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Worse Than It Seems

Drilling down to the rotten foundation of the economic crisis
May 27, 2008

With the economy apparently already in recession, gas prices near record levels, food prices rising, and inflation generally gaining momentum, economic issues are moving to the center of the presidential campaign. Political reporters have been forced to learn the financial crisis on the fly, while business reporters have had to learn to speak to an ever-growing audience. In March, Dean Starkman,
who runs The Audit on CJR.org, spoke with Jeff Madrick, the editor of Challenge magazine, to discuss the roiling economy and how the press is covering it. Madrick is also a visiting professor of humanities at The Cooper Union, and director of policy research at the Schwartz Center for Economic Policy Analysis, The New School. He is a regular contributor to The New York Review of Books, and a former economics columnist for The New York Times. His forthcoming books are The Case for Big Government (Princeton) and The Age of Greed…And the Men Who Made It (Alfred A. Knopf).

What’s going on out there?

Well, we’re facing a credit crisis of very broad potential damage, the likes of which we haven’t faced since the early thirties. What has happened is, by giving mortgages to people who really didn’t qualify, we’ve created a problem that’s having a domino effect. It’s not like the Savings and Loan crisis of the eighties, which could be isolated to s&ls and the kinds of real-estate investments they made in their localities. This problem is worldwide. These bad mortgages were packaged with relatively good mortgages, and all kinds of financial institutions—virtually all the major financial institutions—bought these packages of securities. Pension funds bought these packages of securities. And the securities in turn were used as collateral for other borrowing. So we have all these credit crises linked together. There is so much uncertainty about the value of these securities, about how much further house prices could fall, about how many more defaults and foreclosures there could be.

On top of all that, borrowing is what has supported this economy for thirty-five years now, because incomes haven’t been rising the way they used to. So people have had to borrow more, businesses had to borrow more, government has borrowed more, and we don’t seem to fully recognize that debt has become a much more important foundation to the economy. In fact, it’s the fulcrum of the economy.

It seems like that’s one thing—entering a recession with those debt levels—that really makes this much more dicey.

We’ve got a real serious problem here. Wages have gone up only marginally. Despite having moderately strong economic growth, it didn’t show up in wages for typical people. It showed up at the very top, but that was about it. And in corporate profits.

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What do we need to understand about the housing market?

The boom in subprime mortgages only really happened in the last few years, when people were allowed to borrow a lot of money, often based on adjustable mortgage rates that go up when other interest rates go up, and on top of that, they pay very high prices, so the value of their home is down. Even if they put up five percent or ten percent of the money on that house, all it would take is for the value of that home to drop ten percent—and in many places it has gone down twenty or thirty percent—and then they’d owe more money than the house is worth so they couldn’t refinance; they couldn’t sell it to get out of trouble; the bank wouldn’t really want it.

Foreclosures are up and banks are taking over, but they’re not taking over as rapidly as they would in good times. It’s harder to work it out now because the bank where you got your mortgage is no longer the bank that owns the mortgages, so there’s nobody to help you work it out. It’s a serious practical problem that’s never existed before.

It seems the political campaigns, and as a result, the political press, took a long time to reflect the seriousness of the economy.

Yeah, I think Clinton and Obama are talking about it more. But it’s not like any of them was out ahead. I think they haven’t been out ahead on anything regarding this economy, and I think the press should be pointing that out. But the press, too, has been behind on everything and not aware of the issues.

Were you surprised that John Edwards’s candidacy didn’t resonate more?

I think Edwards did not make the message as clear as he could have. And for some reason, he wasn’t always credible about it. That could have been the press’s fault. He also talked a lot about poverty and didn’t talk about the wages of a heck of a lot of people who are not doing well.

That’s a great point. Poverty sounds like an old perennial when it’s a broader issue than that.

