A Crash Course in Economic Crashes

by on September 17, 2008 · 2 comments

in Economy, Election

Each week, sometimes daily now, we slide by a new economic warning sign, by another wreck that’s already off the road.

By Larry Beinhart / AlterNet / Posted September 16, 2008.

The first time I was in a car crash, I was 6 or 7 years old.

That’s a long time ago. But there are certain things about it that I remember quite vividly.

My father was driving. The road was icy. We began to slide. This was in the days before seat belts, and cars had bench seats, upholstered but not shaped for each individual bottom. My father shot out his right arm and pressed me against the seat back to keep me from flying forward if, indeed, we were going to end up hitting something.

What was most extraordinary was how long it seemed to take. How time slowed while we slid forward and sideways, heading onto the shoulder, then past it. It seemed as if we had all the time in the world, yet there was nothing we could do to get off the ice, alter the trajectory, slow down … nothing … until we crashed.

As I read the economics news, I’m having that exact same sensation that we’re in a slow-motion crash.

Each week, sometimes daily, we slide by a new warning sign, another wreck that’s already off the road.

The new one is Lehman Brothers.

Before that, Fannie Mae and Freddie Mac. Before that, Bear Stearns.

In August, “one in every 416 U.S. households entered the foreclosure process.” In spite of a 2005 law that made personal bankruptcies more difficult and that allows creditors to squeeze money out of people even after they’ve gone bankrupt, personal bankruptcy rates are soaring. General Motors stock has been trading at 1950s prices. Like GM, Ford is laying off thousands of workers. Both of them are asking for federal assistance to survive. Pension funds are routinely failing.

Then there are my personal experiences.

Like when I go to the gas station and watch the ticker on the pump go up over $50, $60 and then $70 to fill the tank. Or when I go to the supermarket and lay down $140 for what cost me $90 a year or so back.

From time to time I run into rich people or their handlers. In February I was traveling with a lawyer from one of New York’s leading law firms. He does the legal work on IPOs. He told me the firm’s January 2008 business was down 90 percent from January 2007. A couple of days ago a hedge fund guy dropped in on our regular tennis doubles game. Between sets he mentioned how hard it was to get credit these days. “On a secured loan,” which means 40 percent backed by assets, mostly commercial real estate — he was talking about $120 million and up — “the banks want 20 percent interest.”

Every analyst I see or hear blames it on the “housing bubble” and the “subprime mess.”

That doesn’t seem right.

It doesn’t explain why the dollar has lost about a third of its value against the Canadian loonie and the euro, among others, or why gold is bouncing up against the $1,000 ceiling — both of which happened before the bubble sprang a leak.

It doesn’t explain why the stock market — as measured by the Dow Jones average — is down (adjusted for inflation) about 15 percent from 2001. Moreover, at its peak during the Bush years, it was only 14 percent (adjusted) over the 2001 mark.

It doesn’t explain why median income is down — depending on who’s reporting it — $700, $1,000, $1,200 per person, over that same time period. Even median family income, with more people working per family, is down.

It doesn’t explain why, during the so-called Bush boom, corporate profits were at an all-time high, but corporations were starved for places to invest the money.

Let us presume that government policy has an effect on the economy.

What are the policies that have produced this economy that’s on an icy road, sliding in slow motion toward the cliff, or, if we’re lucky, maybe just into a ditch?

The core, the very heart of Bushonomics, is cutting taxes, especially for the wealthy.

I find it impossible to figure out what George Bush’s motivations for anything are. He may have that impulse because he himself, his family and his friends are all very rich and they’ll save themselves millions of dollars over the years. Maybe it’s political. As he once said, the super-rich are his “base.” It may be a class thing, borne of the belief that rich people are rich because they’re better and will do better things with the money. It may be the mystical belief that “the market” makes everything better.

Whatever the truth is, the tax cuts were sold as economic stimulus and jobs packages with the promise that they would not create deficits. This last was based on a romantic Ayn Rand vision of millionaires racing into the backwoods to build, build, build new businesses that would create jobs, “good jobs,” and new taxes would be paid by the businesses and the workers, making up for the initial deficits.

Alas, none of that ever happened.

Deficits were created.

Bush went on a war spending spree. That made them bigger. Whatever boom there was did not create sufficient revenue to the government to make up for deficits.

That triggered the next event in our saga.

