Why the Economy Crashed, and Why It’s Still Crashing

What’s in a graph?

Source: http://modeledbehavior.com

This graph helps explain the boom that led to the bust of 2008.

The thing to understand is that middle class and worker wages — the primary source of the aggregate demand fueling the American economy — went flat in the late 1970s and stayed that way while wealth-producing worker productivity continued to rise. This was the first time in over one hundred years that wages failed to track increased productivity. Where did that wealth go, if not to middle-class wage-earners? The chart is an indication of a massive shift of wealth from the poor and middle class to the top 1%.

Keep in mind, as Paul Krugman has pointed out repeatedly, that there was nothing economically imperative about this growing income inequality. It was rather a result of policies put in place during and after the so-called “Reagan Revolution.”

So, if consumers after the late 1970s were now less able to consume, where did we find the demand to keep the economy afloat? The top 1% tend to hoard, not spend, contrary to the conservative folklore about this being the wealth-producing class. How to get money back into the hands of the middle-class, the indebted involuntary consumers?

Answer: More debt, especially home mortgage and stock equity debt, a debt bubble, leading inevitably to bust.

The first big bubble following the flattening of worker wages was in stocks, and it finally burst in the “dot com” bust of the nineties.

The next big bubble — because now we always needed some bubble to keep us afloat — was in mortgages and the structured financial instruments built on them. We’re still living in the midst of the burst of the 2008 bubble.

One of the more frightening aspects of our current situation is the fact that, despite the efforts to bail-out the financial sector, nothing has been done to clear the garbage subprime-based loans from the books. The banks are all still pretending that the mortgages have full value, even as the real estate market itself is slowly “crashing” beneath them.

The following is an incredible chart. It shows that banks are holding on to their foreclosed homes as if they were full-valued assets, instead of actually putting them on the market and being forced to revalue them.

Source: Naked Capitalism (http://www.nakedcapitalism.com)

This is our view from inside the ongoing burst of the 2008 bubble.

Stay tuned.

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