Last week, I discussed a bit about Marriner Eccles, prominently featured in Robert Riech’s new book Aftershock.Â While most people believe the problem with the Great Recession and Great Depression was the fault of Americans relying on too much debt, Reich believes the reason Americans went into dept is the symptom of a much larger problem.Â From pages 23-25,
Across the nation, the most affluent Americans have been seceeding from the rest of the nation into their own separate geographical communities with tax bases (or fees) that can overwrite much higher levels of services.Â They have moved into office parks and gated communities, and relied increasingly on private security guards instead of public police, private spas and clubs rather than public parks and pools, and private schools (or elite public ones in their own upscale communities) for their children rather than the public schools most other children attend.Â Being rich now means having enough money that you don’t have to encounter anyone who isn’t.Â The middle class and the poor, meanwhile, rely on public services whose funding is ever more precarious:Â schools whose classrooms are more crowded; public parks and libraries open fewer hours and often less attended to; and buses and subways that are more congested.Â The adjective “public” in public services has often come to mean “inadequate.”
There is another parallel.Â In the years leading up to 2007, with the real wages of the middle class flat or dropping, the only way they could keep on buying–raising their living standards in proportion to the nation’s growing output–was by going deep into debt.Â “As in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing,” as Eccles put it.Â Savings had averaged 9-10 percent of after-tax income from the 1950s to the early 1980s, but by the mid-2000s were down to just 3 percent.Â The drop in savings had its mirror image in household debt (including mortgages), which rose from 55 percent of household income in the 1960s to an unsustainable 138 percent by 2007.Â Ominously, much of this debt was backed by the rising market value of peoples homes.
The years leading up to the Great Depression saw a similar pattern.Â Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled.Â Total mortgage debt was almost three times higher in 1929 than in 1920.Â Eventually, in 1929, as in 2008, there were “no more poker chips to be loaned on credit,” in Eccles words.Â And “when … credit ran out, the game stopped.”
A third parallel: In both periods, richer Americans used their soaring incomes and access to credit to speculate in a limited range of assets.Â With so many dollars pursuing the same assets, values exploded.Â the Dow Jones Industrial Average reached eight thousand on July 16, 1997, and eleven thousand on May 3, 1999.Â More money poured into dot-coms than could be efficiently used, then into more miles of fiber-optic cable than could ever be profitable.Â The Dow dropped when these bubbles burst, but recovered on self-fulfilling expectations of even higher share prices to come–rising to twelve thousand on October 19, 2006, then to thirteen thousand on April 25, 2007.Â With easy access to credit, the middle class joined in the party, boosting housing prices to all-time highs.Â Â Yet it is an iron law of economics, as well as of physics, that expanding bubbles eventually burst.
Wall Street cheered them on in the 1920s, making a ton of money off gullible investors, almost exactly as it would in the 2000s.Â In 1928, Godman Sachs and Company created the Goldman Sachs Trading Corporation, which promptly went on a speculative binge, luring innocent investors along the way.Â Four years later, after the giant bubble burst, Mr Sachs appeared before the Senate.
[dialogue between Senator Couzens and Mr. Sachs shows that the stock price of the trading company plummeted from 104 to 1 3/4]
Yet however much Wall Street’s daredevil antics in the 1920s and in the 2000s were proximate causes of the giant bubbles of these two eras, the bubbles also reflected deeper problems Eccles identified–the growing imbalance between what most peopel earned as workers and what they spent as consumers, and the increasingly lopsided share of total income going to the top.Â In both eras, had the share going to the middle class not fallen, middle-class consumers owuld not have need to go as deeply into debt in order to sustain their middle-class lifestyle.Â Had the rich received a smaller share, they would not have bid up the prices of speculative assets so high.
Ok, can anyone see any problem with Reich’s reasoning at this point?