I do think the "guns & butter" policy of LBJ was a turning point. Prior to that the dollar was (nearly) as good as gold. That changed quickly and the psychology of this country changed with it. People knock his "Great Society" initiatives and they may or may not be correct. But it is crystal clear in retrospect (and even pretty clear in the moment) that a combination of the Great Society approach and an enormously expensive and draining war was simply too much for even our powerful economy to bear all at once.
I have seen this claimed many times, i.e., it was government policy to make these sub prime loans. And of course one can then extrapolate back to the equal rights amendment if so inclined. Actually this policy to make loans more accessible was a very good policy that had nothing whatsoever to do with the subprime crisis, though I wouldn't put it past an entity like Countrywide to try to use that argument as a plaintiff. It's not going to carry much weight in court however. It was never intended nor directed that loans be made to those obviously incapable of repaying them. What happened is that in some communities banks were simply uninterested in making loans to certain minorities. After the government stepped in, they began making these loans, but to their regular underwriting standards for sub prime, thus these loans were correctly rated as subprime, had a somewhat higher default rate, and a somewhat higher interest rate, though government subsidies may have been involved in some cases. This was in the early days before the ties between those making loans and those holding the loans were totally severed. Originally S&P used a rating for securitized loans that properly took into account the subprime content. Experience had revealed the expected rate of default. S&P knew the default rate and the subrpime content of the packaged loans and correctly rated them. After the major investment banks realized how much more attractive CDO's were than unsecuritized mortgage bonds they got very interested in promoting CDO sales. They were selling like hot cakes as long as they could get a decent rating. The I.B.'s needed more product to sell. They made money available through mortgage closers like Country Wide who would close the loan for a fee and immediately sell it to an entity that was going to package it, i.e., securitize it, like an I.B. for example, with other loans and the various package components, after rating, would then be hawked to eager buyers around the world. There was tremendous demand and money to be made. When S&P rated the resulting CDO's they assumed incorrectly that the quality of the subprime content was the same as it had been previously. They did not realize that those closing the loans were completely abandoning underwriting standards just to make a quick buck. The closers had no skin in the game and apparently no one told S&P that there were now a bunch of liar loans included in these packages. Naturally the default rate was now above what it should have been for subprime. They should have done due diligence, but they did not. They just assumed those subprimes were the same as subprimes had always been. Big mistake! The government never asked nor required that anyone make a loan to someone who could not repay, or to someone without documented income. And no reasonable person in government would assume that someone could walk into a closer with no documentation and walk out with a loan! The government is responsible in one respect however. Greenspan was told, repeatedly actually, two to three years before the crisis hit, that loans were being made without proper documentation, and he did absolutely nothing about it. He was the chief regulator, but he did not believe in regulation. He thought market forces would take care of matters. He also believed in what economists call equilibrium theory. Essentially its the idea that markets spontaneously will tend toward balance or equilibrium. Well, it turns out he was both right and wrong at the same time. Market forces will take care of matters, and in the end they did! But markets don't tend toward equilibrium, they tend to move further from equilibrium! So when the market decided to take care of matters it was far from equilibrium, and then the shit hit the fan. That is of course when the Treasury and Fed stepped in and circumvented the spontaneous path the market would have otherwise taken in "self-correcting". I wasn't pretty, but it could have been much worse if the market had been left solely to its own devices, as Greenspan used to advocate before he got religion.
