Put me in the camp that says, without an accurate diagnosis, it’s not possible to cure our current economic mess.
So, here are two competing narratives explaining how we got to this juncture, both courtesy of Les Leopold (thanks to Ned Krahl for forwarding the Leopold piece):
Narrative #1: ‘We Are All to Blame’
“We Americans sank ourselves in debt. We consumed more than we produced. We bought homes we couldn’t afford and used them as ATMs. Of course Wall Street did its part by offering us mortgages they knew we couldn’t really afford. The government also contributed mightily by pushing Fannie Mae and Freddie Mac to underwrite “politically correct” loans to low-income residents who shouldn’t have been buying homes at all. In short, we all are to blame.
–Les Leopold, “Why the Big Lie About the Job Crisis?”; Huffington Post (9/3/2010)
If the foregoing is correct, here’s what logically needs to happen next:
The era of excess is over. We need to cut back on spending and borrowing. We need to reduce government debt by raising the Social Security retirement age and cutting social programs. We’ve got to streamline our public sector by laying off public employees and cutting back their lavish pensions. And all workers will have to adjust to an era of intense foreign competition: We’ve got to reduce our wage and benefit demands if our companies are going to compete globally. We have to live within our means.
In short, we gorged ourselves until the economy crashed. Now we’ve got to tighten our belts and accept less to get it going again.
Contrast that with Narrative #2, “An untethered Wall Street crashed the financial system (and broader economy) while engorging itself.”
Starting in the late 1970s . . . the financial sector was liberated from its New Deal-era shackles. Freed from any limits on constructing complex new financial products, hedge funds and too-big-to-fail banks and investment houses created an alphabet soup of new securities with the sky-high yields. The rating agencies abetted the crime by blessing these flimsy products with AA and AAA ratings.
Wall Street built this flim-flam of finance out of junk debt — like sub-prime mortgages — which it could pool, slice, and resell for enormous profits. In fact, selling these bogus securities was the most profitable enterprise in the history of Wall Street. Wall Street wrapped credit default swaps and collateralized debt obligations into pretty packages so that they could literally sell the same underlying junk assets again and again.
The whole scheme worked just fine as long as the underlying collateral (our homes) appreciated year after year. But as soon as housing prices peaked, it was game over. The upside-down pyramid of debt and junk financial instruments came crashing down. The entire credit system froze, tearing a gaping hole in the real economy.
Guess which narrative I find more accurate?
Only once the disease has been diagnosed, can a cure be promulgated.
Here is Leopold’s:
Through steep progressive taxes on the super-wealthy, fair income taxes on hedge funds and transaction fees on Wall Street’s proprietary trading, we can keep that bubble from reinflating — and in the process raise the money we need to put America back to work. With the revenue we collect, we can hire millions of people to weatherize homes and buildings and rebuild our infrastructure. Instead of laying off teachers we can hire more, and provide them with better training and support. We can expand universities and colleges too, and allow people to go to college for free, which will improve our peoples’ skills — and keep young people off the unemployment rolls.
The only step Leopold omits is holding Wall Street accountable — through appropriate civil and criminal remedies — for its transgressions.