Monday, January 2, 2012

Wall Street didn't cause 2008 crash: Was it China?

Financial reform? Not exactly. The bill before Congress does nothing to address the fundamental background causes of the crash of 2008.

Wall Street may have been the instrument of the crash. But the crash was made elsewhere: in Washington's failed policies for middle-class families -- and in China's distorted rush for economic growth.

The story is not a simple one. But I hope you will pay attention to the details. If you don't, you may find that the pocket that has been picked is your own.

As you've heard, the crash begins with the huge excess load of debt built up in the last two decades by American households. Why did Americans borrow so much? Some like to tell a story of irresponsibility: We borrowed too much because we were self-involved yuppies who just could not deny ourselves the latest flat-screen doodad for our McMansions.

Maybe that describes some people. But many millions of middle-class families plunged into debt for a very practical reason. Their incomes were not keeping pace with the cost of crucial items of the middle-class lifestyle: housing, medical care, college tuition. At the same time as housing, medical care and tuition were jumping in cost, the cost of borrowing was dropping to historic lows.

Adjusted for inflation, the typical American family earned less in 2007 than that family had earned in 2000. Meanwhile, everyday necessities such as energy were becoming more expensive: By 2007, the typical American family paid more for energy than it did for clothes and entertainment combined. Read More