Sunday, April 8, 2012

blaming the banks

People are still pissed at the banks for screwing us all over and this anger is horribly misplaced. It's like blaming the bartender for your hangover, and it's disturbing to think we may be learning the wrong lessons from this whole economic debacle. Consider the chart below, which shows that in the decade leading up to the Great Recession, the average person's debt grew at a rate roughly twice as fast as their income:

It's pretty easy to see the connection between this debt run-up and the economic collapse, but did the banks force us to borrow beyond our means? Did the bartender force us to chug down those extra shots? Many states have laws that restrict bartenders from serving obviously drunk people, and likewise our financial system used to have reasonably effective safeguards against these kinds of excesses. But they were dismantled by anti-regulatory zealots in the 1980s, 1990s, and 2000s. Who kept voting these people into power?

Similarly, there is a widespread misunderstanding about why we bailed out the banks. Some people smell a conspiracy but this overlooks the simple truth that we did it to save ourselves. If the local nuclear power plant started overheating beyond the control of its managers, it would be a no-brainer to send in public safety resources to prevent a meltdown that could ruin the surrounding communities. It was a similar concern that motivated the bailout of the banks. Our financial power system is as potent as our electrical power system and should be regulated accordingly.

But while re-regulating the financial system deals with the proximate cause of imprudent banking practices, it misses entirely the ultimate cause of out of control consumer debt. Why were people borrowing so far beyond what they could afford? As I argue in my Jan. 4 post ("Dirty Money"), I believe it was due in part to the Reagan and Bush II tax cuts that disproportionately favored the wealthiest and increased income inequality. In his timely, if tragically under-appreciated,  2007 book "Falling Behind: How Inequality Harms the Middle Class", the great economist Bob Frank argues that a good deal of consumer spending is positional - that is, much of it is aimed at gaining a competitive advantage in the great Darwinian game that is life on earth. For example, only half of our children can have an above-average education, so a scenario where the wealthiest bid up homes in the best school districts forces everyone else to spend more so as not to fall behind.

Sure, bankers behaved badly, but any worse than the rest of us who backed this ideology with our political support? Besides, the bankers' behavior was entirely predictable - the fact that many of the regulations we dismantled were themselves antidotes to the Great Depression puts such moves squarely into the "fool me twice, shame on me" category. Bottom line: to scapegoat Wall Street is to deny our own culpability and the fact that the GOP is still peddling these so thoroughly discredited ideas and the magical thinking they require only highlights the importance of getting our facts straight. We've already paid a heavy price for our schooling, so let's make sure we learn the right lessons: progressive taxes and responsible regulation are cornerstones of our prosperity.

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