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.
Baldy,
What I think a major part that is driving this depression (And I’m a contributing factor in this and you, I have to thank, are not). It is the dual income household. Back in the day when there was only one breadwinner in the family there was considerably less money to be spent and therefor prices were lower. Then, when the women entered the workforce (And I’m not blaiming women at work for this. Hopefully I’ll come back around to this point later and save myself from being hunted down by every woman who reads this (although, I do like attention from women… (that’s not helping I’m sure))), because there was so much money to be spent, prices went up, and jobs became harder to find (We didn’t double the amout of jobs when we doubled the workforce). Then, and I saw a cool chart on this the other day that I wish I knew the source of, the divorce rate shot through the roof. Single income families became more common, but we are still living in a dual income economy. I look at the lifestyles that my friends and family have chosen to lead, and many are single income families. This allows them to do many things my wife and I can’t, but at the same time, we are able to do other things which are financially prohibative to some of them. This is one of those times where I know I’m part of the problem, but I’m not willing to work toward being the solution. My wife and I both work because we like working, we like what we do, and neither of us is willing to make the sacrifices necessary to adjust to a single income. That being said, if everyone went back to single income families (I don’t care who stays home, man or woman, that is a family decision), those single parent families would be able to exist on a level playing field with the dual parent families.
Another thing that I think needs to be done is to increase interest rates on money in the bank. What incentive do we have to save now? I can put money in the bank and watch as it grows pennies a month, or I can use it cause it’s not doing me any good investing. I don’t “play the market” as I just see stocks as an overpriced lottery, but I would like a safe way to make my money grow.
Anyway, those are my ramblings from someone who says “Ugh” and “Gross” when economics classes are mentioned.