The Self-Inflicted Recession

03/07/2008 04:23 pm ET | Updated May 25, 2011

One thing to keep in mind as we live through the pain of this deepening recession: It didn't have to happen.

Sure, recessions are part of the natural economic order, implicit in the yin and yang of the business cycle. But often they're brought on by some external shock, like a spike in energy prices.

This one, however, is different. It can be traced right back to the careless policies and practices that fostered the housing bubble, putting people in homes they couldn't afford and allowing financial wizards to mask the risk by slicing and dicing loans to the point that they could no longer keep track of them.

Where were the regulators -- the officials whose job it is to oversee precisely these types of excesses -- when we needed them? Why did high-level officials of the Federal Reserve, including Alan Greenspan, sit back and watch as the bubble inflated, or worse, blow more air into it by encouraging "innovative" lending schemes?

That's not all: The same neoconservative agenda that set the stage for this recession has left most Americans woefully unprepared to deal with it. Many families' real incomes never fully recovered from the last recession, in 2001, and now real wages are falling again. More families than ever lack health insurance, putting them one medical emergency away from financial disaster. Pensions continue to erode, and increasingly, people are tapping into their 401(k) plans - the supposedly enlightened alternative - just to survive.

More Americans are working part-time because they can't find full-time work. That number grew by 600,000 over the past year. More workers have turned to temporary jobs to replace the solid work they've lost, and now even those are disappearing -- employment in the sector was down 28,000 last month, the largest loss in five years.

And then there are the hundreds of thousands of would-be workers who've given up and dropped out of the job market altogether because they couldn't stomach any more rejection. They're not even reflected in the unemployment rate.

Millions have been financing their lives with debt, largely by pulling equity out of their homes. This worked fine while the housing bubble was inflating and home prices were soaring. But as gravity has reasserted itself, housing debt burdens have climbed to the point that for the first time since 1945, Americans' percentage of equity in their homes is exceeded by their debt.

That scene was being painted when the economy was supposedly flush. Now that it's tanking - with a new government report showing a loss of 63,000 jobs last month alone - things look bleak indeed.

So what's the answer? Both President Bush and his new political soul mate, John McCain, call for more of the same tax cuts, deregulation, and business-friendly policies that helped stack the deck against ordinary Americans. Leading Republicans argue against common sense interventions such as extending unemployment insurance or expanding the food stamp program on the grounds that they will only encourage sloth.

At one time, perhaps, those approaches resonated, playing into the myth of rugged individualism, and the idea that we're better off striving on our own than working together. Surely we're past that now.

We are in for a very tough year, but we can ease the pain of this self-inflicted recession by reviving some other basic American concepts, such as the idea that government can serve a useful role in mediating a heartless economy.

In the short term, that means building on the recently-enacted stimulus package by funding needed public works projects and boosting unemployment insurance. In the long run, we need a more fundamental change in the way we approach our economy, from a YOYO (you're-on-your-own) philosophy to one of WITT: we're in this together.