The Culprit Discovered: Chuck Todd Says we Consumers Caused the Crisis with our Spending!
Chuck Todd thinks that the Great Crash of 2008-2009 was caused by consumer spending???
What the hell?
'OBMAMA: All right, Chuck Todd. Where's Chuck?
Question: Thank you, Mr. President. In your opening remarks, you talked about that, if your plan works the way you want it to work, it's going to increase consumer spending. But isn't consumer spending, or overspending, how we got into this mess? And if people get money back into their pockets, do you not want them saving it or paying down debt first before they start spending money into the economy?
Obama: Well, first of all, I don't think it's accurate to say that consumer spending got us into this mess. What got us into this mess initially were banks taking exorbitant, wild risks with other people's monies based on shaky assets and because of the enormous leverage, where they had $1 worth of assets and they were betting $30 on that $1, what we had was a crisis in the financial system.'
Uh, I don't remember about Todd receiving that Nobel Prize in economics. But here is what Paul Krugman said about the cause of the crisis:
' What lies behind the credit squeeze is the combination of reduced trust in and decimated capital at financial institutions. People and institutions, including the financial institutions, don't want to deal with anyone unless they have substantial capital to back up their promises, yet the crisis has depleted capital across the board.'
Does that sound to you like "too much consumer spending" was the problem?
And what does Krugman advise?
' policymakers around the world need to do two things: get credit flowing again and prop up spending.'
Krugman is the world expert on how the last Depression was ended.
Or here is another Nobelist, Joseph Stiglitz, who was prescient just as the crisis was beginning to break:
'The present financial crisis springs from a catastrophic collapse in confidence. The banks were laying huge bets with each other over loans and assets. Complex transactions were designed to move risk and disguise the sliding value of assets. In this game there are winners and losers. And it's not a zero-sum game, it's a negative-sum game: as people wake up to the smoke and mirrors in the financial system, as people grow averse to risk, losses occur; the market as a whole plummets and everyone loses.'
Yeah, that sounds to me like a lot of shenanigans by bankers and high-powered financiers. Not. Spending. By. Consumers.
Why is it that bright people like Todd say these things?
I just have to speculate that corporate news is so tied in with the superwealthy that they make up things to protect the continued ability of the top 1 percent to take home 20 percent of the income of the country every year, even when they have demonstrated that they don't deserve this lion's share-- since they are not making the rest of us prosperous but rather running the country into the ground.
End/ (Not Continued)
posted by Juan Cole @ 2/10/2009 12:05:00 AM
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24 Comments:
Thank you for this article...I am on board with the corporate media involvement shaping the news on all fronts. Glad to see it come up here.
The irrepressible Helen Thomas asked, more or less, if Israel has nukes. Bless her.
Juan, what Chuck says is a partial truth (as much as what Krugman says is a partial truth).
Look at it this way: The savings rate for the average citizen went *negative* in recent years. What that means is that on average we were consuming more than we were producing. The *only* way this can happen is if capital is consumed. Less capital means lower productivity, i.e. lower wage rates and a lower standard of living.
Now the fact that this happened isn't necessarily to *morally* blame the average consumer. A cogent argument can be made that the average consumer was acting rationally in spending more than they were earning since the dollar was depreciating (i.e. prices/wages were rising) at such a rate that the current value of even future debt was *higher* than the expected return of savings. Although this might seem like a mind-bender to understand, it is the inevitable result of monetary inflation (see Wiemar Germany for the most extreme example).
Also, to point to Krugman's Nobel is a naked appeal to authority (i.e. a logical fallacy). Krugman might be a darling to the left, but he is guilty of many of the same intellectual crimes as the right. In fact, he is in a sense the flip side of the same coin as a right-wing moralist (like Bill Kristol, for example). His arguments usually degenerate into moral hand wringing within the spaces a few sentences.
Frankly, I think Krugman is one of the more dishonest intellectuals we have today on the left *or* the right. And given the cesspool that the intellectual right now calls home, that's really saying something. But I won't go into that here...
Chuck may be a dead duck, but for every non-performing mortgage there is a dead consumer floating in the financial cesspool.
Amazed you still believe these economists really understand the economy.
There has been a bubble of overconsumption in this society growing over the last twenty years through home equity withdrawals etc. This of course combined with and was abetted by the banksters, but this society has been living a debt spree for quite some time. Now clearly the banksters provided the debt, but consumption as opposed to societal savings will have to drop. We cannot solve an insolvency crisis by increasing debt. Anyway, the amount of credit worthy borrowers has dropped dramatically and those who are credit worthy have no intention of borrowing.
