Economic crisis started in the 70s

[w¡n9Nµ7 §£@¥€r 123]

By Robert B. Reich

Sunday, February 1, 2009; B03

...

The bursting of the housing bubble caused the current crisis, but the underlying problem began much earlier -- in the late 1970s, when median U.S. incomes began to stall. Because wages got hit then by the double-whammy of global competition and new technologies, the typical American family was able to maintain its living standard only if women went into the workforce in larger numbers, and later, only if everyone worked longer hours.

When even these coping mechanisms were exhausted, families went into debt -- a strategy that was viable as long as home values continued to rise. But when the housing bubble burst, families were no longer able to easily refinance and take out home-equity loans. The result: Americans no longer have the money to keep consuming. When you consider that consumers make up 70 percent of the economy, the magnitude of the problem becomes apparent.

...

Since the late 1970s, a greater and greater share of national income has gone to people at the top of the earnings ladder. As late as 1976, the richest 1 percent of the country took home about 9 percent of the total national income. By 2006, they were pocketing more than 20 percent. But the rich don't spend as much of their income as the middle class and the poor do -- after all, being rich means that you already have most of what you need. That's why the concentration of income at the top can lead to a big shortfall in overall demand and send the economy into a tailspin. (It's not coincidental that 1928 was the last time that the top 1 percent took home more than 20 percent of the nation's income.)

...

This downturn is revealing the U.S. economy's underlying flaws. Once the business cycle turns up, the public and its representatives may be less inclined to tackle the things that truly drag us down. Clinton was, after all, reelected in 1996 on the wave of a cyclical upturn in the economy. But the structural problems that he failed to address -- widening inequality, sagging median incomes, a broken health-care system, crumbling infrastructure and global warming -- are that much larger now, making the current crisis all the worse.

Robert B. Reich, secretary of labor under President Bill Clinton, is a professor of public policy at the University of California at Berkeley.

http://www.washingtonpost.com/wp-dyn/conte...3003116_pf.html

[alienlovechild 75]

Most of what Reich is true. But. . .

As late as 1976, the richest 1 percent of the country took home about 9 percent of the total national income. By 2006, they were pocketing more than 20 percent. But the rich don't spend as much of their income as the middle class and the poor do -- after all, being rich means that you already have most of what you need.

Spending isn't the problem as plenty of American overspent and went into debt. The wealthy down stuff money under their beds. You want to them invest in scetors of the incme where productivity can increase and make more money and jobs for everyone. Mere redistribtion of wealth doesn't guarantee prosperity as the Gini (?) index shows. Some countries has a more equal distribution of wealth but it doesn't increas the GDP.

Clinton was, after all, reelected in 1996 on the wave of a cyclical upturn in the economy. But the structural problems that he failed to address -- widening inequality, sagging median incomes, a broken health-care system, crumbling infrastructure and global warming -- are that much larger now, making the current crisis all the worse.

Good old Bill. The rich got richer . . . it ruined the economy in the 90s. That's not how everyone remembers the decade.

[mRx 16]

Are the richest of the rich just building houses out of stacks of bills?

No, of course not. Their earned wealth makes it's way back into the economy. Either by investment, consumption, or saving for further consumption/investment.

Inflation brought our prices up and forced our wages up, making us uncompetitive in the global market; This is why we have such startling trade deficits, and such a high debt as a nation.

[one...two...tree 2,762]

Reich is right on the money - the carrot on the stick...gave people a false belief that they getting ahead financially, with their home being the foundation and abundant supply of capital through credit.

I said 2 years ago on VJ in OT that I thought the housing market was a scam and I nearly got my head bit off by LisaD ....although understandably so because she worked in real estate. The rapidly growing equity in homes was fueled by both subprime mortgages and home equity loans, but the free market proponents kept ranting it was simply the market forces of supply and demand that effect the value of homes. Now we all know that was utter bull sh!t.

[SpiritAlight 1]

I've had this overwhelming thought lately:

The U.S. are "the shoppers" and so the world's industries got built and grew to satiate the consumption machine, and now the U.S. is not shopping (for obvious reasons), the world – as well as local (economy) – is suffering.

I am so curious to see what the world (especially here in the U.S. and Canada) will look like when this "shake-down" is done/completed.

It is a shock only because it took too long to happen and it feels abrupt.

Kind of like an avalanche.

