Damage squared

From the early 1970's on, the social inequity induced by the growing practice of disproportionate executive self-entitlement insidiously undermined the economic vigor of the nation from two sides. On the one hand, it distorted the psychology of value behind the cost of essential goods and services - most importantly, rentals, home mortgages, vehicle ownership and health care - as businesses of every kind strove to appeal more to the upscale side of the market than those in the middle to bottom. On the other hand, it eroded the spending power that, in a better world, would have gone to millions obliged by geography to play in the same socio-economic sandbox as their better paid contemporaries. With that erosion in personal spending power, came a shrinking of the demand side of the economy that, in turn, obliged the supply side to stunt wage advancement and replace workers with smart machinery. Apologists for the trend touted resulting increases in productivity without adequately explaining how such increases would translate into greater happiness for the average American who wasn't one of the immediate beneficiaries of such productivity.
Even after the spate of criticism that errupted in the wake of the Great Credit Correction of 2008, the basic rationale that had been used to justify such grievous disparities in pay did not undergo significant revision. Those same disparities persist four years later.
The current phase of distribution problems we are attempting to grapple with now started sometime back in the mid 1970's. Like tectonic plates, the two basic realities of median price and median means began to move away from one another, leaving a deep rift between them. Compounding the problem was the fact that the ratio between the median wage and the average wage - a reliable indicator of how well earnings are distributed across society - began to drop, signaling a migration of pay away from the middle toward the top. This gradually widening gulf in means was a space that the financial services industry thought it could capitalize on by offering to bridge with credit. The thinking of the day was that such a bridge could yield a handsome return in interest payments, over time, paid out of the aggregate earnings of those soliciting such help in order to stay afloat financially and included in the life of society. I don't fault that they chose to do business meeting an obvious need. What I fault was the fatal miscalculation (based on the kind of folkloric optimism for which Americans are renowned among nations) that it would all just work out in the end. Any educated realist could see that such casual lending was bound to end in financial calamity, but the industry pursued the option with reckless abandon anyway, mainly because the people who were in that business were making very good money and, almost to a man, believed they would know when to jump ship.
Why did the top people in the financial services sector err so badly? Perhaps it was because the super-successful had so divorced themselves from the daily struggles of more average Americans, financial and otherwise, that they lacked the subjective immersion required to realize that they were expecting blood to flow from a turnip, that, regardless of how hard they squeezed, the result would always only be turnip juice. For a few, no doubt, it was that old game of financial chicken; the trick being to know when your luck had peaked and to get out before you got caught with your financial (or ethical) pants down.

Compounding the whole picture of the crazy runup in property prices fueling lending was the fact that, once they got into their homes, those who had bought them would want nothing more than for prices to rise as quickly as possible - forever, preferably - so they could put a whole lot of distance between where they had come from and where they wanted to get to. The inflation in value would allow them to supplement their incomes with equity extraction while still maintaining a cash-out fall-back position greater than what they owed on paper. It was like getting money out of fresh air, without raising a finger, and altogether too many bought into the heady magic of it, with nary a peep of concern from government, at any level. Somehow, the possibility of a run on the market, that would rip the very guts out of the demand side and send prices tumbling, though talked about, never really took hold until it was too late for most overstretched purchasers to sell their houses for what it would take to expunge their debts. Once underwater, they became instant prisoners of their mortgages. Real estate companies, for their part, were happy to pull out all the stops to make the deals keep coming. Everybody was in it for the money and while this giant scam was on a roll, for those who cashed out soon enough, the winnings were exceedingly good.

Calls from below for moderating the rise in home prices through government action so that homes would not be priced out of the reach of potential first-time buyers fell on deaf ears. People in industries connected with real estate, and those eager to see the held equity in their homes grow, were adamantly opposed to the idea of any kind of government intervention designed to preserve a sustainable form of affordability. Any who dared express misgivings were characterized as alarmists and their concerns deemed nothing more than the whining of losers. Among those who thought they were doing so very well, it was a classic case of "I'm OK, Jack; pull up the gangplank. Full speed ahead and damn the torpedoes!"
Under normal circumstances, buyer restraint would have held prices from going up faster than market realities could support, but these weren't normal times. The rampant extension of credit, with too few prerequisites, gave people an inflated sense of prosperity and the resulting lack of reasoned caution, nationwide, encouraged prices to rise faster than a technical analysis of general disposable income could justify, even with the so-called "help" of credit.
All the while, as a result of the credit industry's subsidization of personal purchasing ability, people felt less compelled to negotiate for pay increases or scrounge for better home-buying deals. Instead, they were encouraged to believe that they could get ahead without such wage/price concessions. Between the two options - trying to persuade your boss to pay you more or just getting a home-equity loan - taking advantage of readily proffered, apparently cut-rate, credit seemed a lot easier, psychologically speaking, than negotiating with management for better compensation. That fewer workers saw fit to join unions to press for better pay and working conditions in the last couple of decades, can be attributed, in large part, to a false sense of rising financial capability engendered by incrementally easing credit terms.

