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We’re Never Getting Back to ‘Normal’:
Some Sobering Thoughts about the
Financial Meltdown

Hendrik van den Berg
UNL Professor of Economics

The first week of March, the U.S. Department of the Treasury announced that it would make another $30 billion available to the bankrupt insurance conglomerate, AIG — on top of the $150 billion that has already been transferred. The government also reported that it had upped its ownership in Citibank to nearly 40 percent. Mid-month, the British government announced it would raise the public’s stake in the troubled Lloyds Bank to 80 percent. As I write, the Netherlands is debating a complete governmental takeover of ING, the huge Dutch banking/insurance conglomerate that (like our AIG) is deemed ‘too big to fail.’

And so it goes.

Conservatives never tire of lamenting the huge amounts of public money being spent and what they see as a ‘nationalization’ of private banks and insurance companies. Liberals also bemoan the huge amounts of money being handed out to private banks and insurance companies, and they use terms like ‘black hole’ and ‘bottomless pit’ in order to urge the government to fully nationalize bankrupt banks and insurance companies.

Meanwhile, the economic problems are clearly not confined to the financial sector. An audit of General Motors concludes that — with or without government help — the firm is not viable. GM’s subsidiary Opel is asking the German government for immediate help, lest it be forced to shut down plants all over Europe within a month or less. The French government has already agreed to lend billions of euros to the big automakers Renault and Peugeot/Citroen.

Another 600,000-plus jobs were lost in February, and the unemployment rate rose to 8.1 percent of the labor force. Add the number of people who were working part-time but wanted to work full-time, plus those who have simply stopped looking for work altogether, and nearly 15 percent of the workforce is now unemployed or underemployed. The Federal Deposit Insurance Corporation just announced it had liquidated its 17th bank this year, and it was running out of funds to protect depositors’ accounts. It is seeking to double the fees it charges banks to insure the accounts, but banks say they cannot withstand the increase of another one-tenth of one percent of their deposits. Congress is casting its eyes on future generations for more borrowing to help the broke FDIC.

And so it goes.

Maybe, if the facts about the economic crisis that’s swirling around us hadn’t prejudiced my outlook, I would have been comforted by the beautiful full-color online brochure I received from General Motors last week touting their large fuel-guzzling pickup trucks. “Now is the perfect time to buy the truck you always wanted!” the ad exhorted. The Internet also runs streaming ads for Ford’s “completely redesigned F-150.” And I am getting more notes from financial firms with titles such as: “It may be time to go back into the market.”

Is the recession over then? Has the market bottomed out? Will things soon be back to ‘normal’?

The Reality

We will never get back to ‘normal’ — not by 2010, 2012 or even 2020 — if by ‘normal’ we mean the economic growth we have experienced over the past 25 years. The fact is that the past 25 years themselves were not ‘normal’ in that they were economically unsustainable.

Over the past 25 years, we let our trade deficit rise to 6 percent of our Gross Domestic Product (GDP) by selling our assets to foreign investors and governments. We incarcerated or confined to our criminal (in)justice system 3 percent of our working age population. We let our healthcare industry be manipulated by private conglomerates even though public funds and subsidies pay for or subsidize 60 percent of all medical expenditures. Americans now pay 17 percent of GDP for healthcare — over 5 percentage points more than other high-income countries (who, by the way, achieve better health outcomes than we do). We ignored our stock of human capital by undermining public education, charging students more and more for college, and demonizing science. We demanded tax cuts and cheered on the deterioration of government to where it now handles neither emergencies nor many routine tasks very well.

We let inequality grow to early 20th century proportions by letting the minimum wage fall to about 60 percent of what it was 40 years ago, restricting workers’ ability to organize unions, and massively cutting taxes on the wealthy and large windfall inheritances. The real wage of the median worker has remained about the same for 40 years running, and the gains from economic growth have gone almost entirely to the very wealthy. We saluted the flag and let defense expenditures rise to about 7 percent of GDP when all military expenditures are fully accounted for. The U.S. now makes virtually half of all military expenditures in the world, and we have in the process triggered a wasteful arms race on earth and in space. And we questioned the ‘science’ of ecology while we went from consuming 70 percent of the Earth’s capacity to provide renewable resources such as water, air, soil, waste management, etc. in 1960 to consuming over 120 percent of that capacity today. We now face climate change and water shortages, and the astonishingly rapid loss of biodiversity may yet make climate change the lesser of our environmental problems.

No, we cannot go back to this ‘normal’ later this year, next year, or ever.

But few people in the media, the political arena, or in the general public have yet grasped that ‘back to normal’ means going back to saving much more, consuming much less, producing more stuff for foreigners and not being able to buy so much stuff from them on credit, stopping the senseless arms race, raising taxes and spending more on public education, health and the environment. We have lived in fantasy land for so long that we have forgotten what a sustainable real world really looks like. Most of all, we have forgotten how to pay for what we buy.

