated market capitalism.
Your arguments are made of straw, Chowda.
The principle of trickle down (aka voodoo) economics is that if you give all the goodies to rich individuals and corporations, they will make good outcomes trickle down for everyone else. That has been tried extensively over the past thirty years and has failed miserably. We're right in the middle of a real life proof of that. The rich use their windfalls to pamper themselves, speculate in real estate and hedge funds, or hide the money offshore. It's a right wing myth that concentration of wealth is a good thing for society as a whole.
Regulated, truly competitive market capitalism is an entirely different thing and most agree that it is a powerful force for overall wealth creation and well being. That does not imply making special giveaways to the rich nor does it imply deregulation and lack of oversight that permit the kinds of fraud and excess we've seen.
I think you are forgetting all the people that couldn't really pay for their homes or didn't take the time to understand what an ARM was. It's easy to blame the banks, but it was just too easy for everyone to buy a house.
Not everyone can afford a house.
easy to blame the banks, but it was just too easy for everyone to buy a house.
This is definitely true to an extent. The mortgage industry was not sufficiently regulated and the Fed kept interest rates too low for too long.
But the real problem was what the financial industry did with these mortgages after they houses were bought. They sliced them up and repackaged them, hiding the risk, and then they made huge leveraged bets on them. In that way they exponentially magnified the problem and created the financial incentives for shady mortgage lenders to given increasingly reckless loans to people.
The reality is that in a sane world(with a properly regulated banking system), lenders wouldn't allow you to take out a mortgage you could't pay for.
Trickle-down economics? The French Revolution? Ring a bell?
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