Crisis of a gilded age

Deregulated capitalism may have come to a crunch, says Doug Henwood, but there's nothing new on the horizon

September 29, 2008
5 min read

For the past two or three decades sceptics watched as deregulated finance got ever more reckless, as the gap between rich and poor widened to a chasm not seen since the turn of the last century, and they said, ‘Someday there’s going to be hell to pay for all this.’ But despite a few nasty hiccups every few years — the 1987 stock market crash, the savings and loan debacle of the late 1980s, the Mexican and Asian financial crises of the mid-1990s, the dot-com bust of the early 2000s — somehow the economy regained its footing for another game of chicken. Has its luck finally run out?

It might seem odd to link the current financial crisis with the long-term polarization of incomes, but in fact the two are deeply connected. During the housing bubble, people borrowed heavily not only to buy houses (whose prices were rising out of reach of their incomes) but also to compensate for the weakest job and income growth of any expansion since the end of World War II. Between 2001 and 2007, homeowners withdrew almost $5 trillion in cash from their houses, either by borrowing against their equity or pocketing the proceeds of sales; such equity withdrawals, as they’re called, accounted for 30 percent of the growth in consumption over that six-year period. That extra lift disguised the labour market’s underlying weakness; without it, the 2001 recession might never have ended.

But that round of borrowing only extended one that had begun in the early 1980s. At first it was credit cards, but when the housing boom really got going around 2001, the mortgage market took the lead. Now households are up to their ears in debt, and the credit markets are broken.

Borrowing is only one side of the story. As incomes polarised, America’s rich and the financial institutions that serve them found their portfolios bulging with cash in need of a profitable investment outlet, and one of the outlets they found was lending to those below them on the income ladder. (That’s one of several places where all the cash that funded the credit card and mortgage borrowing came from.) They also poured their money into hedge funds, private equity funds and just plain old stocks and bonds.

That 25-year gusher of cash led to an enormous expansion in the financial markets. Total financial assets of all kinds (stocks, bonds, everything) averaged around 440 percent of GDP from the early 1950s through the late 1970s. They grew steadily, breaking 600 percent in 1990 and 1,000 percent by 2007. With a few notorious interruptions, it looked like Wall Street had entered a utopia: an eternal bull market. Regulators stopped regulating and auditors looked the other way as financial practices lost all traces of prudence. No figure embodies that negligence better than Alan Greenspan, who as chair of the Federal Reserve dropped the propensity to caution and worry characteristic of the central banking profession and instead cheered the markets onward. As he said many times in the 1990s and early 2000s, who was he, a mere mortal, to second-guess the collective wisdom of the markets? He seemed to have no sense that markets embody no collective wisdom and often act with all the careful consideration of a mob.

So while the proximate cause, as the lawyers say, of the current financial crisis is the bursting of the housing bubble and the souring of so much of the mortgage debt that financed it, that’s really only part of a much larger story. And while it’s inevitable that the government is going to have to spend hundreds of billions to repair the damage over the next few years, there’s a lot more that needs to be done over the longer term.

This is the point where it’s irresistibly tempting to call for a re-regulation of finance. And that is sorely needed. But we also need to remember why finance, like many other areas of economic life, was deregulated starting in the 1970s. From the point of view of the elite, corporate profits were too low, workers were too demanding and the hand of government was too heavy. Deregulation was part of a broad assault to make the economy more ‘flexible’, which translated into stagnant to declining wages and rising job insecurity for most Americans. And the medicine worked, from the elites’ point of view. Corporate profitability rose dramatically from the early 1980s until sometime last year. The polarization of incomes wasn’t an unwanted side effect of the medicine — it was part of the cure.

Although we’re hearing a lot now about how the Reagan era is over and the era of big government is back, an expanded government isn’t likely to do much more than rescue a failing financial system (in addition to the more familiar pursuits of waging war and jailing people). Nothing more humane will be pursued without a far more energised populace than we have. After this financial crisis and the likely bailout, it looks impossible to go back to the status quo ante — but we don’t seem ready to move on to something appealingly new yet, either.

This article appeared in the 24 September 2008 edition of The Nation


✹ Try our new pay-as-you-feel subscription — you choose how much to pay.

