|Share (%) of National US Income for Richest 1% (1974-2010)|
Like a lot of Americans I've been pondering how America picked up the pieces in the wake of the 2007-2008 financial crisis. Specifically, the bad debt of Wall Street was bailed out but the debt of individual American citizens was not. An individual in debt is described as irresponsible and greedy. For example, they buy "too much house" for their income. But a bank that goes into debt is "too big to fail" and is subsequently bailed out. The bank is not blamed for being greedy in extending loans they shouldn't have extended. But loans entail risk, and if there is no risk (if a bailout is available) the bank has no incentive not to pursue greed. It's a win/win.
In short, there is a moral asymmetry in how we view debt.
And let's dig deeper into this. A lot of people blamed the mortgage crisis on low-income people getting loans to buy big houses, more house than they could afford. That was a piece of the puzzle. But surveys of the mortgage crisis have shown that these weren't the bulk of the loans that became distressed. Most of the loans that fueled the mortgage crisis were second loans on houses. In the language of some economists, what was going on was that many Americans were using their homes as ATM machines, taking out a second loan on the house to free up some cash. These, and not first-time low-income homeowners, were the bulk of the loans that became distressed.
Why were people taking out second loans on their houses? Two reasons. First, to pay off other debt (e.g., medical, school). Second, to experience facets of middle class life that were growing increasingly inaccessible.
Let me explain that.
Since the 1970s middle class incomes have remained stagnant or have declined. A certain standard of living that was financially accessible to the middle class in the 70s has been harder and harder to achieve. But this erosion of income, as it gradually shifted from the bottom 99% to the top 1%, has been largely masked and hidden from view. Masked and hidden by what?
As incomes fell or leveled off since the 70s households have held onto middle class lifestyles by going into debt. Either credit card debt or mortgage debt (those second loans on houses that fueled the housing crisis). And one could argue that the political and economic "powers that be" were more than happy to extend this line of credit to Americans because it masked the real erosion of income that was taking place. Debt kept the middle class docile, feeling like the American Dream was still a reality while it was fading rapidly away. The facade of the middle class was being propped up with debt. It was a house of cards waiting to collapse.
Here's a description from a NY Times editorial summarizing this research:
Recent research by economists from the International Monetary Fund and academia offers some new insights about income inequality, with important implications.What we are witnessing in all this might be described as captialism's version of debt peonage, with the rich lending to the poor leading to greater and greater income inequality and debt bondage.
The researchers compared the top 5 percent of United States households from 1983 to 2007 with the remaining 95 percent. What they found is that as the rich got richer in the decades before the Great Recession, everyone else tried to maintain his standard of living by going deeper into debt. As income inequality grew over that period so did debt levels, because the rich increasingly invested their growing wealth in bonds and bank deposits, in effect providing money for ever more lending to the poor and middle class.
The top group’s increasing wealth, and the bottom group’s increasing reliance on debt, spurred the growth of the financial sector. But with ever increasing debt, the financial system — and the broader economy — became ever more vulnerable to crisis.
The point here is that when Wall Street was bailed out a key part of the problem was never addressed: income inequality and the stagnation--since the 70s--of middle class wages. All that was "bailed out" during the financial crisis was a mechanism--debt--that has been used to hide income inequality to convince the middle class that it still exists.