Deficits normally lead to inflation.

Bankers hate inflation. So do politicians.

So Alan Greenspan, everyone’s favorite economic hero, stepped in. He cut the rates that the Federal Reserve charged banks to borrow from the government.

The intent was to keep inflation low.

It sort of worked for about five years. The official, and actual, rates of inflation were pretty low.

The reason I say it only sort of worked was that, in reality, it suppressed inflation. It made the dollar worth less — as we now know, at least one third less. Oil, as it happens, is priced in dollars. Overseas suppliers of oil began to see their incomes decline — by about a third. So they did what any sensible person with the power to do it would do: They began to raise their prices.

That does not account for the full rise in the price of oil, but it triggered it, and it’s a large segment of it. Since everything in America moves on oil, it has raised the cost of everything else. It doesn’t account for all the cost increases we’re seeing now, but it propels a significant portion of them.

This was combined with several other impulses.

Free trade has to be number one on the list.

Free trade brought cheap consumer goods into the United States from overseas. That made shoppers very happy. It kept inflation down.

It was tough on workers. It not only put a lot people out of work directly, it put downward pressure on wages all across the board. That too, helped keep inflation down.

It was also very tough on businesses that actually make things here in the United States. The making of things, and then the support services, were outsourced, though the companies remained here, as corporate and marketing entities.

Other factors include deregulation, non-enforcement of regulations, appointing industry representatives to regulatory agencies, and union busting.

With outsourcing and domestic wages going down, corporations did, indeed, make record profits.

Three things came together to produce a great deal of loose cash.

First, the government cut taxes while it increased spending.

Second, the Federal Reserve made it cheap, artificially cheap, to borrow money.

Third, corporations made money — largely by pushing wages and salaries down — but had no place to put it.

But, what was there to do with all that money?

There was nothing being produced with the right kind of growth potential to pay back the loans. Working people were not making more money that could be used to create more consumption.

So the great ocean of money went, ultimately, to two places, from which it was supposed to be paid back: to real estate and to consumers (who were making less income) for personal spending on credit.

There was growth, about a 37 percent increase in the GDP in actual dollars across seven years. That’s about 17 percent in inflation-adjusted dollars.

Let’s go back and look at two other numbers: median income and the stock market.

They’re both down.

Where was the growth?

It was in borrowing. In credit. In debt.

There’s one bubble, the housing bubble, which is inside of — or a symptom of — a much larger bubble, the credit bubble. That bubble is so big that it represents almost the entire growth in the U.S. economy for the last seven years.

At the core of it, the seeds from which the poison fruit has grown are the tax cuts.

Do tax cuts actually stimulate the economy?

Vast sums of money have gone into creating that myth. Major intellectual industries have been created and sustained to sell that story. At the center of that claim is the Legend of Saint Ronald Retro Reagan.

Reagan cut income taxes, big time. But he raised Social Security and Medicare taxes. That meant that rich people paid less and working people paid more. The immediate result was that the economy faltered. Then Reagan raised taxes, though not by as much as he cut them. At about the same time, oil dropped from $40 a barrel to $20. The economy did grow. That is until the stock market crash of ’87.

There is vastly more evidence the other way. Tax increases stimulate the economy. It may not make sense, it may be counterintuitive, but here are the facts.

What if taxes went up to over 90 percent?

According to the Reaganauts and Bushwackers, the world would collapse. Business would grind to a halt. Investors would flee. Workers would lay down their tools.

Back in World War II, taxes did go up that high.

Americans who earned as little as $500 per year paid income tax at a 23 percent rate, while those who earned more than $1 million per year paid a 94 percent rate.

The result:

The American economy expanded at an unprecedented (and unduplicated) rate between 1941 and 1945. The gross national product of the United States, as measured in constant dollars, grew from $88.6 billion in 1939 — while the country was still suffering from the depression — to $135 billion in 1944, according to Economic History Services.

From 1946 to 1963, the top rate fluctuated from 86 percent to 91 percent.

Average economic growth was 3.5 percent per year.

The current top income tax rate is 35 percent.

Economic growth has been, at best, 2.5 percent — that is, if you stop counting in 2007. And don’t consider the type of growth, which consisted primarily of increased debt and pyramids of borrowing.

In 1992 the top tax rate was 31 percent.

Bill Clinton increased it to 39.1 percent.

