Credit Binge: Looking Back in Anger
According to Gretchen Morgenson, the prolific journalist for the New York Times, only ordinary folks were asked to sacrifice in the unwinding of the biggest credit binge this side of Ancient Rome. “Why,” she asked at a presentation this week at the Museum of American Finance, “wasn’t sacrifice required of the big financial institutions? We would not have the anger and rage that is out there now if it had been.”
True enough, this one-sided sacrifice is precisely the issue stoking the flames of resentment throughout working and middle-class America a.k.a. the 99%. It rears its head on the banners of Occupy Wall Street: “You got your bailout, where’s mine?” And it surfaces in the garbled messages of mad-as-hell tea partiers who call for more austerity.
Morgenson detailed the lack of “shared pain” in the credit unwind. “Creditors have not been made to take a haircut. I would have wished for shared pain. This reinforced the idea that creditors are always protected.” An institutional investment manager noted, in the largely Wall Street crowd, that GM and the automakers were forced to “take a significant haircut.” The investor was outraged by the forced “cram down” for automakers from the federal government. The Times journalist, however, noted that this should have been the solution for the big banks as well.
Morgenson detailed the staggering stats around household debt: 130% in 2007 and 115% in 2011. Homeowners had levered up the same way Wall Street had—pulling out equity from their homes as real estates values grew. As Gretchen noted, most consumers were not living high, jetting off to Europe or purchasing a Lexus they couldn’t afford. Incomes were flat through much of the easy mortgage craze and most people were simply trying to make ends meet: cashing out equity to pay increasing costs of college and healthcare. Perhaps it’s ironic that medical insurance during this period increased by 20% a year for individuals and small businesses. Also escalating throughout these years was college tuition at rate hikes of 10, 15 & 20%. These trends have not abated, despite the fact that even less people can afford them.
Morgenson laid the blame squarely on the shoulders of the negligent Federal Reserve who was remarkably blind to the housing market ramp-up. “The Fed had no reliable way to monitor home equity. The Fed as regulator ignored the leverage taken on by homeowners.” Her take? They should have known. Sure, somebody should have known. But no one did. Now what to do we do about it is the real question?
According to Morgenson: “We should put our resources to support small business, entrepreneurs and innovation and take less care and feeding of the large monolithic companies.” She further claimed that, “One positive outcome of the crisis could be helping small business and entrepreneurs rather than too-big-to-fail companies that have received more than their fair share of the pie.”
Richard Ravitch, a long-time member of New York’s political wheel, gave the long view of the crisis dating back half a century. His historical retelling of the near bankruptcy of New York City in 1975 was an eye-opener. He said, “Everyone came together to save New York.” Labor unions, the financial community and public sector “worked together to avoid the bankruptcy of the City of New York.” They agreed on how to “share the pain” to restructure the debt. Remarkably, it worked. To date, however, we do not have the same cooperative plan to repair the national economy. Ravitch noted the current climate was unfortunately devisive and non-collaborative.
Ravitch spoke eloquently of the resilience of the American public. He reminded the business crowd that we have overcome seemingly insurmountable obstacles in our short 200+ year history. A mindset that there “was no burden we couldn’t overcome led us here. That doesn’t excuse it, but it explains the view.” Americans, Ravitch declared, “are optimistic people.”
Poor Richard, however, is still thinking FDR, who became president the year Ravitch was born. When asked about possible policy solutions, he offered a whopping tax on gasoline to balance the budget and a jobs program that puts people to work on U.S. infrastructure. The 78 year-old Ravitch clearly must not drive, because taxing gasoline would probably put the nail into the coffin for the already struggling 99%. And unless you are ready to pick up a shovel to build a bridge, the nation’s millions of unemployed white-collar college-educated workers aren’t going to benefit much from road repair.
However, it was good to see someone of his age and experience still in the game and care enough about his legacy to be part of the solution. Ravitch was non-judgmental of the rest of us who came after and made a big mess of things. He said simply: “We have to reexamine ourselves as a society…and go back to an old-fashioned idea that we can’t borrow money that we can’t repay.”
Words of wisdom to live by. But will Americans be able to strap ourselves in and go on a wallet-shrinking credit diet? Given the current capital and credit anemia, we really have no choice.
Category: Sustainable Small-B
