Appendix 1: The Causes of the Meltdown: An Update on the Debate
THE REVAMPED CONSERVATIVE ARGUMENT
A LIBERAL RESPONSE
Housing Policy: Pattern and Role
Fannie, Freddie and Ginnie – The role of the GSE’s
Regulation or De-regulation: Which was it?
A FINAL NOTE ON LEVELS OF ANALYSIS
As we saw in Chapter 6, quite where you break off your explanation of the causes of the financial meltdown ultimately turns on the depth of the analysis that satisfies you. Joseph Stiglitz rightly said, “finding root causes is like peeling back an onion. Each explanation gives rise to further questions at a deeper level.” Basically, you can settle at the level of the actors and the immediate causes, or you can go for the broader context of resource flows and power-relationships, or you can probe deeper still, to examine the underlying logics of a capitalist system in crisis.
The proximate causes are best located by detailed financial journalism and by immediate policy analysis. Follow the people. Find the links between them. See how they slowly build up to a huge disaster. Then you get a list, looking something like this.
i. Supply of new housing is relatively flexible
ii. Tax system encourages higher leverage and flipping
iii. Legal system is swift but generous to defaulters
iv. Lenders could rely on external credit scores
v. Financial regulation did not prevent riskier lending
vi. Cash-out refinancing is inexpensive in the United States
vii. Structured finance enabled subprime and other non-conforming lending.
But explaining why there was so much “structured finance” flowing around Wall Street in the first decade of the new century requires that the explanatory framework be widened, and that we probe deeper, behind the flows. Part of that money was internally generated. Part came from abroad. The internal flows (and the internal pattern of demand for them) have lots to do with growing income inequality in the post-Reagan United States: the emergence of a new stratum of the rich with money to invest, while the rest of us were working hard but seeing no significant increase in our real claim on wealth. The rich lent. We borrowed. Affluence was built on credit. The credit dried up. Recession followed. What we borrowed also came from abroad. Personal debt was matched by international debt. Economies diverged in their performance: some earned a huge overseas surplus. Others lived beyond their means. We certainly lived beyond ours, enjoying a life style that ultimately depended on the willingness of overseas investors (especially German, Japanese and Chinese) to bring their surpluses to the U.S. Some commentators found that flow functional, and a source of American power. Others found such global imbalances troubling, a sign of American problems to come. But either way, income inequality at home and global imbalances abroad framed the U.S. financial meltdown, and were certainly central to the wild economic ride that Wall Street took us on first in the 1990s and then after 2001.
Asking why finance should become so potent at the heart of the global system, and why some economies within that system should flourish and others not, takes us out to a still larger analysis, and to one that requires an even deeper probing of the underlying logics at play. For as Sheila Bair told the Financial Crisis Inquiry Commission, “this crisis represents the culmination of a decades-long process by which our national policies have distorted economic activity away from savings and toward consumption, away from investment in our industrial base and public infrastructure and towards housing, away from the real sectors of the economy and toward the financial sector.” There is a fascinating literature out there on the necessary separation of finance from industry as capitalism matures. There is an equally powerful literature on the necessarily combined but uneven economic development of the global system; and there is a yet third literature on the special role of hegemonic powers in global capitalism – on the costs and benefits of global economic leadership. A full analysis of our contemporary condition ultimately requires us to take this final step as well. To really understand our present circumstances, there is a lot of reading that simply has to be done. It is time for all of us to get on with it.
David Coates holds the Worrell Chair in Anglo-American Studies at Wake Forest University. He is the author of Answering Back: Liberal Responses to Conservative Arguments, New York: Continuum Books, 2010.
He writes here in a personal capacity.