[SpiritAlight 1]

Reich is right on the money - the carrot on the stick...gave people a false belief that they getting ahead financially, with their home being the foundation and abundant supply of capital through credit.

I said 2 years ago on VJ in OT that I thought the housing market was a scam and I nearly got my head bit off by LisaD ....although understandably so because she worked in real estate. The rapidly growing equity in homes was fueled by both subprime mortgages and home equity loans, but the free market proponents kept ranting it was simply the market forces of supply and demand that effect the value of homes. Now we all know that was utter bull sh!t.

People have been trying to shut me up with my view points too.

Not my friends, just those conservative, right-wing types.

Things I said years ago are here and now.

Time always answers questions.

Great link in your signature Fancypants. Thanks!

[one...two...tree 2,762]

I've had this overwhelming thought lately:

The U.S. are "the shoppers" and so the world's industries got built and grew to satiate the consumption machine, and now the U.S. is not shopping (for obvious reasons), the world – as well as local (economy) – is suffering.

I am so curious to see what the world (especially here in the U.S. and Canada) will look like when this "shake-down" is done/completed.

It is a shock only because it took too long to happen and it feels abrupt.

Kind of like an avalanche.

Our economy shifted from one driven primarily from manufacturing to one driven by consumption...and that consumption was fueled by artificial credit. A grand scheme brought to us by the free market capitalists who really think it's the path to economic utopia. This isn't Kansas anymore.

[w¡n9Nµ7 §£@¥€r 123]

I said 2 years ago on VJ in OT that I thought the housing market was a scam and I nearly got my head bit off by LisaD ....although understandably so because she worked in real estate.

People have been trying to shut me up with my view points too.

Not my friends, just those conservative, right-wing types.

I don't think we need to start a war here. Diss the generic right-wing, no names please.

[mRx 16]

Steven, the free market capitalists cannot create artificial credit. That would be counterfeiting. Only the Federal Reserve is above that law.

Fannie Mae, Freddie Mac, and other Government Sponsored Enterprises were created to directly interfere with the housing market by determining loan procedures, completely usurping the free market model of determining risk and default. Being completely backed by the government (read: American taxpayer), these GSE's had little incentive not to lend. Where was the risk? Their funding came directly from discounted loans from the Federal Reserve, enabling them to offer rates not possible by the unsubsidized private sector, thus forcing these mortgage companies out, because they actually had risk. This explains why Fannie and company held or secured over 50% of the mortgages in the U.S.

It's true that supply and demand effect the value of housing, but as I've pointed out, the demand was created by the artificial supply of money that was fed out for mortgages via the GSE's from the Fed. So the free market was not bullsh!t as the supply/demand forces correctly valued the houses due to their demand, however the supply was enabled due to artificial credit expansion, which created the bubble. And all bubbles must eventually bust.

[spookyturtle 9,466]

It started in 1929. We still haven't recovered.

[Mr. Big Dog 10,747]

Came across this piece today - quite an interesting perspective.

What Obama Could Learn from Germany

By Gabor Steingart in Washington, DC

The United States is experiencing its worst crisis in decades. Obama is trying to fight it by preparing one gigantic economic stimulus program after the other. But the hangover is inevitable, and if the desired economic miracle doesn't materialize, it will be a massive one.

The most attractive thing about globalization is that it has enabled us to develop international tastes in our shopping. Our wine comes from France, our flat-screen televisions from Korea and our elegant shoes from Italy.

But you can also find good ideas for governing by shopping for them around the world. The catalogue of ideas is packed. Indeed, many countries have answers to the question on everyone's mind these days: "How do I rescue my economy?"

But the new US president prefers American-made products. And even if the Senate has watered down the internationally contested protectionist provisions in the US economic stimulus package, "Buy American" remains a popular term in the heartland as Washington navigates the muddy waters of this crisis. For Obama, the obvious course was to opt for an XXL-sized stimulus package complete with a job-creation program, even if that meant a huge deficit. It is a concept that was developed and tested by former US President Franklin D. Roosevelt in the 1930s and 1940s.

FDR, as the Depression- and World War II-era president is commonly known, remains popular in the United States today. Obama describes him as his role model.

The idea works like this: You take money that you don't have, you let it rain down on the people and public construction projects start to spring up all across the country. Under FDR, the country built 900,000 kilometers of new roads, 77,000 new bridges and 285 additional airports. Under Obama, the country will see millions of new high-speed Internet connections, health insurance companies will obtain modern computer systems and the parks on Capitol Hill will be freshly landscaped.

