Bubbles Instead of Income


Atrios remarks:

Some people losing their homes were victims of bad lending practices. Some people, however, saw their houses as ATMs. In some cases people might have been pulling out money to fund emergency expenditures, but given the apparent volume of mortgage equity extraction it’s hard not to conclude that lots of people were just enjoying the extra funds. There’s a weird psychology to all of this. I stand by my earlier take that people didn’t really think they were taking out loans, but were instead essentially selling off a piece of their home to the bank. That’s what “mortgage equity extraction” would really be.

I think it’s important for progressives to shift the dial, relative to these sentiments, a bit away from shadenfreude and back toward the sympathy setting. The missing fact in this narrative is stagnating incomes. Incomes fell from their late-Clinton highs early in the Bush years and though that recession was mild by historical standards, the subsequent recovery was preposterously weak by historical standards. Even years later, incomes hadn’t re-achieved their late-Clinton high point and then we started tumbling into the current downturn. People were, yes, “just enjoying the extra funds” and without really understanding — or wanting to understand — what they were doing. But the policymakers responsible for running the country didn’t raise any warning signs about these trends or even try to initiate a discussion about whether there was any reasonable way to keep things under control. Meanwhile, the broad conservative movement spent a lot of time trying to shout down anyone who worried about rising inequality or stagnant wages by pointing out that the trends looked better if you only examined consumption. In other words, if you ignored the fact that people were maintaining consumption growth by piling on more debt, things looked great! And yet, now somehow things don’t look so great….

Obviously, the mere fact that conservative politicians, hacks, and operatives were egging this trend on didn’t force anyone to accumulate enormous debts. Plenty of people didn’t do so. But the underlying ill here is economic policies that sought to substitute an asset price bubble and innovative credit products for real, broadly-based prosperity.