The Problem is Us

Over the last several months I've gotten hooked on Chicago Public Radio's This American Life. I first remember hearing about it years ago from my dear friend Pam, who was in love with Ira Glass and the show, but for whatever reason, I wasn't interested at the time. Now, I'm a podcast subscriber who looks forward to every Monday morning when I download the newest episode.

You may remember that a few months ago, I linked to an episode of TAL called "The Giant Pool of Money," in which a couple of reporters broke down the mortgage crisis in easy-to-understand terms. It was brilliant. Well, they've done it again with "Bad Bank," which aired about a month ago and made the current banking crisis comprehensible to ordinary people. I was reminded of the episode the other day when Rod Dreher linked to and excerpted from the transcript. This part is incredibly eye-opening:

Alex Blumberg: ...When a bank is insolvent, it doesn't have enough capital to cover its losses. In that situation, banks would actually be doing the RIGHT thing by keeping the bailout money that we're giving them. It needs to hold onto their capital, that's how they fix their balance sheets. If they loaned the money away, they'd be returning to the situation we're trying to rescue them from. In other words, saving the banking system, means that the banks that are worst off, should loan less, not more. But beyond the balance sheet, David Beim has a much more profound reason why banks shouldn't lend. He shows me something on his computer.

David Beim: Ok, so here is a picture, a graphic, and a chart that goes back to 1916 and up to...

Alex Blumberg: We're in his office, and we're looking at a graph, and it's, basically, a measure of how much debt we the citizens of America, are in. How much we all owe--on our mortgages and credit cards and auto loans--compared to the economy as a whole, the GDP. And for most of history, the amount we owed was a lot smaller than the economy as a whole. This ratio, household debt to GDP bounces along around between 30 and 50 percent, for most of the '30s and '40s 50s, 60s, and 70s, right into the 80s. Then it breaks through 50 % in the 80s, starts heading up in the 1990s. And then ...

David Beim: From 2000 to 2008, it just goes, almost a hockey stick, it goes dramatically upward.

Alex Blumberg: Like a rocket.

David Beim: It hits 100% of GDP. That is to say, currently, consumers own 13 trillion dollars when the GDP is $13 trillion. That's a $100 trillion owed by individuals. That is a ton.

Alex Blumberg: I'm going to ask a leading question, because I'm looking at a graph right here. Tell me professor, has there ever been a time where we owed that much before?

David Beim: I'm glad you asked me that. And guess what? The earlier peak, which is way over on the left part of the chart, where debt is 100% of GDP, was in 1929. This is a map of twin peaks. One in 1929 and one in 2007.

Alex Blumberg: Does that chart scare you?

David Beim: Yes. That chart is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks, it's something that had little to do with mortgage securitization, or ethics on Wall Street, or anything else. It says the problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us. We have over-borrowed. We have been living very high on the hog. We are, our standard of living has been rising dramatically over the last 25 years, and we have been borrowing to make much of that prosperity happen.

Alex Blumberg: And so, when you see Congress, sort of saying we need more, we need to make sure there are strings attached to this money, to make sure the banks are lending it out, that doesn't make any sense.

David Beim: It makes, not only no sense, it makes reverse sense. It's nonsense. Because what the banks have done is already lend too much. The name of this problem is too much debt. We have over-borrowed, and we have done that over many, many decades. And now it's reached just an unbearable peak where people on average cannot repay the debts they've got.

Interestingly, Planet Money (an NPR podcast I occasionally listen to--also great for translating the economic news into plain English for me to understand) said the same thing in a recent podcast. We all want someone to blame for this mess we've in--it's human nature to try and pass the buck--but the painful truth is, to find someone to point a finger at, we need look no further than the bathroom mirror.