I cannot sit here and read this drivel without adding some economical history perspective, the kind that is less driven by party or ideological line, and more strongly rooted in fact and timeline.
If we look back over the last quarter of a decade, as far back as 1980 (early Reagan), the economy was in a recession, led by high unemployment, severe inflation (although abating under Volcker's stern rate medicine), an harmfully strong dollar and the prospect of rising federal deficits. The American consumer did not carry high amount of debt, housing or personal, and saved (even in inflationary times). Money supply, as measured by contemporary metrics was very low (choked by inflation and slow exports).
This was a crisis that provided, in essence, a perfect storm...setting the stage for an unlocking of an enormous monetary and productivity boom that was unleashed with the Fed easing of the discount rate, M1 & M2 growth, a set of Reagan tax cuts, and market prognosticators (Henry, aka Dr. Doom Kaufman) turning tide to bullishness. The stock market soared, Reagan gave great press and Paul Volcker's war on inflation had worked. Unemployment fell, real & median incomes rose, and productivity began to rise. The cold war was won, globalization of trade flourished. Americans bought homes with 20% or more down financed by local & regional banks.
Throughout the early 80's there was NO large scale securitization instrument markets for debt and little, if any, excess leverage within any financial system, save for a sneaky and ominous trend of specious lending by S&L's, created years back by competition with newly created money-market funds. Free-market de-regulation allowed these S&L's to depart from their original mission, borrow larger sums of $$ and begin OWNING (instead of just lending to) real estate and other tangible assets. Still these were great economic times for our country. The stock market went up and everyone bought new cars and new homes and most, if not all, assets continued to appreciate dramatically. Trees grow, but not to the Ozone layer!
1987 gave us the instantaneous risk adjustment of an over-heated equities market with Black Monday, but the American economy shook it off, led by a sharp uptick led by US consumer spending. Most of our historically close trading partners were not so lucky and fell into sharp recessions. We trudged on, though red ink was beginning to fill the balance sheets of banks and the US Treasury.
Around this time though, US Savings & Loans revealed their toxic pattern of large, highly levered, poorly-collateralized lending practices over the past decade. They had been pushed by regulation over the last decade to consolidate, get larger, ultimately leading to collapse, thus requiring a $170 bailout by the gov't and the establishment of the RTC.
1990 through 1992 serves up a plate of the newly expensive Gulf War, a concurrent oil price shock and marked a period of sharp, but short-lived recession. Unemployment rose, government spending accelerated and Germany & Japan became dominant global trade machines outpacing US growth and competing with the USD for prominence. Budget deficits, mostly due to a bloated defense spending spree grew near exponentially. Our politicians explain it away as the cost of winning the cold war and becoming the world's police force.
1993 sees Clinton/Rubin gets credit for new fiscal discipline, reducing the national budget & trade deficits, adding jobs, and pushing new home construction and ownership. Greenspan lowers rates, re-igniting the capital markets and by 1998 there is a budget surplus (for the first time since 1969), low unemployment, income growth, GDP expansion and savings rates drop nearer to 1% (by 2000). He may have been busy under the Oval Office desk, but the economy flourished.
By 1998, we've stopped savings, begun speculating in equity and housing markets and have the tacit endorsement of the FRB (by Greenspan's easy money). We share a delusional belief that the good times will go on forever. Little worry is ascribed to the now-prescient collapse of LTCM(caused by massive leverage and disconnect of market correlation's). Emerging markets, now a hotbed of capital investment, demonstrate their ability to instantaneously combust and the NY Fed successfully orchestrates a Wall Street-led quasi public-private bailout. Nobody thinks twice about resuming the party. The kool-aid continues to flow freely, and again the $$ spigot is dialed wide open.
It is right here that the securitization markets for debt begin their exponential growth, further fueling debt expansion (now with other people's money) and we expand the ability of larger financial institutions to take risk by repealing the Glass-Steagall Act, (essentially inviting the larger banks to the party's keg and letting the free-market decide who will make the most coin!). Again, trees don't get to outer space.
The Nasdaq/Internet bubble is but another blip as financial engineers outweigh risk managers and the once provincial and local nature of the US housing market is given the wholesale endorsement by both political parties, the FRB, and the President. Concurrently (as a tonic for the short-shock of 9/11), our government endorse the idea of expanding personal credit and excessive (read: borrowed) consumer spending to lead our economy higher! Most interestingly, median income growth stagnates, becomes the most dichotic between the upper and lower economic strata since the 1920s...hmmmm!!
Market oversight is abandoned and abhorred, accounting standards loosened, and the quest for the holy grail of sequentially higher (albeit specious) earnings becomes the new mantra as we embark on a several trillion-dollar, questionable, war in Iraq. Again, federal deficits soar, the USD tanks but that can't stop the daily fixation on more wealth, little or no savings, and an ever-rising DJIA. Don't forget the then-common(and Presidentially-endorsed) mentality that every red-blooded American should pursue his/her dream of buying a home and has a nearby mortgage-banker with a pal at a GSE to make this a reality. The amount of leverage in the US financial system is nearly 3X it's GDP
Onto this shaky mix add the liquid oxygen combustibility of CDOs, CDSs, and the always false premise that housing (the underlying for most all of these derivatives) will go up forever. Allowing these to go on the books of our most critical financial institutions was the directly akin to lighting a fuse to a fiscal neutron bomb. Guess what...it went off and we are now seeing how well we can contain the poisonous radioactivity.
WHAT THE HELL DID ANYONE EXPECT TO HAPPEN
All the political and ideological bullshit expounded here should take a very long look at their respective parties, their ideologies, and recognize their roles in bringing us to the brink of historic disaster (the edge of the back of one of Cape Kidnapper's cliffside fingers). Both parties have failed us miserably.
All of you spout off about taxes, spending, slanted and false histories and blame and credit, blah..blah...blah...Politicians aren't alone in contributing to this mess. The media has played a large and non-constructive role in this as well and deserve a lambasting. They conveniently go from giddiness and celebrity worship to never-ending gloom and prognostication of fault.
HOWEVER,WE LET IT HAPPEN OURSELVES!!! Pat, Dave, Kalen, Lou, Craig everyone...take some damn responsibility. I know I do. Break this chain of ascribing blame.
We've allowed our collective conscience to take a hiatus in the name of personal gain, greed, avarice and excessive comfort. We went from a nation of strong, often Purtian-like values, to one of weak thought and ignorance of consequence. We have lost our ethical and moral compass.
The only thing worth loudly advocating, IMHO, is a wholesale surge (and then purge) of Congressional reform. Let's use the American spirit and will to demand the very real abolition of lobbying by term limits, federally-financed elections (cheapest government fix I can see), and the end of the seniority system. I didn't vote for either Nancy Pelosi or Mitch McConnell and I resent their ability to dominate the potential legislation for the world they'll leave my daughters. My generation is probably screwed, but theirs doesn't have to be. Let's have legislators who make the office responsible to us, not their financial benefactors (be they corporations, unions, think-tanks, or other political ideologies).
We may not like the medicine we are about to take and it won't taste good, but without some of it (and I don't pretend to sit here and tell anyone what will work and what won't...wtf knows just yet???) we are doomed to watch this accelerating spiral of deflationary pressure sink us into a morass that might take multiple decades to recover from! Let's stop arguing over what's right and wrong with every bailout and every piece of legislation...they are mostly attempts at short term fixes. Stop worrying over what taxes you will have to pay and start thinking about where this country has to get to. We need real and dramatically different solutions to successfully extract us from this mess.
They won't come from the stale monotony of ideologic bullshit.