Keynesian economics and monetary economics the two orthdoxies in the economic world simply have no solutions to this crisis...more stimuli and more bailouts aren't going to work.
We need to bring in a broader spectrum of economists to think about this not the same tired hands we have been listening to. Winning the Swedish Bank Prize is no certification that they can understand this crisis. Anyway, I think the question is serious and appealing to Stiglitz, Krugman, or Summers will not convince me that this logical question is stupid.
I think that a more measured look at this crisis shows that the dependence on consumer spending instead of production did play a role, and Obama did try briefly to point that out to the reporter.
The problem of consumption is that if done without production, it involves some kind of gimmick. What Obama should have said was that real wages in America have been stagnant for 30 years, yet people have continued to increase consumption as if that calamity had never happened. Productive jobs were shipped overseas by exploitative American corporations, and the profits were shipped home to enrich the investors. Now the bubble has collapsed, and both spending and wages are deflating down, far below the point that they objectively needed to.
Kevin Phillips has argued in his recent books that this is part of a pattern of entitlement and divorcement from reality found in declining empires. Obama is not yet ready to say that we must prepare for a post-imperial future, but he is saying that in the future we cannot rely on consumption as we have known it.
This line of Republican attack falls flat on its face.
Between 2001 and 2008, every town in America saw a parking lot sale of pickup trucks marked:
NO MONEY DOWN!!!
$199/MONTH!!!
GOOD CREDIT / BAD CREDIT OK!!!
For a quarter-century, we have been bombarded with envelopes promising we are
PRE-APPROVED!!!
for an unsecured platinum Visa or MasterCard if we ACT TODAY!!!
One could not turn on the television without seeing commercials for mortgage lenders promising cheap prices and low rates.
GET THE CREDIT YOU DESERVE!!!
That last line puts responsibility for this crisis squarely in the hands of the financial wizards who forgot the basic rule of credit: it is a privilege you are supposed to earn, and NOT an entitlement.
Stiglitz was on Prison Planet (of all places) were he said the USA would be in depression by 2009. I listened to him and I believed it. He was WAAAY ahead of everyone on that one. No one else would listen to him, hence the slightly-fringe Alex Jones site.
I would guess that Chuck spent more time and thought being groomed for his prime-time appearance than thinking about what to ask President Obama. It's a good thing NBC did not put him in charge of "Press the Meat." If he had, what an excuse to become a Vegan!
Obama could have better responded to Todd's question by noting that excessive consumer borrowing is more accurate as a factor in the mess than consumer spending itself. That excessive consumer borrowing was made possible by irresponsible securitization by banks as well as nonbanks aided and abetted by an ideology of no regulation. As a result, the financial sector grew to be 40% of GDP instead of the normal 8% or so. And, when excessive consumer debt is added to business and government debt, the US went from a ratio to total debt-to-GDP in normal, good economic times of 1.5 to 1.8 times GDP to 3.5 times GDP.
The ratio in the Great Depression was 2.4 times GDP.
Our economy is 70% determined by consumer spending. That's too much to be healthy and sustainable. But, the challenge we face now is too much debt; not too much spending per se.
In effect, all the debt seriously expanded the supply of money. Again: 3.5 times gdp. To get back to a healthy 1.8 times gdp (keeping gdp constant at $13.5 trillion - which is a mistake since it will shrink -- but am doing it to illustrate), that means we have to eliminate debt of 3.5 - 1.8 or 1.7 times $13.5 trillion: About $23 trillion.
And, yet, as we see every day, the economy itself is totally stalled. Another way of looking at this is that there are only four sources of growth: consumers, businesses, government and exports. Well, we're not going to get it from consumers or businesses right now. And, while there may be some small growth in exports, any sizable change depends on a very cheap dollar. So, that leaves government. And that means we need a strategy to use MORE government debt to induce both a change to positive direction in the economy plus a reduction in consumer and business debt.
Not easy. But simplistic formulations -- whether they come from Nobel prize winning economist or from TV reporters or from government officials -- will not steer us clear of the unprecedented catastrophe created by so-called 'free market fundamentalists' who took the nation and world for the wild ride of irresponsibility.