The Dow Jones average went up 360 percent. The number of jobs went up 237,000 per month (under Bush, as of 2007, it was just 72,000 per month). Median household income went up rather than down. The budget was balanced.

Both candidates are talking about tax cuts to fix the economy.

Does that make sense?

Here, in New York State, we are facing a budget crisis due to the collapse in the financial markets, which is where a lot of our tax revenue comes from.

The governor has a choice between raising taxes and cutting expenditures. He’s a good, fairly liberal Democrat. But he polled the people and the Legislature, and everyone wanted to cut spending.

That means cutting the state workforce.

That means that people who had jobs and were spending money will be unemployed and spending a lot less. That means less revenue for the state and for the places that they did business with, which means the economic crisis will grow worse.

States are in a difficult position because they compete with each other for “friendly business environments,” which always means, in the short term, lower taxes.

This administration, and most economists, at least as they appear in the media, want us to “consume” our way out of trouble.

But the model should be the other way. We should be producing our way out of trouble.

Is that possible in a “free trade” world?

The answer is yes — through government spending. Through the kinds of things that the market cannot, or will not, supply.

The market will not protect our coastlines. How many Katrinas and Ikes do we have to have before we understand that it is in the common good — and good for business and good for the economy — that we do so?

Most of the costs of doing so cannot be outsourced. They have to, by their nature, stay here.

The same is true for wind and solar power and rebuilding our electrical grid to make such power sources work.

The market will not produce sensible, affordable health care. The market, in fact, has produced the worst cost-to-benefit ratio in the civilized world. The market has produced more bureaucracy in health care than any government agency ever could.

An affordable, national health care system would make American business more competitive.

For those of us who pay for our own health care, it would leave more money in our pockets than most of the tax cut proposals.

The market cannot and will not produce clean air and water. It will not produce an educated population.

Why did we have so much growth — so much business growth — when we had high taxes and when the taxes on corporate profits were actually collected?

If taxes on income (personal or corporate) are high, the impulse is not to take them, especially if they’re as high as 90 percent. But there’s no need to go that high to start making a meaningful adjustment.

What do companies and people do when they’re making money in a high tax environment? They reinvest, in producing something. Cashing out is difficult, but the value of what they own continues to grow as the reinvestments pay off. We then have to “make money the old fashioned way … earn it.”

There is a difference between my business and “business,” the wealth of the nation.

In my business, I hate regulations, unions and high taxes.

In my country, I appreciate regulations, unions and what high taxes, if intelligently spent, do for me. Then I live in a country in which business in general does better, my investments in the stock market do better, my retirement is protected, my children’s health care is affordable, and I have more hope for their future.

[Go here for the original at alterNet.]

Larry Beinhart is the author of Wag the Dog, The Librarian and Fog Facts: Searching for Truth in the Land of Spin. All are available at LarryBeinhart.com. His new novel is Salvation Boulevard (Nationbooks)

{ 2 comments… read them below or add one }

dougbob September 17, 2008 at 3:56 pm

For the last 10 years or so, people like John McCain, Phil Gramm, George W. Bush and terrible Bill Clinton have let big investment banks do whatever they want — low margins, murky debt investment packages, insurance for those murky debt investment packages, etc. — and ceded their regulatory authority to supposedly flawless risk models. Corruption? There’s always some corruption. But when the government leaves major firms that control such vast and widely distributed amounts of wealth to their own devices, those firms see a window to play aggressively with their capital — aggressive to the point where such lending should be illegal, but isn’t illegal, and that’s when they fuck up, legally, and “we” pay for the bail-out.

The financial collapse is not so much “cronyism” as it is “the unequivocal failure of Republican economic theory, and Bill Clinton sucked too.”


dougbob September 17, 2008 at 8:07 pm

lobbyists that work for mccain…including clients
hil Anderson: American Council of Life Insurers, Aetna, AIG, New York Life, MassMutual, VISA

Rebecca Anderson: Aegon, American Council of Life Insurers, Cigna, Barclays, Credit Suisse First Boston, HSBC

Stanton Anderson: The Debt Exchange

David Beightol: Allstate, Amerigroup, Charles Schwab, HSBC

Rhonda Bentz: VISA

Wayne Berman: American Council of Life Insurers, AIG, Americhoice, Shinsei Bank, Blackstone, Carlyle Group, Broidy Capital Management, Credit Suisse Securities, Highstar Capital, VISA, Ameriquest Mortgage, Fannie Mae, Freddie Mac, Fitch Ratings