The Enabler: The Financial Industry

We have been spoiled by the financial industry. We blame the collapse of our unsustainable lifestyles on the financial industry — and it’s true, they are not blameless — but we need to get the blame right. The banks, brokers, and insurance companies are in financial difficulties because they enthusiastically took on the task of funding the unsustainable imbalances described above. U.S. consumers have been able to buy all this foreign stuff and consume without actually increasing their real wages, because the financial industry did such a bang-up job of bundling our risky home mortgages, mountainous credit card debt and constant stream of new car loans into what’s called ‘securitized’ packages, and then selling (and pretending to insure) these overvalued securities all around the world. Our government could engage in costly wars without anyone feeling any immediate financial burden, because the international financial markets channeled a couple of trillion dollars worth of government bonds to China and elsewhere. These were monumental accomplishments of our global financial industry. Unfortunately, even those really bright guys cannot forever postpone the inevitable. As the noted economist Herbert Stein once observed: “If something is unsustainable, it will stop.”

These Are Opportunities, Not Problems

Once we accept that it was the financial industry that enabled our irresponsible consumption binge and the government’s war making, then the solution for what to do about Citibank, ING, AIG and all the other large financial firms that are struggling becomes clear. While any modern economy does need a viable financial industry, we do not need the financial industry we now have. The basic functions of lending and borrowing, funding productive investment, saving for retirement, etc. can be handled by a much simpler and manageable financial system. We should be grateful Citibank may be defunct. It saves us the trouble of having to dismantle it.

We do not, therefore, need huge bailouts to sustain private financial firms we do not want. Instead, nationalization, liquidation and reorganization are called for. The emphasis in the short run should be on protecting deposits and loans, and then placing them in existing or new smaller financial institutions. In the longer — but not too long — run, a new regulatory and oversight structure should be established. This also is not as difficult as some people suggest. Remember, we had a good regulatory structure not very long ago. We could easily go back and start where we were. There are, no doubt, more than a few people still alive who remember how things used to work. Many of the really smart guys from Wall Street (after a brief but sobering spell of unemployment) could get socially productive jobs as auditors, inspectors, loan officers and, I suppose, even managers of well-regulated smaller banks and brokers.

The recent fiscal stimulus package also takes on a very different appearance when we recognize that, in the long run, we need to save more, consume less, educate more, distribute the economic gains more equally, provide everyone with basic healthcare and comfortable retirement, and stop funding our dangerous and senseless arms race. We should heed the Republicans’ rhetoric (though not their record) and not ‘waste’ any money. We simply do not need as many automakers and homebuilders, but we need more auto repair workers, home improvement workers to insulate homes and install solar panels, teachers, nurses, counselors, writers, organic farmers and conservationists. We do not need so many health insurance agents, but we could use good administrators of a single-payer national health plan. What an opportunity we now have to redirect expenditures in our economy.

The World Is Changing

The economy is already taking us in the right direction. The higher household saving and the lower automobile sales, which the media report as evidence of our deepening economic troubles, are actually close to the ‘sustainable normal’ we seek. The decline in private health coverage caused by the sharp rise in unemployment provides the opportunity to extend government provided healthcare to more of our population. Rising unemployment and poverty will trigger a reversal in the decades-long effort to shred the government safety net. As the wealthy lose their financial wealth, income distribution may improve, especially if we reestablish a more progressive tax system to fund Social Security, extend food stamps and other assistance to more families, and make college more affordable for the unemployed and the children of the poor.

Most important for humanity, the U.S. will no longer be a false role model for the rest of the world. In this sense, this economic crisis comes not a moment to soon. The American-inspired acceptability of greed and material wealth has already launched a race to the bottom in excessive consumption, lowering corporate taxes, dismantling government social programs, and privatizing crucial government services like water, education, health, transportation, criminal justice and the military. Income inequality grew almost everywhere over the past ten years. And with the U.S. refusing to recognize the science of global warming, even progressive Canada felt no constraints in letting the oil conglomerates develop Alberta’s tar sands. Hopefully our economic collapse makes such foolishness less attractive, perhaps even repulsive.

The spectacular crash of the U.S. economy may end up saving humanity. After 25 years of irresponsible, unsustainable economic behavior, Americans are finally getting a planetary wake-up call. And this unprecedented opportunity to stake out a new direction for our nation may make the loss of our jobs, retirement funds and home equity just a tad bit easier bear. Forty-five years later, it just maybe that the prophecy of that Sixties minstrel is finally coming to pass, “for the times they are a-changin’.”