It's a shame, though, that Obama hasn't shopped around a bit more. He could have looked to Germany for ideas -- its competing plan for rescuing the economy is certainly worth a look. It's cheaper and has a longer shelf life than a lot of the other products currently available on the intellectual market. It originated in the 1950s and is referred to as a "culture of stability."

It was the handiwork of former German Economics Minister Ludwig Erhard, better known as the father of the country's post-war Wirtschaftswunder ("economic miracle"). Erhard's model not only functions differently from FDR's, it also smells different -- namely of sweat.

His plan shuns excessive debt. His argument was that people would first make an effort when money became tight and, thus, more valuable. You get the best results, he found, if, in the tried and true manner of our forefathers, you work hard and don't forget to save. "The state can't afford anything that doesn't come from the strength of its own people," was the message. He also could have said: No pain, no gain.

The Roosevelt model is more generous in this respect -- one could also say more careless. The same rules apply which were standard until the beginning of the American real estate crisis: we'll give you the keys today, no down-payment necessary, we'll send you the bill later. Of course you can pay in installments.

The national debt under the Roosevelt administration stood in his first year in office at a moderate $22 billion. By 1940 it had doubled to $50 billion and in 1943 it was $143 billion. In Roosevelt's last year in office, he achieved his personal record of $260 billion.

Cheating the People

No US president governed on credit with such abandon as FDR. Obama, however, is now trying to emulate him. He has already asked Congress for $1.5 trillion in debt-financed public spending. Another $2 trillion could follow, if the banking sector continues to be unsettled.

But nobody should worry about the cost, say those who are trying to sell the FDR model. That is exactly the clever thing about this product: Everything pays for itself. If a country has enjoyed too many economic excesses -- so says the instruction manual -- it should simply keep partying. The merry reveler knows no hangover, as the Germans like to say.

And anyone who feels a bit unwell has drunk, not too much, but too little from the credit punchbowl. The limiting factor is not money, writes the Nobel laureate Paul Krugman, goading on the Obama administration, but the timing and the speed of the borrowing.

Erhard called such rhetoric "cheating the people." His key words were not consumption and credit, but pay and performance. He insisted, practically to the point of stubbornness, that work and only work is the foundation of prosperity: "We must either make do with less or work more." He felt that the third way, which leads to the vault of the next best bank, was a dead end.

His record is impressive, even from today's perspective. He gave Germany the longest economic boom in world history, from 1949 to 1966. During this period, the country, still recovering from the war, rose up to become a leading exporter. It overtook first the French, then three years later the British and as of 1976 the Americans. Germany's currency remained stable and its level of debt low. From the late 1950s onwards, there was full employment in Germany.

The FDR approach enjoys not nearly such a good reputation. If statistics were kept for the biggest flops in political concepts, it would be right at the top. The then Secretary of the Treasury Henry Morgenthau admitted that much himself.

In court and in his own diary, Morgenthau told the truth. Toward the end of the 1930s, the treasury secretary reached the following gloomy conclusion in his personal records: "We are spending more than we have ever spent before, and it does not work ... I say after eight years of this administration, we have just as much unemployment as when we started -- and an enormous debt to boot."

A Roosevelt without a World War

The Roosevelt model would be impossible to sell today if it had stopped there. But although Roosevelt was good at spending money, he was even better at warfare. And he was best of all at winning wars. In the same year that he set a world record for debt, he won the war against Hitler's Germany which had been imposed on him. But the funds which he had used mainly to support the armaments industry were subject to high interest after 1945.

American corporations moved into war-ravaged Europe and the country was able to export itself out of the credit hole. US firms enjoyed dazzling profits and the American middle class was born. Fifteen years after the end of the war, the debt burden was largely eliminated.

But the original version of the FDR model is -- thank God -- no longer available. Obama is a Roosevelt without a world war. The national debt which he is currently imposing on the country serves no higher purpose than to postpone America's hangover one more time.

In relieving the crisis, Obama is laying the foundations for another one which will be almost as big. But the hangover cannot be postponed forever. Unless a miracle happens, Obama will be looking pretty rough on the morning after.

