When people talk about the economy, whether on talk shows or in bars or just standing at the bus stop, the conversation eventually goes the same way. Everyone has a theory about who is to blame, where the money went, or at least how this might play out in the distorted politics of our time. If you let the conversation play out a bit, however, there’s one thing that always seems to turn people’s gaze to the floor as if the answer is written at our feet – what the Hell really happened?
Thing is, the answer is right there at our feet. Let’s retrace our steps a bit.
Back in January, I posted an analysis that showed that we’ve been in a kind of recession since 2001. It was papered over with a bit of deficit spending by our government and a system that turned equity into an in-home ATM, so we could ignore it. I didn’t have all the tools at my disposal to do a really good job of it, but fortunately a few folks at the University of Chicago had the degrees, the computers, and the Grad students to do it up right.
A paper by Atif Mian and Amir Sufi shows in great detail just what the housing part of the Great Bubble did for our economy. Typically, economists expect a rise in assets to be used about 3-5% for cash-out spending on consumable things like cars, electronics, cheez doodles, and whatever else meets our taste. However, in the period between 2002 and 2006, something more like 25-30% of the rise in equity was cashed out with a new loan against the old homestead.
That’s about $1.45 Trillion dollars, or about 2.8% of GDP during that period, a part of our economy that wouldn’t have been in our economy. What we are seeing now is simply what that wave of cash once covered up.
The thing is that all this money all came at a price. If it took about $300 Billion a year to keep us propped up during this period of time, where did we get it? That’s what all these loans paid for in the end. Many of us may not like the idea of our government printing trillions of dollars, but there was a time when the private world of banks and investment houses was doing the same thing. And that was just plain fun.
What really happened? If you wind up hanging your head and looking at your feet, you’re actually really close to the right answer. All you have to do is turn your head back a little bit and you’ll see the trail of credit card receipts, wrappers, and Styrofoam packing. That’s what happened. We spent an awful lot of money that wasn’t really there in the first place.
Meanwhile, the economy that had geared up to advertise, import from China, and sell us all this stuff is an economy we can’t afford anymore. It has to restructure, or find a way to do something that makes sense in the new world we find ourselves in.
It’s going to be hard or even dangerous to move ahead if we keep looking at our feet rather than what’s in front of us, so perhaps we need to answer the question first. What really happened? We can retrace our steps a bit and see how we got into this mess if it helps us get a handle on it. The answer is that everything we knew for the last decade or so about where we were walking was absolutely and completely wrong.
Looking at our feet may seem a bit pathetic, but it’s really not a bad idea – if we do it right.