Exactly. I don’t like the idea of only worrying about middle-class people and neglecting the poor. I should be clear about that, but Edwards should have been inclusive about it. And he was a little screechy about corporate greed, and some of those attacks sounded a little bit like name-calling rather than problem-solving. I mean, growth should help the middle of the pack, at least somewhat. It hasn’t helped it at all in recent years and helped it only a bit in the preceding twenty-five.

Why has that happened?

It’s a complex set of issues. The conventional economic issues have to do with jobs becoming more sophisticated due to changing technologies. So you need a better education than you did before. But that doesn’t explain everything, because college-educated people aren’t doing that well either. There are also issues about business norms now that have changed significantly from the fifties and sixties. There is no hesitation to fire people, for example; there is no hesitation to keep wages down. The government and the Federal Reserve participate in this—since the seventies, every serious wage increase has been considered inflationary, so keep it down. The minimum wage wasn’t raised for many years, and it’s much lower than it used to be in real terms. That’s a sign the federal government isn’t paying attention.

There seems to be a widespread assumption that this sort of pressure on wages and income is inevitable because we live in a global economy.

Yeah, I think the American people accepted that for a while. But I don’t think they’re accepting it any more.

Isn’t it true, though, that because people overseas will work for pennies, Americans must accept job losses?

Trade issues do have some effect, but we’re not necessarily losing the better-paying jobs, or even the middle-income jobs, due to trade. I think it’s just less of an issue than we’ve been led to believe by mainstream economists and the press, though it is an issue and it will be a growing issue. I think globalization also makes it easier to overlook and excuse the deterioration in business norms and government norms—businesses shouldn’t be able to throw their workers out, especially as unions have lost so much power. We’ve just lost all of those cultural and political restraints in the great shift in attitude toward business.

And the press has played a large role in fostering the assumption that layoffs are part of this healthy process?

Yes—“It’s a healthy, creative destruction. Don’t be an old-fashioned, sentimental bleeding-heart.”

I’ve noticed left-of-center policies are often called populist in the press.

There’s been a remarkable change in public attitudes toward the economy, and I think the candidates are behind the curve—and I think the press is definitely behind the curve. It’s funny because the press has bought so many of the arguments of the conservatives over the years. Labels are a big deal, though, like “liberal populist”—these terms have become pejorative. But things have changed. You know, two years ago, nobody thought it was practical to talk about a universal health-care plan. Now they’re talking about it all the time. Nobody talked about infrastructure, but now people are talking about it all the time.

Are people more sympathetic to the conventional left on economic issues than is generally assumed by the political press?

I think people are hurting and recognize they need government programs. To them, they probably don’t call themselves liberals because it’s so out of fashion, but that’s what government does. It solves problems that business can’t solve. In fact, that’s a lot of problems, and government and business should work hand-in-hand. There’s no such thing as one being more important than the other. History does not suggest it works that way.

What else in the broad economic story needs more press coverage? The generally dire straits of the middle class, for one.

I think it’s starting to come out, but I’m concerned that the dominant financial and business media just don’t get it. There is an instinct among the people that I now read in The New York Times, The New Yorker, the people who cover the economy for The Wall Street Journal—and there are always exceptions, you know, and some of them are remarkable exceptions—they have very little historical perspective. They don’t really ever seem to know what the good times were like and that broad-based prosperity is possible. They don’t know what optimism could be.

Journalists see optimism as a fifties-type thing?

Yeah, worker optimism. Workers could take care of their families; they could take care of themselves; there was a future out there, and they could say, “Holy cow, my kids are going to have a great life.” And then you have people who say, “Well, that was only in the fifties and the sixties,” but, you know, there’s been a long period of progress in America. There’s a serious lack of historical perspective from many of these writers, and they reflect a high level of ideology, leading them to accept as fact what are really just neoliberal assumptions about regulation, trade, inequality, and the economy in general. They kind of believe economists at Harvard [many of whom are economic conservatives] must be right. Economics is too important to be left solely to the economic sciences now being practiced.

Dean Starkman Dean Starkman runs The Audit, CJR’s business section, and is the author of The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.