So David Brooks puts our recent economic history this way:
A few years ago, the global economic culture began swaying. The government enabled people to buy homes they couldn’t afford. The Fed provided easy money. The Chinese sloshed in oceans of capital. The giddy upward sway produced a crushing ride down.
Basically it’s the standard conservative line: “It’s the government’s fault.”
But what’s missing from this picture?
How about the slimy mortgage originators and their hungry securitization brethren on Wall Street who enabled individuals to get those mortgages? When, exactly, did the government say, “Lower your mortgage standards! Falsify documents! Pass along bum mortgages through securitization! Get the rating companies to give securities built on bum loans AAA ratings so that they can spread everywhere around the financial system! Oh, and buyers of these securities, make sure you load up on lots of debt so that you can buy even more of these securities!”
Well, the SEC did consciously relax leverage limits in 2005. But that points to the real government problem, in my opinion. It’s that the financial services industry got whatever it wanted for years. Anything that could increase their profits was granted. Anything that could have put in prudent safeguards to keep the system transparent and stable was defeated. Our government leaders bet the house on the financial sector, and we all lost. And, of course, we keep on losing. Now we’re all having to get taxed to give those same companies government money to keep them functioning so that we’re not all screwed even worse. Nice.
Let me just say, I believe the government should get out of subsidizing and promoting home ownership. I’m including winding down Fannie Mae and Freddie Mac and getting rid of the mortgage interest tax deduction. (I’d prefer a political focus on increasing wages for everyone.) But to write a five-sentence description of recent economic history and leave out bad private sector decisions and the influence of the financial services sector on the political process is really something.
As for the Federal Reserve and easy money, that does seem to have been a factor. But it strikes me that we would have been hard-pressed to find Republicans and conservatives who would have supported the Fed tightening the monetary screws during the Bush administration. But that’s a hypothetical, so we’ll never know.
And as for the Chinese money sloshing in, that was in their self-interest. They wanted Americans to keep consuming anyway possible in order to keep their export-driven economy growing. They had to buy American assets to keep the dollar strong and keep us buying lots of cheap Chinese stuff. The last thing they wanted was for American credit to get cut off and see our consumption decline. And they sure didn’t want to sell off a bunch of American securities and see the dollar collapse. That would only make their products more expensive to us and further damage their economy.
That observation leads me actually to support the general idea that Brooks is trying to get across – that certain times have a certain economic culture – with particular values, expectations, and problems. This is an important point that I don’t see talked about very much. Of course, the biggest cultural change should probably be the trimming back of our consumer culture and our easy acceptance of debt – be it through mortgages, credit cards, or any other route. No more exhortations from political leaders to “go shopping.” Accepting that cultural change, though, will crash our economy in the short- to medium-run. The overhang from our debt culture will be with us for some time, but once it’s gone, let’s say, “Good riddance!”
But then, of course, comes the hard part – how does our economy grow from there?