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Thursday, Oct. 9, 2008 | The 2004 book, “What’s the Matter with Kansas?” created a stir because it so brilliantly analyzed conservatives’ success in diverting attention from our economic self interest. Forget that Bush dissipated the Clinton surpluses, that America is de-industrialized, mired in debt and running current account deficits that equal 6 percent of GDP; forget that income inequality is as great as in the 1920s and that median real incomes were lower in 2005 than in 1973.
What really matters is guns, stem-cell research, school prayer, flags in the lapel, abortion, gay marriage, affirmative action and a host of other issues that have nothing to do with leadership or good government. Thomas Frank picked on Kansas because it’s his home state and because it used to be a center of American liberal populism. Abroad, the book appeared under the more appropriate title: “What’s the Matter with America?”
Frank put his finger on a phenomenon that, coupled with an electoral college system that rewards the smallest states, was supposed to assure conservative government for years to come. So long as Americans could be diverted from economic self-interest by marginal cultural issues exploited by armies of born-again Christians and right-wing talk-show entertainers, Democrats were doomed.
But things have changed. If a month ago it looked like John McCain could exploit the Kansas issues and win the crucial swing states, the collapse of Wall Street, and its spread to Main Street, offers a different perspective. Today, it matters less whether Barack Obama has a flag in his lapel and once consorted with Jeremiah Wright and Bill Ayers than whether, as most economists insist, his program is better for the country.
It has taken the most serious financial crisis since 1929 to bring a majority of Americans to focus on their own self-interest.
Because of America’s unique financial position, we’ve long had it easy. We could print money, run up debt, fight wars and spend more than we saved without the economic costs such policies would have for other nations. We did it all on credit, getting away with it because our economy was too big and the dollar too important for others (above all Asian countries) to let fail. An economist friend used to warn: “The wolf’s not yet at the door, but there are termites in the woodwork.”
Economists knew the wolf was getting closer, but then came the Clinton administration, and a remarkable — if temporary — reversal of fortunes. Clinton raised some taxes to reduce the deficits; markets, industry and interest rates liked what they saw and by the turn of the century we were in budget surplus, debt falling as the economy boomed. Never before had a decade seen such high employment accompanied by such low inflation. The Phillips Curve was a myth.
If the 1990s were good economically, it was also a decade of political rottenness. Republicans hated Clinton’s successes, tried to shut down the government (over Medicare funding) and finally impeached him. Impeachment led to George W. Bush and a series of decisions (war, tax cuts, deregulation, reckless spending, return to deficits) that finally brought the wolf to the door. One ominous sign among many: the income gap between rich and poor exploded. Fifty years ago, CEOs earned 30 times more than the average American worker. Under Bush, they earn 350 times the average wage.
Where did all the money come from? We’re learning more every day.
A huge credit bubble was blown. As investment bankers got richer through the creation of credit “derivatives” (using some of the same tricks that brought down Enron), the manna soon spread to commercial bankers via housing mortgages. When I moved back to California in the 1980s, I was denied a credit card (however wealthy, however well-employed) because I belonged to a group classified as “high risk” (single parents). So quickly did things change, that 10 years later my un-wealthy and unemployed children were receiving unsolicited credit cards in the mail.
We know the rest. The instrument that led Wall Street over the edge this time (in 1929 it was buying securities on margin) was sub-prime mortgages, which is buying houses on margin.
We thought we learned something during the Great Depression, and in the 1930s created institutions to prevent another collapse. Key among them was the Securities and Exchange Commission, the primary overseer and regulator of U.S. securities markets, whose mission is “to protect investors, maintain fair, orderly and efficient markets.”
But in 2008 the SEC was nowhere to be found. Christopher Cox, the right-wing, Orange County de-regulator Bush nominated to head the commission in 2005 was a Wall Street patsy. Rather than regulate, he de-regulated, dismantling the risk management office, allowing investment banks to double their leverage ratios, inviting the wolf into the house. Cox was one more Bush nominee named for ideology, not competence.
The current crisis has de-routed McCain. While his maverick reputation and Sarah Palin’s fresh face appealed to the GOP convention a month ago, today — faced with the worst economic crisis since the 1920s, one that reflects eight years of Bush governance — they are clearly over-matched. McCain is trying to erase decades as a de-regulator by supporting government credit regulation, but his heart’s not in it. As for Palin, she is completely at sea. In the debate last week she called both for “strict oversight” and government to “get out of the way.” Her campaigning today is pathetically reduced to trying to link Obama to terrorists.
Franklin Roosevelt, who set up the SEC to protect us from future financial crises, could not have known the commission would one day be subverted from within. It’s worth recalling words from his second inaugural address: “We have always known that heedless self-interest was bad morals; now we know it is bad economics.”
Bad economics got us into this mess. We need good managers to get us out.
James O. Goldsborough has written on foreign affairs for four decades, both from the United States and abroad, where he worked as a foreign correspondent for The New York Herald Tribune, International Herald Tribune and Newsweek magazine for 14 years, reporting from more than 40 countries. Visit his website here. Submit a letter to the editor here.