It's a cliché, of course, that the 2000s are the new Gilded Age, that inequality in America is at levels not seen since the original Gilded Age, which you may recall was ended by a terrible depression.
During this decade's tiresome debates about inequality, the don't-worry-be-happy side of the argument frequently, and correctly, noted that income inequality statistics overstate the lived experience of inequality, since the poor spent more than they earn and the rich spent less.
Of course, the poor spend more than they earn primarily by taking on debt. In the halcyon days of 2006, that was no problem. Credit flowed like honey, and what could always be refinanced need never be repaid. It's a wonder we didn't do away with the whole "money" thing entirely. If you can spend all the way down to negative infinity, it hardly matters whether your starting wealth is one dollar or a billion dollars. Why keep track?
But, alas, people did keep track. They also stopped lending to people who might not be able to repay, people who, you know, spend more than they earn. Which means, even putting aside the terrible hardship of bankruptcy, or struggling to pay down old loans, all of a sudden the lived experience of inequality must come very much to resemble those unpleasant income inequality statistics. Are we cool with that?
In a way, the credit crisis comes out of a tension between the broad-middle-class America of our collective imagination and the economically polarized nation we have in fact come to be. We borrowed to finance an illusory Mayberry. The crisis won't be over until this tension is resolved. Either we modify the facts of our economic relations, or we come to terms with a new America more comfortable with distinct and enduring social classes.
Tanta and Calculated Risk have popularized the notion that "We are all subprime now." But that simply isn't true. The vast majority may be subprime now, but not all of us. To use an old expression, as the easy money falls away, we are being left to "find our own level". For many, it may be quite a bit lower than we had imagined.
I'm sure this is a bit polemic, but I don't think it is much overstated. Credit was the means by which we reconciled the social ideals of America with an economic reality that increasingly resembles a "banana republic". We are making a choice, in how we respond to this crisis, and so far I'd say we are making the wrong choice. We are bailing out creditors and going all personal-responsibility on debtors. We are coddling large institutions of prestige and power, despite their having made allocative errors that would put a Soviet 5-year plan to shame. We applaud the fact that "wage pressures are contained", protecting the macroeconomy of the wealthy from the microeconomy of the middle class.
The credit crisis will end, and life in America will go on. What we have to decide now is, when the floodwaters clear, what kind of country will be revealed. Peering down through the murk, I don't like what I am seeing.
Addendum: Tyler Cowen was prophetic on this point. He wrote in January, 2007 on income vs. consumption inequality:
People may be borrowing and accumulating large debts. Note that in this case, however, the comeuppance, however bad it may be, has yet to come. It could instead be argued that "inequality will (someday, when the debts come due) be a serious problem."
Welcome to someday, Labor Day, 2008.
FD: I'm still very stagflation-oriented in my personal portfolio (precious metals, short long bonds and stocks), so the wage-price spiral demagoguing might be interpreted as self-interested. That said, no apologies. It astonishes me that even very liberal economists take comfort in the evisceration of wage-earners' bargaining power. Yes, it means that Ben doesn't need to hike, regardless of what commodities do. But what kind of economy are we building when we take the price of past mistakes out of future wage-earners' pay packets, while protecting the accumulated wealth of those who profited by erring?
This article has 16 comments:
Loans continue to be made in an irresponsible manner, and it needs criminal convictions to stop this.
Bernanke is financing the turning of America into a banana republic, after Greenspan financed unsustainable debt.
The alternatives are best viewed by the little dutch boy story, whom seeing the leak in the dam left it alone, ...it would promote shoddy construction in the future and people in the valley should know better. Well, they all died, including the morally prude...
Especially, when considering that the author does recollect the gilded age, which mirrored the ongoing credit crisis and ended so apocalyptically...
Fortunately, Bernanke is at the helm of the Fed in this mess.
I had thought that maybe 9/11 would have sparked a change in attitude, but unfortunately, the choruses of "Kumbaya" lasted about 90 days (30?).
So it looks like it's going to take a lot more pain before we start working together. I only hope that by the time that happens, we still have something worthwhile left to work on.
Second, revolution may not come in the form of torches and pitchforks but in mass default on debt obligations. Watch for this trend to develop as low to mid income earners start to wake up to inflation and usury.
It takes time for many to wake up to the fact that this is a treadmill. GKM is right also. The middle class have begun to slash unecessary spending. And the middle class won't rise up at either the voting booth or physically until they can't pay property taxes and homes begin to be confiscated.
That isn't this year or perhaps even next but the DoD being asked for a billion in funding and received by the IRS for tax collections should be considered a bit ominous in that regard.
If your middle class, consolidate your debts by either working with your bank or an outside agency. Be prepared to downsize. This is painful and frustrating but perhaps more frustrating is paying on each individual payment in a budget and trying to figure out if buying food, medicine or fuel is the priority with what's left. Better to consolidate and preserve credit and get to one or two payments financed over ten to fifteen years to get through this time.
to bail out the big banks...
and to pay for the oil wars...
thus causing the inflation...
that reduced the purchasing power of everybody's earnings...
as effectively as doubling the tax rate would have done.
Yet, the same people...
who'd have rioted had taxes doubled...
dutifully pay double or triple for energy, goods, and groceries...
and watch a greater and greater percentage of their taxes...
being spent paying interest to communist China...
rather than invested in education, infrastructure, or public safety.
But hey, Obama's funny name is the real threat to us all!