A Crisis Not of Debt But of Faith

A Crisis Not of Debt But of Faith


America doesn't have a debt crisis; it has a financial and political crisis. Our financiers and politicians, the elite experts we trust to manage our finances and politics, have proven to be incompetent and corrupt. We are losing faith in our system. To salvage our money and our politics, the corrupt elites are going to have to be kicked out of their jobs and stripped of their criminal gains.


Our governing financial and political elites failed us. A governing class, an elite, is essential to any nation state, including ours, however much we might wish otherwise. Citizens have faith in an elite, if it manages the particular financial, political or military sector it is in charge of to serve the common good. An elite is incompetent and failing, if it destroys the sector it is meant to protect. It is corrupt if it places its self-interest before the good of the country.


Beginning about 1980, the financial elite began gaming the political system to remove any regulation or control on its freedom to loot the system. This take over has been noted. First, they bought and paid for the political elite with campaign donations. Second, they staffed the financial regulatory bureaucracy (SEC, Treasury, OCC, the Fed, etc.) with their own people. And third, they sold us on an ideology that teaches markets are always good, fair and efficient. Any and all regulation is, therefore, unjustified.


The elite of the finance, insurance and real estate industries then, in an orgy of greed, used this power over the next 30 years to take for themselves almost all the increase in wealth the economy produced. The mean after-tax income of the top 1 percent increased by 176 percent compared to 6 percent for the bottom 20 percent. For the same 30 years, the share of income received by the top1 percent increased from 7.5 percent to 14 percent of the total. No other industrialized country has seen such a malignant redistribution of income. The problem is peculiar to America.


In a very real sense, our financial elite stole this purchasing power from the workers of America whose income is still stagnating. Financial sector profits continue to rise This redistribution of wealth, from us to them, brought the financial system near to collapse while rewarding the bankers with riches beyond imagination. But, more importantly, the elite parked the money in cash, Treasury bonds or foreign tax havens. This starved the economy for spending and brought on the present Depression.


This loss of income is at the heart of our current Depression. For this is a depression and not a recession. The difference is analytical and not merely a question of size. The failure to make this distinction is a serious flaw in the mainstream analysis of our problems.


A recession is part of the normal, Federal Reserve-managed business cycle. A recession is, like inflation, a monetary phenomenon that we know how to cure. When an overheated economy produces inflation, the Federal Reserve steps in, cuts the money supply and raises interest rates. The consequent recession dampens inflation by discouraging investment and the bidding for resources. Whereupon the economy repeats the cycle.


A depression, on the other hand, arises from an exogenously generated decline in aggregate demand. It involves the real economy and requires fiscal action. Depressions are not well understood by the economics profession. But, if anyone can "cure" a depression, it has to be the Congress and the Administration rebuilding aggregate demand. In this case, that means putting purchasing power in the hands of working families. The economist's call for job creation is really the call for wages and spending.


But our political leaders also failed us. The political elite are responsible for imposing and policing a system that works for the public good and brings to justice those who violate the rules. The financial sector had an established set of rules that, until about 1980, were well enforced by the bureaucracy. But with their takeover of Washington, the financiers were able to eliminate or ignore those rules and pay petty fines for enormously profitable criminal activities. This failure and those crimes continue to this day.


Politics and money are based on trust; the confidence that the elites can and will do their job. Our politicians and our financiers have seriously undermined that faith in our money and in our government. Over 80 percent of Americans believe our government has gone wrong. Our money is being questioned not just by the Chinese and other investors but Americans themselves.


The most serious question facing us as a people is not the amount of debt, that is trivial, but how we are going to rebuild aggregate demand, bring the system to justice and reestablish trust in our financial and political systems.