Charlie Black: JP Morgan, Washington Mutual Bank, Freddie Mac, Mortgage Bankers Association of America, National Association of Mortgage Brokers

Judy Black: Colorado Credit Union League, Genworth Financial, Bay Harbour Management, Merrill Lynch

Kirk Blalock: Credit Union National Association, Financial Executives International, American Insurance Association, Mutual of Omaha, Zurich Financial Service Group, Fannie Mae, Federal Home Loan Bank of San Francisco

Carlos Bonilla: Financial Services Roundtable, Freddie Mac

Christine Burgeson: Citigroup

Mark Buse: Freddie Mac, Goldman Sachs, Manufacturers Life Insurance Company

Nicholas Calio: Citigroup, Managed Fund Association, Fannie Mae, Merrill Lynch, The Investment Company Institute, TIAA-CRE, Securities Industry and Financial Markets Association

Ben Nighthorse Campbell: Amscot Financial Corporation, Community Financial Services Association, Fidelity National Financial

Andrew Cantor: American Insurance Association, Merrill Lynch

Alberto Cardenas: Fannie Mae

James Courter: Goldman Sachs, Donaldson Lufkin & Jenrette, Investment Company Institute, Merrill Lynch

David Crane: Financial Services Roundtable, PriceWaterhouseCoopers, Deloitte & Touche, KPMG, Ernst & Young, Bank of America, Association of Corporate Credit Unions, Freddie Mac

Dan Crippen: Merrill Lynch, National Multi-Housing Council

Arthur Culvahouse: Fannie Mae

Bryan Cunningham: Arch Capital Group

Alfonse D’Amato: AIG, Freddie Mac

Doug Davenport: Federal Home Loan Bank of San Francisco, Goldman Sachs, VISA

Ashley Davis: Prudential Financial, American Financial Group, American Premier Underwriters, Great American Insurance Company

Mimi Dawson: MassMutual

Melissa Edwards: Freddie Mac, National Association of Real Estate Investment Trusts, Access to Capital Coalition

Chris Fidler: American Bankers Association, Milcom Venture Partners, National Association Real Estate Investment Trusts

Samuel Geduldig: American Bankers Association, American Institute of CPAs, America Gains, Berkshire Hathaway, Consumer Bankers Association, Ernst & Young, Financial Services Roundtable, Investment Company Institute, PriceWaterhouseCoopers, Prudential Financial, Sovereign Investment Council, Fidelity Investments, FMR Corp.

Benjamin Ginsberg: Massachusetts Mutual Life Insurance, AIG Technical Services

David Girard-Dicarlo: American Financial Group, American Premier Underwriters

Juleanna Glover Weiss: RJI Capital, American Institute of CPAs, BNP Paribas, Ernst & Young, PriceWaterhouseCoopers

Slade Gorton: Allstate Insurance, Hannan Armstrong Capital

Phil Gramm: UBS Americas

John Green: Laredo National Bank, Alternative Investment Management Association, AIG, Blackstone Group, Carlyle Group, Citigroup, Credit Suisse Group, Fannie Mae, Icahn Associates, FMR Corp., AFLAC, VISA

Janet Grissom: American Institute of CPAs, NYSE, Merrill Lynch

Kristen Gullott: San Diego Credit Union

Kent Hance: Stanford Financial Group, Municipal Capital Markets Group, Inc.

Vicki Hart: American Financial Services Association, Citigroup, Investment Company Institute, Lehman Brothers, Merrill Lynch, New York Stock Exchange, VISA, Carlyle Group, Credit Suisse, Federal Home Loan Bank of Indianapolis, Goldman Sachs, National Association of Government Guaranteed Lenders, Stanford Group, Lloyd’s of London, National City Corp.