Speaking of miracles: Erhard bears part of the blame for the fact that his approach is today considered a hard sell. He wasn't a fan of fancy packaging. Even the term "Wirtschaftswunder," coined by an admiring populace, was repugnant to him. Anyone who used the expression in his presence was snubbed. "There are no miracles," he liked to say.

Hence, although today's Germany can export cars, heavy machinery and Riesling, it is not able to export its culture of stability. After all, sweat is hard to sell.

[Ban Hammer 13,678]

good article, et

[Rocky_nBullwinkle 6]

One of the leading public issues of the immediate postwar period was related to the nation’s currency.

The heart of the debate centered on an action the government had taken to fund the Union effort in the Civil War. Between 1862 and 1865, the government printing presses issued $450 million in greenbacks, paper notes that were not backed by reserves of specie.

Simply stated, the agrarian and debtor interests wanted to keep the greenbacks in circulation and even urged that more be printed. Such a move would likely generate inflation, which was regarded as a favorable event since it would be easier to pay of debts with “cheap” money. From the political side, this point of view was adopted by many Democrats who floated a scheme to redeem war bonds in greenbacks.

The Republicans, as the representatives of the wealthy creditor interests, wanted the greenbacks removed from circulation and the return to a gold-backed currency. This would halt inflation and assure that they would be repaid in hard money.

Tensions were heightened during the depression that followed the Panic of 1873. Farmers and debtors bore the brunt of the economic distress and issued calls for the printing of additional greenbacks and the unlimited coinage of silver. These calls for action were transformed into a political movement and, in 1876, into a political party. The National Greenback Party took up the greenback refrain and pledged to fight the Specie Resumption Act (1875), as well. Peter Cooper received the group’s presidential nomination, but polled only about 80,000 votes.

In 1878, a congressional election year, the organization changed its name to the Greenback-Labor Party and supplemented its membership by taking in workers. They received more than one million votes nationwide and elected 14 party members to Congress.

In the Election of 1880, the Greenback-Labor Party nominated General James B. Weaver on a platform designed to further broaden its appeal. Such issues as women's suffrage, federal regulation of interstate commerce and a graduated income tax were included. Weaver polled only 300,000 votes, a clear demonstration that the greenback issue had passed its prime. The times had changed: Resumption had been a success, the depression had ended and the Bland-Allison Act had concentrated attention on the emerging issue of the coinage of silver.

Despite its lack of success, the party made a last stab at the presidency, nominating Benjamin F. Butler in the Election of 1884. His showing was dismal and the party disbanded. Its members drifted off to the Union Labor Party and the Populist Party.

The Greenback Party made an important contribution to American politics by demonstrating the monetary policy could and should be part of the national debate

http://www.u-s-history.com/pages/h212.html

I see some parallels here.

--Bullwinkle

[NickD 203]

A negative tariff, US government was paying the Japs 10% for everything we imported from them while we were being creamed by the newly formed EPA and OSHA, the ERA also fits in the picture when weren't allowed to hire qualified workers in favor of race. What a fvcking mess. Wasn't until the Japs devaluated the buck in around 1990, we could finally begin to compete with them again, then that a$$hole Clinton brings in the Chinese, they really murdered us with no help from Bush increasing the imports by a factor of four.

Want to know where the problems are at? Look at Washington, DC.

[alienlovechild 75]

Fannie Mae, Freddie Mac, and other Government Sponsored Enterprises were created to directly interfere with the housing market by determining loan procedures, completely usurping the free market model of determining risk and default. Being completely backed by the government (read: American taxpayer), these GSE's had little incentive not to lend. Where was the risk? Their funding came directly from discounted loans from the Federal Reserve, enabling them to offer rates not possible by the unsubsidized private sector, thus forcing these mortgage companies out, because they actually had risk. This explains why Fannie and company held or secured over 50% of the mortgages in the U.S.

It's true that supply and demand effect the value of housing, but as I've pointed out, the demand was created by the artificial supply of money that was fed out for mortgages via the GSE's from the Fed. So the free market was not bullsh!t as the supply/demand forces correctly valued the houses due to their demand, however the supply was enabled due to artificial credit expansion, which created the bubble. And all bubbles must eventually bust.

Brilliant summation of the housing bubble and why simpleminded assaults on the free market embodied by Bush's bailout and Obama's stimulus plan are the road to ruin by pumping more money in the economy without any backing beyond Uncle Sam's promise to repay in the far flung future.