After listening to an informative episode of an NPR program explaining the banking crisis this morning, they concluded by noting that our debt obligation is now right about equal to GDP ($13 Trillion or so). The last time it was that high was 1929, The implication being that we are all guilty of creating this crisis. In fact, it wasn't just implied, it was flatly stated. I am of a different view. I think it is much more insidious than that. People behaved rationally in an irrational system. It isn't about morality. They made the rational choice. The blame lies on those who created a system that made these levels of debt a rational choice for the average worker. I thought there was a need to repost these two previous posts explaining why I agree that credit is the problem, but it won't wash to blame the population as a whole for the phenomena.
Why is it that credit ate the economy?
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.
Time was when the capital markets served a useful function. There are two primary components to economic activity in our system. Capital and labor. As our greatest president famously said, 'Of the two, labor is superior because all capital was at some point generated by someone's labor'. In other words, if you are to apply the chicken or egg question to this issue, labor clearly comes first. And is therefore superior.
Now, one may be willing to be gracious. One may be willing to accept the notion of an equivalence. Both components being necessary for economic activity in our modern world.
But what has happened in this country over the past forty years, is a systematic tilting of the political system, the laws, the rules of the game and even the popular culture to favor capital over labor. The propaganda has been so pervasive and incessant that we don't even notice it. The message broadcast 24/7 in a multitude of ways is that work is for suckers. The way you get ahead in America is through 'investment'. We have devalued labor to the point where wages can stagnate for a generation and people just accept it. What do you expect if you are stupid enough to just work for a living?
One of the ways that we discourage certain behavior and encourage other behavior is with the tax code. We consider smoking tobacco to be a dangerous vice. So, we tax the hell out of cigarettes. Look at our tax code. We tax income from work, even with our so called progressive income tax system, at a significantly higher rate than we tax income from 'investment'. Because work is for losers. "Investment" is how smart people make their money.
When this mentality takes hold, it is a short trip to con man heaven. Because the line between 'investing' and gambling is non existent. When everyone is scrambling for some way to increase their 'rate of return on investment' you have created an environment where anything goes. It is all about 'playing the angles'.
We have created an environment where a mechanism for raising capital (Wall Street and Investment Banking) has become the tail that wags the dog. The only function that Wall Street fullfils is to raise operating capital for businesses. They don't know jack shit about running businesses. They don't know jack shit about managing people. It turns out they don't even know jack shit about raising capital in a responsible manner. Yet we have essentially given them the power to determine fundamental business policy and strategy for the entire nation.
These parasites have puffed themselves up, convinced that it is due to their heroic efforts that the capital, the life-blood of the system is generated to the benefit of all. When it is a self serving fatuous argument. They place themselves at the center of the universe and construct a toll booth. Funny how money always seems to stick to the people entrusted with the job of managing it. These people are essentially bookies in pinstripes. Running numbers and pegging ponies. And they have come within an eyelash of destroying the country and perhaps the global economy.