bald man blogging

I’m a big fan of This American Life. One reason is the fantastic coverage of the economic crisis. The most recent installment, Bad Bank, aired a couple weeks ago, and I caught up via the podcast this week. Very good. For those of you who hated economics at university (which is pretty much everyone if the, “Ugh!” and, “I’m sorry,” reactions by those who asked me what my major was is anything to judge by) but want – no NEED! – to better understand what is happening in the world today, it’s a must-listen-to episode. Not only do they do a very good job of making the jargon filled financial world very approachable and understandable, they are also among the first people I’ve heard mention the possibility that everyone might just be completely missing the point, the problem that is really at the core of the crisis.

Toward the end of their act, while talking with David Beim, a professor as Columbia Business School, they throw this out: Rather than toxic assets, perhaps the real problem the crushing burden of household debt that has been fueled the last ten or 20 years of economic growth. (Robert Reich has also been beating this drum with consistency the past few months.) Perhaps, in an age when the ratio of household debt to GDP is 100% – a stat not seen since 1929 – getting back on track, back to “business as usual” might not be a wise move. To quote from the show:

David Beim: Yes. That chart [depicting the ratio of household debt to GDP over the last 80 years] is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks, it’s something that had little to do with mortgage securitization, or ethics on Wall Street, or anything else. It says the problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us. We have over-borrowed. We have been living very high on the hog. We are, our standard of living has been rising dramatically over the last 25 years, and we have been borrowing to make much of that prosperity happen.

Alex Blumberg: And so, when you see Congress, sort of saying we need more, we need to make sure there are strings attached to this money, to make sure the banks are lending it out, that doesn’t make any sense.

David Beim: It makes, not only no sense, it makes reverse sense. It’s nonsense. Because what the banks have done is already lend too much. The name of this problem is too much debt. We have over-borrowed, and we have done that over many, many decades. And now it’s reached just an unbearable peak where people on average cannot repay the debts they’ve got. In the face of that, it is no solution to try to lend more.

People are tapped out. Two decades of short-term thinking by everyone, from politicians and CEOs to moms and dads, has gutted the house and left a fragile shell standing… until recently when that shell collapsed. These are the just and expected consequenses of excessive leveraging, i.e. managing the payment instead of the cost. Getting that train back on track is not going to do any good. Unfortunately, I’m beginning to think the only thing that might derail that train is a “Lost Decade” of our own. With the Dow already at late 90’s levels and so much more to go before this is all cleaned up, we may even be looking at a lost quarter century.