In September 2008, as the worst of the financial crisis engulfed Wall Street, George W. Bush issued a warning: "This sucker could go down." Around the same time, as Congress hashed out a bailout bill, New Hampshire Sen. Judd Gregg, the leading Republican negotiator of the bill, warned that "if we do not do this, the trauma, the chaos and the disruption to everyday Americans' lives will be overwhelming, and that's a price we can't afford to risk paying."
In less than a year, Wall Street was back. The five largest remaining banks are today larger, their executives and traders richer, their strategies of placing large bets with other people's money no less bold than before the meltdown. The possibility of new regulations emanating from Congress has barely inhibited the Street's exuberance.
But if Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption.
It is commonplace among policymakers to fervently and sincerely believe that Wall Street's financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009.
Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did.
It's easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart.
But if 2009 has proved anything, it's that the bailout of Wall Street didn't trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can't get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating. Top executives and traders on the Street will soon be splitting about $25 billion in bonuses (despite Goldman Sachs' decision, made with an eye toward public relations, to defer bonuses for its 30 top players).
The real locus of the problem was never the financial economy to begin with, and the bailout of Wall Street was a sideshow. The real problem was on Main Street, in the real economy. Before the crash, much of America had fallen deeply into unsustainable debt because it had no other way to maintain its standard of living. That's because for so many years almost all the gains of economic growth had been going to a relatively small number of people at the top.
President Obama and his economic team have been telling Americans we'll have to save more in future years, spend less and borrow less from the rest of the world, especially from China. This is necessary and inevitable, they say, in order to "rebalance" global financial flows. China has saved too much and consumed too little, while we have done the reverse.
In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up -- had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share -- most Americans would not have felt the necessity to borrow so much.
The year 2009 will be remembered as the year when Main Street got hit hard. Don't expect 2010 to be much better -- that is, if you live in the real economy. The administration is telling Americans that jobs will return next year, and we'll be in a recovery. I hope they're right. But I doubt it. Too many Americans have lost their jobs, incomes, homes and savings. That means most of us won't have the purchasing power to buy nearly all the goods and services the economy is capable of producing. And without enough demand, the economy can't get out of the doldrums.
As long as income and wealth keep concentrating at the top, and the great divide between America's have-mores and have-lesses continues to widen, the Great Recession won't end -- at least not in the real economy.
Cross-posted from Robert Reich's Blog
I agree with much of what you've written. There were several paths to fix this economical debacle. But, what would you have done differently?
Have you considered the fact that we are mortgaged up to our ears giving money to our enemies and not demanding accountability?
At least President Obama is insisting that governments like Pakistan be accountable for the expenditures against terrorism. Also, because of the previous administration, we owe China more money than we will be able to repay in the next 50years.
I need not remind you that world banks depend upon the sovereignty of the American banking system.
I know the greedy bankers think they've gotten over on the American people but we have to keep pushing our representatives to vote for regulations...
Remember: the obama administration will get the last laugh
Kind of like sheep hanging their heads low on the way to become bleeping shorn.
ENOUGH !!!!!!!
To compete globally, we need to adopt a Value-Added Tax. And no, not because I think the VAT is better than our approach, though it well could be if properly structured. It is the ONLY tax approach recognized by the WTO as fair. Nobody is talking about this. That and trade subsidies place US companies at a 20%+ trade disadvantage globally. It is one of the main reasons why companies off-shore manufacturing and why we can't export competitively.
I honestly can't tell whether it is Obama that is the problem. He is being careful about picking his fights, is very smart, knows what might be accomplished with momentum, and is painfully aware that he has lost it. It is Congress, particularly the Senate, which remains fundamentally corrupt.
http://www.progressive.org/wx041409.html
Today, we can hardly maintain our US way of living any longer while huge chunks of the world are essentially impervious to total US economic domination: Europe, Russia, China, and much of Latin America. Today, our 'Cuba' lies in the Middle East and Africa. What will happen when our 'in hock' to foreign lenders becomes unbearable? What if the Chinese continue refusing to devalue their currency? Secession from the world's economy and forwards to autarky? A real war? Today our country has become as militaristic as the Confederacy was. Our Generals are adored as if they are reincarnations of Robert E. Lee. That is frightening.
Now Robert. Really. Your comment sounds as though the goal of every U.S. citizen is excessive consumption. Conceivably that was the consumer's thinking prior to 2008, but it would appear that consumers now value savings and financial security coupled with necessity purchases and moderate discretionary consumption over the excessive consumption of all goods and services produced pre-2008. Another thought supposes that pre-2008 consumers were just stupid, self-serving people; devoid of the intellectual capacities required to sort out what they needed and what they didn't need, and thereby made poor decisions in judgement due to arm-twisting by greedy corporate interests. I can tell my kids all day not to put their arms into the bonfire because it is pretty, but we all know that if they don't follow my advice they didn't get burned because of overly aggressive matches. Possibly the increased desire to save more of their discretionary income and reduce the amount of consumer debt just might be a consumer behavior learned from past mistakes that benefits the futures of our children.
"In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up -- had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share -- most Americans would not have felt the necessity to borrow so much."
When World War 2 ended many people feared that the Great Depression would return. That did not happen in the USA primarily because wages had shot up during and immediately after the war which encouraged people to buy cars, refrigerators, and TV sets.
As long as we accept capitalism/free trade there is no escape from the dreaded 'cycles'.
DEMAND A SECOND STIMULUS THAT IS JOBS FOCUSED---! For a change, Mr. President, invite "community organizers" to the White House, not your banker buddies--to get THIS job done!