The Great Recession and “We the People”

Not the Great Depression. But is that because the government did something right, or would it have been better if it did something else?

The US and Britain are slowly clawing themselves out of the “Great Recession” (with the Eurozone threatening to drag us all back in). There’s been a lot of screaming about what the government did, should, or shouldn’t have done, and whether its attempt to restart our economic engine by shoveling money into it will feed the fire or just smother future growth under a pile of debt.

Now, whether or not the government did the worst thing it could possibly do with the various bailouts, or just did what had to be done at the time (unpopular as it may be now) in order to keep the whole mess from going over the precipice, I will leave to others.

As an aside, however, I do those people who think it would have been better to do nothing are, I think, deluding themselves. It seems pretty clear, at least to me, that the world economy was on the razor’s edge of collapsing in systematic and catastrophic ruin. The economic and social consequences of this happening on a world-wide scale would have made the “Great Depression” seem small, exacerbated world tensions to the point of dangerous chaos, and probably put a whole lot of us, who still have something to hold on to, in bread lines. Only survivalists, and people who wish for Armageddon, would have liked that (until the rest of us came to take their K-rations from them by force).

Click here for a link to "The Giant Pool of Money"

If you want a clear picture of how we got into this mess, you should check out Planet Money’s “The Giant Pool of Money,” which also ran on This American Life. But to oversimplify, the financial world went looking for a place to park bundles of cash, and by creating new kinds of trading instruments (derivatives, mortgage-backed securities) and hedging strategies (credit default swaps, computer-modelled and controlled mass trading) was able to fuel an incredible expansion in the over-valuation of assets (real property, securities made up of bundled mortgages) that, like a bubble, was filled with nothing but hot air. The world, in effect, was living on assets whose value did not really exist, and that were, even worse, insured for their inflated value by the same bad paper. All that “growth” and “wealth” was really just numbers in what amounted to a global Ponzi scheme.

Who did this to us?

It’s typical, when a Ponzi scheme comes apart, for the people who were caught while still hoping to make a killing to play the victim and blame others for their semi-intentional delusions. Then they get angry at everyone else. And here we have a Ponzi scheme in which people from the highest echelons of finance to the lowest strata of home-owners participated.

And, by the way, it’s not our fault. It’s the government’s.

After all, it was the government who hired physicists and computer scientists to come up with the trading instruments and models that allowed this to happen. It was the government who invented and wrote sub-prime mortgages, and bundled them into un-verifiable mortgage-backed securities. It wrote bad loans, approved, and signed them. After all, the government not just allowed, but encouraged, applicants to fantasize about their income for loans, and baited them into signing high-commission loans which they neither understood nor could afford. And it was probably the government too, half blinded not by the mortgage seller but by the lure of quick cash or the big house, who signed on the dotted line without reading or understanding the implications.

Ah, the free-market Joker.

Yep. The government raked in money from overblown drive-by assessments, and marked off inspections that never happened. It flipped properties over and over until it was sucked under by the whirlpool it had created, or took out loans over value on speculation houses and property and split. And the government took second, third, and fourth mortgages, and home equity lines of credit, to ride the bubble up to bursting until its loan-to-value ratio on its own house was under water. Our government took its retirement money and threw it into bad 401k investments and mutual funds whose values were inflated by the sick and bloated bubble, and kept us in the game by promising us Maddof-like returns that seemed to be in the bag.  Too bad the bag was empty.

What I want to point out here is that the economic failure doesn’t have all — or even most — of its roots in government, but in a deeply embedded ideology of the ability of the market to contain itself and to transform our individual self-serving motivations into a collective good. When it came to what the free market is supposed to do best, manage and make money, we kept government and its pesky regulators either out of our way, or found ways to run rings around them. Why did we do it? We did it because everything always works best if government just gets out of the way. And because we were greedy. And gullible. And everyone else was doing it. And we didn’t want to be left behind. And because we couldn’t live the life to which we wanted to become accustomed without pretending that it was all going to work.

Eventually the government was also induced — in fact directed — by free market and constituent-defending congress people to jump on the sub-prime bandwagon and not miss out of the bonanza of market bliss being sold just down the street. And that compounded the problem, for sure. But it didn’t create it.

No, my friends, that was us: you and me. It was the hard-working small business owner, the mortgage broker, the appraiser, the banker, the refinancing suburbanite, and the city council member from rural America seeking to fund public goods people wanted but wouldn’t pay for with high-risk-reward investments. It was the roofer who wanted to finally have his own roof no matter what, and the wiz-bank financial guru who wanted the multi-million dollar bonus. It was the family who bought above their means, the guy who just wanted to finally have an iPod and a vacation, and the Morgan Stanley VP who could expect a multi-million bonus for taking a risk with other people’s money that really wasn’t there. It wasn’t the government, it was “We, the people.

Welcome to our collective catastrophe.

Blame one boogie-man, then another. It's about time to admit that it's the citizens of Gotham that are the Jokers.

And now that it’s all come home to roost, who are the most angry? Well, some people might single out the Tea Partiers as the kind of people who are particularly aggrieved.  And with good reason. Even though they have been over-rated by the media, it turns out that the TPers are mostly well-educated, moderate to upper-income, and white folks from some of the very communities that benefitted the most — and then were hit the hardest — by our collective delusion. It looks to me that the middle class, who have been losing ground over the last twenty years except by leveraging the illusion of their continuing prosperity on the hopes of the all-mighty market are still in denial that they actually have to pay for what they want (including government services). Instead of calling into question the ideology on which the delusion was based, it’s someone else’s fault. We’re the victim here. Boo, hoo, hoo.

And who are we left to be angry at? Oh, yeah, the government.

I’m not enthusiastic for taxes. I’m definitely opposed to unwarranted government intrusion. I’m all for local people trying to take care of local problems. What I’m not for is being unwilling to face the fact that what we have borrowed, built, expect, and want from our common state of affairs costs real money.  I’m against refusing to face the consequences of things we have largely brought on ourselves by making the common good and our elected leaders into a socialist-nazi boogieman painted in mock black face. I think it’s about time we faced our common financial problems squarely, honestly, practically, and pragmatically. But I forget: it’s not my fault. It’s the government’s. If we just got rid of that it would be all good.