The US educational system is working perfectly. We have a nation of people held in thrall by the corporate media which pushes celebrity, sports, electronic gadgets, and other mindless distractions. Go to your local mall some evening and watch the people walking by. How many of them know that we have over 760 military bases around the world? The military-industrial-complex will destroy us.
Krugman is right that the proximate cause was the real-estate-based derivatives; but the reason those derivatives were fragile was not consumer spending as such, but that the consumers were overextended with their "spending" on real estate. The overspending led to a bubble in prices, which inevitably collapsed.
I believe one of the ultimate causes is that the spending was based on debt rather than real assets. As income inequality has skyrocketed over the past 25-30 years, real income for all but the very top of the ladder has stagnated or decreased. To keep spending up, the economy moved to spending based on debt. The lesson for me is that we can't borrow our way to prosperity; we need to reduce income inequality so that consumers can spend money they really have rather than money they borrow.
Bill S. writes: >Now the fact that this [excessive consumption] happened isn't necessarily to *morally* blame the average consumer. A cogent argument can be made that the average consumer was acting rationally in spending more than they were earning since the dollar was depreciating (i.e. prices/wages were rising) at such a rate that the current value of even future debt was *higher* than the expected return of savings. ... it is the inevitable result of monetary inflation (see Wiemar Germany for the most extreme example).<
This over-consumption by the lower half of the income distribution (the lower-middle and working classes) was not spurred by inflation (as normally defined) and was in no way due to anything like the hyperinflation of the Wiemar years. The fact is that the inflation of the price of goods and services was pretty moderate during the early 2000s, even if you include the price of food and fuel. The problem was instead one of asset inflation: the price of houses went crazily upward in a massive bubble (financed by our friends the bankers and abetted by the real estate industry). It was the popping of that bubble that spawned the current financial crisis, while the continued fall in house prices continues to make matters worse.
Second, after decades of stagnant real incomes, people in the lower middle classes tried to keep their families going by taking out home equity loans. (Having both adults working full time for pay was no longer sufficient.) To some extent there was an effort to "keep up with the Joneses" by buying jet skis and the like, to live the American Dream of consumerism, financed in the same way. Back in the 1950s & 1960s when real wages were growing, this kind of consumption didn't get the economy into trouble; it's only when we try to live as if the economy were still living through that kind of prosperity that we see "overconsumption."
By the way, Bill Todd was just representing a major orthodoxy among the economic elite. To some extent, they are talking about their own behavior (McMansions, etc.)
Jim Devine
Giving Chuck Todd a bit of the benefit of the doubt, I presume he was referring to exactly the sort of debt spending Martin mentions in his post: People fueled spending by treating home-equity like an ATM card. Regular people -- abetted by hundreds of entirely rational self-interested mortgage brokers and the willfully blink investment bankers who bankrolled them -- took on more debt than they could afford. The illusion of wealth created by rising home values and easy credit coaxed people to live well above their means for years and years.
But the "blame" for this lies with the big bankers, who over-leveraged loans based on mortgage assets which were far riskier than they realized.
Shame on them because unlike us mere-mortal consumers, those guys are supposed to "know better." It literally is their business.
But yeah, give Mr. Todd a bit of slack here -- people spent money they didn't have, and that helped trigger all of this.
For a really solid look at the whole financial mess, check out http://suddendebt.blogspot.com/
-this guy was explaining why the whole financial system was going to explode about a year before it did.
Consumer spending was definitely part of the reason, along with the crazy CDS that overleveraged pratically every financial company on the planet.
Hi all,
I agree with Bill Stearns' comment above.
Sure, the bankers, Wall Street, and the media are too blame.
But there IS a problem with consumer spending. In a nutshell, we are consuming beyond the earth's resources, we have hit the limits to growth, and "restoring credit" to economic growth is probably the worst thing we could do. We are in over our heads in debt (consumers, banks, the entire world). Debt drives growth, growth drives consumerism, and consumerism is death to the earth. Consumerism is also becoming impossible, even if we were willing to destroy the earth, due to peak oil, which probably arrived in July 2008.
Moreover, I think Obama at least partially gets it: "Now, you are making a legitimate point, Chuck, about the fact that our savings rate has declined and this economy has been driven by consumer spending for a very long time. And that's not going to be sustainable. You know, if -- if all we're doing is spending and we're not making things, then over time other countries are going to get tired of lending us money and eventually the party's going to be over. Well, in fact, the party now is over."
Exactly.
