As the economy teeters on the edge of complete collapse (and judging by the content of the 'stimulus package' is about to slip away), we should ask ourselves what went wrong.
It is actually very simple. We employed the wrong theories.
The effective functioning of our economic system requires a compact between labor and capital. It is a consumer based economy and most of the people in the economy make their living by working, by laboring, not by investments or capital. Therefore, growth in the economy which is generated by increased productivity of the workforce results in increased profits which need to be equitably shared between shareholders and employees. Because those employees are in a broad sense the nation's consumers upon whom the entire economy depends.
With the rise of radical Republicanism in 1980 populist political impulses where channeled into anti-government sentiment resulting in a drive for deregulation and lower taxes. Anti-labor policies were enacted. The fundamental compact between labor and capital was destroyed. Labor was considered to be nothing more than a parasitic business expense. Everything was done to reduce the cost of labor.
But the paradox remained. How can you encourage the consumer economy to continually increase spending, while starving wages, the source of that spending? The answer from the financial 'industry' was credit. Instead of giving workers a share of increased profits generated from increased productivity, they would make cheap easy credit available to them. And how can you extend hundreds of thousands of dollars of credit to people who's incomes simply don't warrant it? Collateral. And the only real collateral the vast majority of people had was their homes. So, you get your corrupt appraisal houses who are in your employ to begin the process of pumping up the artificial value of their shitbox houses. Soon, on paper, the fifty thousand dollar piece of crap house was worth two hundred thousand dollars. Now, this person could refinance and continue to buy all sorts of consumer stuff. Enough to keep the profits flowing. Without any wage increases. Why it was capitalist heaven wasn't it?
If we are serious about fixing this mess, just pumping money into the banks is not enough. Just pumping money into the economy and creating jobs is not enough. We need to restore the fundamental compact between capital and labor so that in the future, labor has the political power to insist on its fair share of the profits generated from increased productivity. This needs to be the engine of growth in this country. Not credit. Unless we do this, any attempts to fix this mess are simply going to create more debt and a bigger mess at the other end of the tunnel.