People have borrowed and lent to one another since the invention of money, but how Americans borrowed in the 20th century was entirely novel. Mass access to credit became an American way of life, and tax cuts for the rich has been the political mantra since the Reagan presidency. The trouble is, Louis Hyman explains, the rich haven't keep their side of the bargain.
For most of history, personal debt was personal. It existed between two people that knew each other. With the beginnings of the resale of debt, from installment credit and mortgages in the 1920s, a new impersonal relationship developed.
Debt could now be traded like any other commodity. Buying and selling debt remained a specialist's task. The debt itself remained tied to the original purchase of cars, televisions or houses.
In the 1970s, this specialized network of resold debt transformed again with securitization, which made debt look like any other form of security. A bond backed by credit card debt or mortgage debt could not be differentiated from any other corporate bond.
Consumer debt had become interchangeable. Easy to invest in, the supply of money for consumer credit reached unprecedented levels. The technical, proximate causes of the credit crisis are perhaps less important than the long-term shifts in the debt economy that made them possible.
Easy access to credit is neither a good thing nor a bad thing. It depends on context. Credit is just one part of American capitalism. On the one hand, in the context of rising incomes and stable jobs, borrowing enabled postwar Americans to realize their material dreams — years before they could have saved up enough money.
One the other hand, encumbering consumers with debt when incomes are uncertain or stagnant can make borrowing less an opportunity than a shackle. As the volatility of American capitalism returned in the 1970s, consumers relied more on themselves than ever before.
The return of economic inequality, all-too-familiar before World War II, collided brutally with easy borrowing made possible through resellable debt. Hemmed in by low wages and easy opportunities, Americans looked to leverage in the only way that they could — through home mortgages. Even those who did not speculate enjoyed the rising home prices, cashing out all that excess home value through home equity loans, and using the money to pay off the credit cards.
Yet today, five years after the onset of the financial crisis, the underlying financial practices that enabled the crisis remained unfixed. Financial institutions and instruments are largely unchanged. Credit rating agencies continue to operate unregulated, their AAA ratings as uncertain as they were before the crash. Mortgage lenders, though currently under scrutiny, only have to wait for the next opportunity to enable speculation.
Adjustable-rate mortgages and teaser rates still lure people to budget themselves into bankruptcy. Securitization allows loans to happen without lenders putting any of their own capital at risk. But these financial practices are still just an echo of the real problem in America.
Ask why our financial institutions lent
The structural connection between economic inequality and the crisis remains ignored. The dangerous investment choices that precipitated the crisis are but a symptom of this underlying cause. Income stagnation continues, pushing Americans towards greater borrowing and less real saving.
Many of those who lost their jobs in the crisis remain unemployed, but went uncounted since they had run out of benefits and hadn't looked for work in the last two weeks (which is how the government measures unemployment).
Meanwhile, as those at the bottom hang on, profits continue to concentrate at the top. Without a good alternative, surplus capital continues to be invested in consumer debt. It is more important to ask why there was so much money to invest in mortgage-backed securities than to ask about the particulars of how those investments went awry.
Don't ask why Americans borrowed. Ask why our financial institutions lent! To avoid this calamity, we cannot pretend that by sending some traders to prison we have rectified the economy.
The crisis was not caused by a few individuals, but by the structures in which those individuals acted. We must ask why these individuals made the choices they made and why those choices had such power over our lives.
There is no question that consumer credit is necessary for modern capitalism to function. But the excess of capital allowed to form at the very top is starting to inhibit the continued necessary growth of the economy. High tax rates, like we had during the postwar prosperity, put money in the hand of the consumer and the government to spend.
Since the Reagan era, those tax rates have been falling. The justification for low tax rates was that the wealthy would invest their savings and grow the economy. Instead, that wealth has been invested in speculation, destroying capital and hampering growth.
If that capital were invested in businesses and not in consumer debt, then those low tax rates could be justified. The fact of the matter is that it wasn't — and they, the low tax rates, cannot be justified.
**Editor's note: This article is adapted from Borrow: The American Way of Debt (Vintage Books/Random House) by Louis Hyman. Published by arrangement with the publisher. Copyright © 2012 by Louis Hyman.