We need to apply the same kind of critical thinking that you've given to Middle East politics to our economy. I'm heading in the direction of looking at the ecological economists like Herman Daly and reading TheOilDrum.com.
Keith Akers
Both sides are right here. There was too much spending ON CREDIT by consumers, as a result of moral hazard of too easy credit (home equity loans based on ever-appreciating home values and no-doc, no-down loans) shamelessly offered by the banksters.
A lot of this can be laid at the feet of the Bush administration, which called on patriotic Americans to spend, spend, spend to pull us out of the setback of 9/11. On top of this, of course, are stagnant wages that made borrowing a necessity if one were to live like their neighbors, who were doing the same.
But those who did not buy into it and overspend on credit are in better shape now.
With all due respect Dr. Cole, I disagree that we should absolve consumers of any responsibility for this mess. I quite agree with what martin wrote that the bankers were abetted in their crimes. Someone had to sign on the line for the mortgages and loans against mortgages that dragged us into this pit of debt. Somewhere along the line we perverted the American Dream into a habit of enjoying material things in the present while pushing the cost of those things into the future. There will be no recovery until we come to terms with this habit...
Consumer spending can't a bad thing, Chuck. We wouldn't have much of an economy without it . But consumer spending *based on unsustainable debt* got us where we are, and is no doubt questionable. Spending based on sustainable income or accumulated real wealth should be a good thing. If Obama's stimulus only leads to temporary jobs (unsustainable income) then it's affect may be somewhat limited.
At the end of the press conference, someone should've presented Chucky with the "Bag Of Hammers" award for the most idiotic question ever.
Chucky needs to go back to the set where he can play with his whiz-bang techy toys and leave questions about the economy to those that have a clue.
Unfortunately, too many in the CCM (corporate controlled media) would rather use RNC talking points as the basis of their questions in place of actual research on the subject.
If Edward R. Murrow were to return and see what is being done in the name of journalism, he'd never stop throwing up.
posted by: draftedin68
Consumer spending can be a symptom of a healthy economy, or a bubble. The difference is in the borrowing. Consuming without it is healthy and borrow-and-spend is not,on a personal level at least.
However, unemployment is costly even in a capitalist system. Now if the state wants to stimulate spending in order to safeguard jobs then the stimulus appears to make sense. But it all depends on the "value" that the stimulus can generate. In the worst case, the money goes mostly to imports, corruption, and to speculatos (of land for example.) The best case scenario is that the jobs lead to more jobs in an ever increasing circles.
So, the key is how the stimulus is managed. If the mismanagement and corruption that the Americans exhibited in Iraq is replicated, then the stimulus could sink the US in a deep hole, because the money has to be paid back (on top of the $10Tr W legacy.)
EXCESSIVE consumer spending is certainly a component of the economic problems we face today. People wanting a new car every year, tapping their home with another refinance/HELOC to pull money out, not saving anything for a rainy day, and unscrupulous lenders appraisers, and real estate agents as well as the bankers and investments (AND INVESTORS) who sold illicit products are all to blame.
In our small family, we make 6 figures. We live in a 10 year old house, drive the 8 year old cars, put our child in public college, and have well over 5 years of CASH assets in the bank to shore up our income should that paycheck stop coming. Do we spend money, sure we do but we do NOT buy anything we want. We do not read advertisements, watch commercial TV ads drooling, nor do we keep up with the Jones, as so many people underwater CHOSE to do.
We chose to save our money for the future.
Those who did not and those who abetted them (corporate, advertising, neighbors) are the problem as well as the fools who followed along like little dogs.
The age of blaming everything wrong on everyone else but OURSELVES is over. We as a country need to grow up and stop acting like a five year old child who can't have the candy in the grocery store checkout lane.
G in INdiana
I am surprised to find myself disagreeing with you for once, Dr. Cole. Rather than restating the grain of truth in Todd's comments, I'd like to point out that relying on a person's credentials over the soundness of his arguments doesn't hold up. Those well-established economists who claim to really understand everything got us into this mess. To hear that we need people to be taking out car loans to prop up our gas guzzling Detroit industry is only going to make the problem worse. The creation of money as debt has already inflated our economy and exponential growth based on numerical balances (not based on anything of value) is completely unsustainable. The expertise of the proponents does not make their ideas correct.
I dontated $25 to Juan Cole and I bet he kept it instead of spending it like he should have, reducing Michigan GDP by 0.000000000000000000000000000000001%.
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