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
Yasmin Gunaratnam reflects on John Berger’s gut solidarity with the stranger
Charlie Clarke and Heather Mendick discuss how to work through the tensions within Momentum
As man-made global warming gets closer to the tipping point, Andrew Simms finds reasons to be positive about averting catastrophic climate change
In this extract from his new book The Candidate, Alex Nunns tells the inside story of how Jeremy Corbyn scraped onto the Labour leadership ballot in 2015
Graham Jones proposes a framework for a diverse movement to flourish
Bryony Moore profiles Stitched Up, a non-profit group reimagining the future of fashion
Musician Eliane Correa reflects on the fading revolution
Trump's victory is another sign of the failure of the centre-left's narrative on climate change. A new message is needed, and new politicians to deliver it, writes Alex Randall
Siobhán McGuirk says the question we are too afraid to ask is simple - what kind of society leads to Donald Trump as President?
The battle lines are clear. Democracy is in peril and the left must take itself seriously electorally and politically. Ruth Potts speaks to Gary Younge, who was based in Muncie, Indiana, for the US election, about the implications of Donald Trump’s victory
Utopia: Work less play more
A shorter working week would benefit everyone, writes Madeleine Ellis-Petersen
Short story: Syrenka
A short story by Kirsten Irving
Mum’s Colombian mine protest comes to London
Anne Harris reports on one woman’s fight against a multinational coal giant
Bike courier Maggie Dewhurst takes on the gig economy… and wins
We spoke to Mags about why she’s ‘biting the hand that feeds her’
Utopia: Daring to dream
Imagining a better world is the first step towards creating one. Ruth Potts introduces our special utopian issue
Utopia: Room for all
Nadhira Halim and Andy Edwards report on the range of creative responses to the housing crisis that are providing secure, affordable housing across the UK
A better Brexit
The left should not tail-end the establishment Bremoaners, argues Michael Calderbank
News from movements around the world
Compiled by James O’Nions
Podemos: In the Name of the People
'The emergence as a potential party of government is testament both to the richness of Spanish radical culture and the inventiveness of activists such as Errejón' - Jacob Mukherjee reviews Errejón and Mouffe's latest release
Survival Shake! – creative ways to resist the system
Social justice campaigner Sakina Sheikh describes a project to embolden young people through the arts
‘We don’t want to be an afterthought’: inside Momentum Kids
If Momentum is going to meet the challenge of being fully inclusive, a space must be provided for parents, mothers, carers, grandparents and children, write Jessie Hoskin and Natasha Josette
The Kurdish revolution – a report from Rojava
Peter Loo is supporting revolutionary social change in Northern Syria.
How to make your own media
Lorna Stephenson and Adam Cantwell-Corn on running a local media co-op
Book Review: The EU: an Obituary
Tim Holmes takes a look at John Gillingham's polemical history of the EU
Book Review: The End of Jewish Modernity
Author Daniel Lazar reviews Enzo Traverso's The End of Jewish Modernity
Lesbians and Gays Support the Migrants
Ida-Sofie Picard introduces Lesbians and Gays Support the Migrants – as told to Jenny Nelson
Book review: Angry White People: Coming Face to Face With the British Far-Right
Hilary Aked gets close up with the British far right in Hsiao-Hung Pai's latest release
University should not be a debt factory
Sheldon Ridley spoke to students taking part in their first national demonstration.
Book Review: The Day the Music Died – a Memoir
Sheila Rowbotham reviews the memoirs of BBC director and producer, Tony Garnett.
Power Games: A Political History
Malcolm Maclean reviews Jules Boykoff's Power Games: A Political History
Book Review: Sex, Needs and Queer Culture: from liberation to the post-gay
Aiming to re-evaluate the radicalism and efficacy of queer counterculture and rebellion - April Park takes us through David Alderson's new work.
A book review every day until Christmas at Red Pepper
Red Pepper will be publishing a new book review each day until Christmas
Book Review: Corbyn: The Strange Rebirth of Radical Politics
'In spite of the odds Corbyn is still standing' - Alex Doherty reviews Seymour's analysis of the rise of Corbyn
From #BlackLivesMatter to Black Liberation
'A small manifesto for black liberation through socialist revolution' - Graham Campbell reviews Keeanga-Yamahtta Taylor's 'From #BlackLivesMatter to Black Liberation'
The abolition of Art History A-Level will exacerbate social inequality
This is a massive blow to the rights of ordinary kids to have the same opportunities as their more privileged peers. Danielle Child reports.
Mass civil disobedience in Sudan
A three-day general strike has brought Sudan to a stand still as people mobilise against the government and inequality. Jenny Nelson writes.
Mustang film review: Three fingers to Erdogan
Laura Nicholson reviews Mustang, Deniz Gamze Erguven’s unashamedly feminist film critique of Turkey’s creeping conservatism
What if the workers were in control?
Hilary Wainwright reflects on an attempt by British workers to produce a democratically determined alternative plan for their industry
Airport expansion is a racist policy
Climate change is a colonial crisis, writes Jo Ram
Momentum Kids: the parental is political
Momentum Kids is not about indoctrinating children, but rather the more radical idea that children have an important role to play in shaping the future, writes Kristen Hope