Collective Conscious

I’ve sort of been col­lect­ing charts that describe var­i­ous pic­tures of the Great Diver­gence in the Amer­i­can econ­omy since 1980. Here’s another one:

Again we see that, just about in 1980, the finan­cial sec­tor broke away from the rest of the econ­omy, tak­ing the top 1% with it. Here’s what hap­pened around that time:

But by the early 1980s, the lend­ing indus­try used its polit­i­cal clout to push back against gov­ern­ment reg­u­la­tion. In 1980, Con­gress adopted the Depos­i­tory Insti­tu­tions Dereg­u­la­tory and Mon­e­tary Con­trol Act, which elim­i­nated interest-​​rate caps and made sub-​​prime lend­ing more fea­si­ble for lenders. The S&Ls balked at con­straints on their abil­ity to com­pete with con­ven­tional banks engaged in com­mer­cial lend­ing. They got Con­gress — Democ­rats and Repub­li­cans alike — to change the rules, allow­ing S&Ls to begin a decade-​​long orgy of real estate spec­u­la­tion, mis­man­age­ment, and fraud. The poster child for this era was Charles Keat­ing, who used his polit­i­cal con­nec­tions and dona­tions to turn a small Ari­zona S&L into a major real estate spec­u­la­tor, snar­ing five Sen­a­tors (the so-​​called “Keat­ing Five,” includ­ing John McCain) into his web of corruption.

The dereg­u­la­tion of bank­ing led to merger mania, with banks and S&Ls gob­bling each other up and mak­ing loans to finance shop­ping malls, golf courses, office build­ings, and condo projects that had no finan­cial logic other than a quick-​​buck profit. When the dust set­tled in the late 1980s, hun­dreds of S&Ls and banks had gone under, bil­lions of dol­lars of com­mer­cial loans were use­less, and the fed­eral gov­ern­ment was left to bail out the depos­i­tors whose money the spec­u­la­tors had put at risk.

The sta­ble neigh­bor­hood S&L soon became a thing of the past. Banks, insur­ance com­pa­nies, credit card firms and other money-​​lenders were now part of a giant “finan­cial ser­vices” indus­try, while Wash­ing­ton walked away from its respon­si­bil­ity to pro­tect con­sumers with rules, reg­u­la­tions, and enforce­ment. Mean­while, start­ing with Rea­gan, the fed­eral gov­ern­ment slashed fund­ing for low-​​income hous­ing, and allowed the FHA, once a key player help­ing working-​​class fam­i­lies pur­chase a home, to drift into irrelevancy.

Into this vac­uum stepped banks, mort­gage lenders, and scam artists, look­ing for ways to make big prof­its from con­sumers des­per­ate for the Amer­i­can Dream of home­own­er­ship. They invented new “loan prod­ucts” that put bor­row­ers at risk. Thus was born the sub-​​prime market.

At the heart of the cri­sis are the con­ser­v­a­tive free mar­ket ide­ol­o­gists whose views increas­ingly influ­enced Amer­i­can pol­i­tics since the 1980s, and who still dom­i­nate the Bush admin­is­tra­tion. They believe that gov­ern­ment is always the prob­lem, never the solu­tion, and that reg­u­la­tion of pri­vate busi­ness is always bad. Lenders and bro­kers who fell out­side of fed­eral reg­u­la­tions made most of the sub-​​prime and preda­tory loans.

Today, con­ser­v­a­tives are try­ing to encour­age more of the same, and they want con­sumers to pay for it when it goes bust:

In every other year they cover finan­cial reg­u­la­tion they call for repeal­ing the Bank­ing Act, one of the cor­ner­stones of the New Deal’s 100 days that gives us FDIC, or alter­na­tively reduc­ing the FDIC cov­er­age to just $1,000. In every other year they are quite pas­sion­ate about abol­ish­ing the well-​​functioning and highly pop­u­lar social insur­ance plan. (Eliz­a­beth War­ren had a great line at Net­roots Nation. She men­tioned that her grand­fa­ther told her than FDR made it safe to put money in banks, and he did a bunch of other things too.)

Dou­ble whammy, huh?