Richard Hohlt: Capmark Financial Group, Fannie Mae, JP Morgan Chase and Co., Student Loan Marketing Association, Washington Mutual, Guaranty Bank & Trust, Peachtree Settlement Funding, Dime Savings Bank of New York

Gaylord Hughey: Heartland Security Insurance Group

Kate Hull: Credit Union National Association, Fannie Mae, Federal Home Loan Bank of San Francisco, Zurich Financial Services, American Insurance Association, Financial Executives International

James Hyland: American Insurance Association, Seattle Home Loan Bank, Self Help Credit Union, National Association of Bankruptcy Trustees, Merrill Lynch, Mortgage Investors Corp., Federal Home Loan Bank of Indianapolis, Freddie Mac, New York Stock Exchange, Citigroup, VISA

Aleix Jarvis: Credit Union National Association, Fannie Mae, Federal Home Loan Bank of San Francisco, Financial Executives International, Mutual of Omaha, American Insurance Association, Zurich Financial Services

Greg Jenner: American Council of Life Insurers, JG Wentworth, UBS, VISA, PriceWaterhouseCoopers

Frank Keating: American Council of Life Insurers

Steven Kuykendall: California Bankers Association

William Lesher: Chicago Mercantile Exchange, Commerce Ventures, Rabobank International

Thomas Loeffler: Citigroup, Fannie Mae, Investment Company Institute, World Savings and Loan Association, United Services Automobile Association (USAA)

Kelly Lugar: RJI Capital Strategies

Peter Madigan: Arthur Andersen, Bank of New York, Broadridge Securities Processing, Charles Schwab, Deloitte and Touche, Goldman Sachs, International Employee Stock Option Coalition, Mastercard, NYSE, Fannie Mae, Merrill Lynch, PNC Bank

Mary Mann: MassMutual

Paul Martino: Morgan Stanley, Baker Tilly

Jana McKeag: Venture Catalyst

Alison McSlarrow: Fannie Mae, Hartford

Mike Meece: Georgetown Partners

David Metzner: Ernst & Young, Harbinger Capital Investments, Prudential, Public Financial Management, Western Union

Susan Molinari: Freddie Mac, American Land Title Association, Association of Consumer Credit Unions, Beacon Capital Partners, College Loan Corp, Coventry First, E-Trade, Financial Services Roundtable, Rent-A-Center

John Moran: Cerberus Capital Management, American Council of Life Insurers, Accenture

John Napier: Freddie Mac

Susan Nelson: AIG, San Antonio Credit Union

Paul Otellini: Ernst & Young, Financial Services Forum

Steve Perry: Charles Schwab, Hoover Partners, HSBC, National Stock Exchange

Nancy Pfotenhauer: American Land Title Association, Mortgage Bankers Association

Elise Pickering-Finley: Credit Suisse, DE Shaw, Hartford Financial Services, Research In Motion, Retail Industry Lenders Association, URL Mutual

James Pitts: Advanced Association for Life Underwriting, AETNA, American Council of Life Insurers, AIG, Council of Insurance Agents and Brokers, Debt Advisory International, Financial Services Coordinating Council, GE Financial Assurance, Hartford Life, Jefferson Pilot Financial, Kenwood Investments, MassMutual, Mutual of Omaha, New York Life, UNUM Provident, VISA, PMI Group

Tim Powers: AP Capital, Genworth Financial, Retail Industry Lenders Association, E-LOAN, General Electric Mortgage Insurance

Walter Price: Wachovia

Sloan Rappoport: Friedman, Billings, Ramsey Group, Inc. (FBR), Trafelet Delta Funds

Hans Rickhoff: Capital One, Investment Company Institute, United Services Automobile Association (USAA)

Kathleen Shanahan: New York Stock Exchange

Andrew Shore: Accenture, Retail Industry Lenders Association, Barclays, Bond Market Association, Credit Suisse, TPG Capital

Katie Stahl: Alliance for Investment Transparency, Ares Management, Fairfax Financial Holdings, Uhlmann Financial Group

Milly Stanges: TIAA-CREF

Aquiles Suarez: Fannie Mae

Don Sundquist: Freddie Mac, The Hartford

Peter Terpeluk: JP Morgan Chase, Ernst & Young, Prudential

Fred Thompson: Equitas

Jeri Thompson: American Insurance Association

John Timmons: National Association of Federal Credit Unions

William Timmons Sr.: American Council of Life Insurers, Citigroup, Dun & Bradstreet, Freddie Mac, Vanguard Group

Vin Weber: Agstar Financial Services, AKT Investment Corp., American Institute of CPAs, Ernst & Young, Freddie Mac, Louis Dreyfus Corp, PriceWaterhouseCoopers

Jeffery Weiss: JP Morgan

Tony Williams: Russell Investment Group, American Life Inc., Northwestern Mutual


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