When it comes to improving one's lot, ducking the issue and taking the easy way out rarely proves to be the wisest path in the long run. This case was no exception. Quietly, the financial approaches that people were taking to make ends meet were gnawing away at the nation's storehouse of owner-held home equity - a figure that rested, in large measure, upon people's confidence in the general economy - until, in the beginning of 2008, the nation awoke one day to the scary news that homeowners held less in equity in their homes, as a bloc, than they owed for the combination of first having purchased and then borrowed against those homes for every kind of other expense imaginable - an unprecedented situation in the history of the nation. Not just that, mind you, but the dread prediction that equity values would fall in the not-too-distant future and significantly increase the unfavorable ratio between indebtedness and held equity. The stage was now set for the dark events that were soon to commence. It was just a question of where the first crack would appear; after that all hell would break loose.

At the same time real doubts were beginning to be voiced, it was reported that the earnings of the richest quintile had risen 34% in the years between 2001 and 2006 alone, effectively allowing that group to pay out-of-pocket for whatever they needed, free of the inconvenient extra sting of attached interest - yet one more factor contributing to the pace at which the financially privileged were pulling away from the huge bulk of their fellow citizens. Those at the very tip of this gilded class had seen a meteoric rise in compensation - up 300% since 1979 for the top 1%, compared to only a rise of 1% for the bottom quintile whose basic life costs quadrupled during that time.

This striking difference between how most people were having to manage their financial affairs and how the richest of Americans were able to go about it fed the dichotomy that opened up during the second term of the Clinton administration and the first years of the new century. By the end of 2007, the richest one hundredth of the population owned fully a quarter of all the wealth in the country and the trend feeding that imbalance was accelerating, pushing prices up on one side and lower-end earnings down on the other.

It was never a case of whether the struts supporting that gigantic, overloaded credit bridge would give way (financial inventiveness notwithstanding), just when. On that fateful day, the standard thought forms feeding general confidence about what homes were actually worth would go too, turning the securities based on the values of a significant fraction of those homes into junk that brought down top-flight investment houses and their insurers, along with a good chunk of the main-street economy across the nation that had grown fat on spending based on the extraction of imaginary wealth from homes across fifty states, courtesy of banks, large and small; banks who would suddenly reverse course on the bullish propaganda they'd been disseminating, get cold feet and freeze nearly all lending while they came to grips with what was happening. But before it actually happened, not many people wanted to talk about the possibility of that kind of collapse occurring. The imagination reeled in the face of it. So many, at so many levels, were so deeply invested in this grand, nationwide illusion of being able to get rich through real estate that they found it preferable not to be informed, let alone discuss how they would deal with it should things happen to go sour.

The coup-de-gras and final insult to prudence was the stunning magnification of losses created by unregulated credit default swaps - a nest of bogus financial assurances that made a complete mockery of what combined purpose the American dollar and law ought be put to in a civilized country.

In one case, in an effort to dress perfidy up in prudence, the federal government kept the main purveyor of credit default swaps, American International Group, a private insurance house that had greatly over-leveraged itself, afloat to the tune of $180 billion. To be fair, when one considers the alternative, they could hardly have done otherwise, and yet, ordinary working people everywhere are hard put to understand how this giant row of financial dominoes could possibly have been allowed to be set up. To say that it's made them cynical about how the government they sponsor exercises oversight is something of an understatement.

The ultimate cost of such public cynicism should not be underestimated. There are certain grand initiatives the nation badly needs to undertake. The tenor of public opinion could spell the difference between victory or defeat in the one war we really do need to win - not the War on Terror, but the war against catastrophic climate change driven by increased economic activity on the part of the many nations competing to develop their economies. Lose that one, and none of this will matter.