Red Pepper’s race section: open editorial meeting 19 April
On April 19th, we’ll be holding the second of Red Pepper’s Race Section Open Editorial Meetings.

Changing our attitude to Climate Change
Paul Allen of the Centre for Alternative Technology spells out what we need to do to break through the inaction over climate change

Introducing Trump’s Inner Circle
Donald Trump’s key allies are as alarming as the man himself

Secrets and spies of Scotland Yard
A new Espionage Act threatens whistleblowers and journalists, writes Sarah Kavanagh

#AndABlackWomanAtThat – part II: a discussion of power and privilege
In the second article of a three-part series, Sheri Carr reflects on the silencing of black women and the flaws in safe spaces

How progressive is the ‘progressive alliance’?
We need an anti-austerity alliance, not a vaguely progressive alliance, argues Michael Calderbank

The YPJ: Fighting Isis on the frontline
Rahila Gupta talks to Kimmie Taylor about life on the frontline in Rojava

Joint statement on George Osborne’s appointment to the Evening Standard
'We have come together to denounce this brazen conflict of interest and to champion the growing need for independent, truthful and representative media'

Confronting Brexit
Paul O’Connell and Michael Calderbank consider the conditions that led to the Brexit vote, and how the left in Britain should respond

On the right side of history: an interview with Mijente
Marienna Pope-Weidemann speaks to Reyna Wences, co-founder of Mijente, a radical Latinx and Chincanx organising network

Disrupting the City of London Corporation elections
The City of London Corporation is one of the most secretive and least understood institutions in the world, writes Luke Walter

#AndABlackWomanAtThat: a discussion of power and privilege
In the first article of a three-part series, Sheri Carr reflects on the oppression of her early life and how we must fight it, even in our own movement

Corbyn understands the needs of our communities
Ian Hodson reflects on the Copeland by-election and explains why Corbyn has the full support of The Bakers Food and Allied Workers Union

Red Pepper’s race section: open editorial meeting 15 March
On 15 March, we’ll be holding the first of Red Pepper’s Race Section open editorial meetings.

Social Workers Without Borders
Jenny Nelson speaks to Lauren Wroe about a group combining activism and social work with refugees

Growing up married
Laura Nicholson interviews Dr Eylem Atakav about her new film, Growing Up Married, which tells the stories of Turkey’s child brides

The Migrant Connections Festival: solidarity needs meaningful relationships
On March 4 & 5 Bethnal Green will host a migrant-led festival fostering community and solidarity for people of all backgrounds, writes Sohail Jannesari

Reclaiming Holloway Homes
The government is closing old, inner-city jails. Rebecca Roberts looks at what happens next

Intensification of state violence in the Kurdish provinces of Turkey
Oppression increases in the run up to Turkey’s constitutional referendum, writes Mehmet Ugur from Academics for Peace

Pass the domestic violence bill
Emma Snaith reports on the significance of the new anti-domestic violence bill

Report from the second Citizen’s Assembly of Podemos
Sol Trumbo Vila says the mandate from the Podemos Assembly is to go forwards in unity and with humility

Protect our public lands
Last summer Indigenous people travelled thousands of miles around the USA to tell their stories and build a movement. Julie Maldonado reports

From the frontlines
Red Pepper’s new race editor, Ashish Ghadiali, introduces a new space for black and minority progressive voices

How can we make the left sexy?
Jenny Nelson reports on a session at The World Transformed

In pictures: designing for change
Sana Iqbal, the designer behind the identity of The World Transformed festival and the accompanying cover of Red Pepper, talks about the importance of good design

Angry about the #MuslimBan? Here are 5 things to do
As well as protesting against Trump we have a lot of work to get on with here in the UK. Here's a list started by Platform

Who owns our land?
Guy Shrubsole gives some tips for finding out

Don’t delay – ditch coal
Take action this month with the Coal Action Network. By Anne Harris

Utopia: Work less play more
A shorter working week would benefit everyone, writes Madeleine Ellis-Petersen

Mum’s Colombian mine protest comes to London
Anne Harris reports on one woman’s fight against a multinational coal giant