Bubble and Bail: For Most of the 20th Century, America Manufactured Things. for the Past 30 Years, Though, It Has Chiefly Manufactured Debt. Here's How Wall Street, with the Aid of Both Political Parties, Gravely Damaged the Economy

By Phillips, Kevin | The American Prospect, May 2008 | Go to article overview

Bubble and Bail: For Most of the 20th Century, America Manufactured Things. for the Past 30 Years, Though, It Has Chiefly Manufactured Debt. Here's How Wall Street, with the Aid of Both Political Parties, Gravely Damaged the Economy


Phillips, Kevin, The American Prospect


As of spring 2008, we're probably just a third of the way through the unfolding debacle in the housing, credit, and financial markets. In political and regulatory terms, the ultimate problems and remedies have only begun to define themselves. We're not just looking at an ordinary recession. Since the 1970s, the United States has redefined itself from a manufacturing nation to a financial economy built on debt, leverage, and a considerable ratio of speculation. Both political parties have been complicit in this, and the downturn now beginning will be unusual and potentially tragic.

The case being made in some reform-minded and progressive circles--that we are on the cusp of a grand political, ideological, and pro-regulatory opening such as that of 193a--has some logic but also merits a considerable amount of economic and historical caution. The plausible analogies deserve a quick run-through. To begin with, there is the prospect that, over the next few years, the largest credit bubble since the Roaring Twenties is going to unwind with at least some of the angst and pain of the Depression years. In 2007, total credit-market debt in the U.S. reached almost 340 percent of gross domestic product, far above the previous high-water mark of 287 percent a few years after 1929. Second, it is also becoming likely that the 2006-2010 decline in U.S. home prices will be the largest in three-quarters of a century.

However, there are also good economic reasons why the analogy should not be overindulged; today's U.S. political economy is quite different from that of 70 years ago in several ways. First, whereas the 1929 crash came in the wake of three to four years of strongly deflationary trends in the global commodity markets, today's international economy is caught up in what appear to be major inflationary pressures in global agricultural and energy prices. In its panic over deflation, today's Federal Reserve may be more likely to err in the direction of feeding inflation.

The second relevant caution is that finance is a far more dominant element in the current-day U.S. economy than anyone could have imagined in the era of Herbert Hoover. Even amid 1929 ballyhoo and tickertape, finance was overshadowed by manufacturing. In the 1990s, by contrast, financial services sprinted ahead of manufacturing as a share of U.S. GDP. By 2006, financial services counted for over 20 percent of the economy, and manufacturing just 12 percent. As of 2008, portions of this swollen sector--mortgage finance, reckless securitization products like Collateralized Debt Obligations (CDOs), and elements of the credit markets--now threaten to implode. Still, even if the de-leveraging of the U.S. economy over the next few years is as painful as it was during the 1930s, that does not necessarily re-recommend the New Deal regulatory model. It will probably recommend some model that the 2008 political debate has not even touched upon.

The third relevant caveat is that the United States is now far more exposed to negative international actions and perceptions than it was in the 1920s and 1930s. Back then, the United States enjoyed three beneficial attributes: It was the world's leading energy producer, the world's leading manufacturer, and the world's leading creditor nation. So favored, the U.S. economy was able to survive the years of Herbert Hoover's inactive stewardship. Over the last decade, however, under the derelict management of George W. Bush, the United States has cemented its embarrassing status as the world's leading debtor nation, the No. 1 importer of foreign manufactured goods, and the No. 1 importer of foreign oil. As a result, the shrunken dollar has lost over 40 percent of its value against the euro since 2002. That shrinkage could even intensify if foreigners believe that the U.S. government, in particular the Federal Reserve Board, is committed to supplying liquidity to rescue reckless financial institutions at risk of inflation and at the expense of dollar holders. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Bubble and Bail: For Most of the 20th Century, America Manufactured Things. for the Past 30 Years, Though, It Has Chiefly Manufactured Debt. Here's How Wall Street, with the Aid of Both Political Parties, Gravely Damaged the Economy
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.