Piezoe Very well said. Excellent posts. Late 70's , early 80's I remember two performance reviews/ year for approx 6% each and that was only cost of living to offset approx 11% inflation. The great Commonwealth of Massachussetts was home to Wang, Digital Equipment, Data General, and Prime(all refrigerator size minicomputer makers), defense contractors, Ratheon , GE etc... $22 an hour on a GM, Ford assembly line with an average 7th grade education. At the local watering hole I drank with those who made my TV(Sylvania or RCA), radio, and everyone seemed to work for "the telephone company" , AT&T. What the hell happened. Sure the pc, $6000 retail for the first PcXT which had a 10 Meg Hard drive decimated the mini computer industry. My first recollection was pc mother boards from Malyasia, Taiwan, etc... My only point in that rambling is that as I recall, virtually everything was large, labor intensive and expensive. A Magnavox 25" wooden console color TV was near $500. Everyone was working. You did not have to be exceptional and it was not that competitive To get a decent job. Employment stats were more accurate pre-Clinton changes to those stats. It is hard to convey how different it was then. The rate of college grads was low then and in previous decades. Some men had " good jobs" and some didn't often with little connection to talent and eduction, much more connections "who you knew". Pensions For life are part of that. AT&T and GE come to mind first in this regard. Any man willing to work could afford a house( and pay for it) . Square foot envy had not started then s most houses were in the 960-1200 sq foot range. There was no other debt. Car.....sure....done at the local bank with your mortgage. A child could take a passbook savings book to the bank, stand in line, hand over $10 We did this mostly to see the new entry punched in the book calculating the 6% return on Our "capital". Middle class was real and well. Corporations/ shareholders were not doing well flatlining from 69-81 and based on the above its not hard to see why. Middle class was not yet watching sp500 and not a shareholder pre 401k days. Soros in a sentence in "Alechemy" said something's along the lines of "they threw in the towel and outsourced/ took it overseas" or something like that. This is not really that long ago. The changes are astounding. We in the US have a system That provides a living wage to the relatively exceptional and a government willing to Subsidies those that do not quite measure up with unemployment, welfare etc.. Not good. Grateful to have lived in those days that I did. And I know, the new mantra is "get off your ass and get your PHD" . These days you are a shareholder or you are not. Don't get me wrong....I try like hell to be a shareholder. I believe the last 30 years pre-Obama was a power grab that became manic, greedy and overshot. The backlash to that is an opposing power grab (masterful) so far and is near complete with the US changing demographics and willingness to subsidize. Austerity....that will be tough wont it. Just a rambling opinion
Deficits became "structural" in the 80's. Meaning the US economy peaked in the early 80's, and began a slow, accelerating decent, thereafter. To stem that, ever-larger deficits were introduced to offset the growing shortfall in GDP. To "paper over" the real recession in the economy. This is the exact same situation we have today, except on a much larger scale (note the size of the Federal Budget deficit and FED Reserve monetization initiatives = >15% of GDP...). Why the 80's? What happened in the 80's? That coincided exactly with the peak of US manufacturing employment. As US jobs packed up and went overseas, the US economy contracted and fell into recession. Who woulda thunk it? Fast forward 30 years later, and we're at about a shortfall of 20% GDP, with multiplier considerations. For every one factory worker that goes overseas, there's about .4 - .6 "support jobs" that go along with it (industrial suppliers, financial services, consumer products etc). Examine this chart carefully. Wow. Looky here! EXACTLY AT 1980 manufacturing employment (total) peaked!!! What happened after? OUTSOURCING. Now, I would add, most of the posters in this thread are old timers, advanced in age, who voted for these slimy carpetbagging politicians who sold offshoring as a great thing. And these dopes fell for it. The US gave the Chinese a gigantic piece of its economy, because these fucking tards wern't minding the shop. What's worse, this is just the beginning. The US is sustained by debt. The US, like Italy, Portugal, Spain etc has a debt limit. Once the market says no mass, guess what? We're fucked. And if Bernacke prints, say goodbye to your precious dollar reserve status, which is basically the only thing keeping this sinking ship afloat. We're headed for a gigantic depression. See, nobody gives a fuck. Every one is an idiot who buys the spoonfed pap. Look around, only 3 traders on this thread mentioned the trade deficit, which is an around about way of saying offshoring is the problem. TV? Divorce rates? Fuck. Its called JOBS!!!! Anyway, enjoy. Too late now. All done. Good luck to your granddaughter. She'll be growing up in a fucking shitshow. Federal Deficits (note: consistently start ~1980)
well piezoe, you know I like you, but your last ditch effort as a partisan hack is a little pathetic by the way, I watched Krugman's interview on Charlie Rose tonight. He is not the crackpot the right wing makes him out to be. As a matter of fact, it's starting to get embarrasing to be a conservative. But geting back on track, the first national election I ever (and my wife) voted in went for Jimmy Carter, (seemed like a no brainer at the time.) After 4 years of that crap I enthusiastically voted for Reagan. I was never politically active, just a werkin stiff, but I knew I felt horrible about my life, my future and the economy after four years of Carter (who I voted for.) Then came 8 years of positive feelings. In spite of the fact Reagan deregulated two industries which hurt me personally financially. Sometimes it aint so much about facts, but more about rhetoric. And your side has a very offensive rhetoric which demoralizes the American Spirit.
Jeezus you've been hard on me lately, oldtime. You know you go to the bank and take out that home equity loan, and turn around and buy that bass boat you've been salivating over. Then you start getting those "positive feelings"; just like when "Dutch" was our president, except the feelings only stay positive until the first payment comes due. It doesn't last like those 8 feel good years under Reagan did. But the bill comes due the same way. Only difference, Reagan's bill isn't delivered until years later in the form of inflation that never ends, and ill will against Americans in all those Latin American countries we got Ollie and the CIA to screw over at our expense. I'll tell you one thing: those villagers in Nicaragua didn't get positive feelings when Ollie's Contras began the slaughter. And there is another similarity too between buying the bass boat and those Reagan feel-good-years. In both cases what was bought depreciated rather rapidly. Neither the bass boat nor the missiles were worth a damn ten years later, but at least the boat is paid off.