By Karl Reiner
Many ardent conservatives believe the country is spiraling downward, the future bleak. They urge buying gold, stocking up on food and arms, getting ready for the collapse of society. The gloomy mindset may be a reaction to the fact that the recession was partly caused by the banking deregulation they advocated.
Their sense of unease is not completely misplaced. The government reaction to the 2008 financial collapse sent budget deficits soaring and held interest rates to near zero. Although the actions prevented the Great Recession from turning into a depression, the economic hit was hard, a consequence of the misallocation of resources to the housing sector.
Before the crisis, the growth of the financial sector provided some benefits. It helped world trade increase from 22% to 33% of global GDP during the years before the housing crash. New ways of financing homes led to lower borrowing costs and increased home ownership. Unfortunately, the availability of easy credit also promoted poor lending practices and a rise in private sector debt.
Too many homes were bought by people who had no hope or intention of repaying the loan. Speculators engaged in home flipping, crafty innovations allowed banks to avoid regulation and take on more risk. In 2005, about a third of homes sold were second homes or investments, not primary homes. Appraisers stretched valuations. Mortgage lenders accepted phony income declarations for a variety of devious mortgage plans.
Mortgage debt ballooned from $6 trillion in 1999 to $12 trillion in 2008. In many areas, the boom in residential real estate raised housing prices 30% in three years. Buyer attitudes changed. Houses became an investment, not a place to live. The size of houses expanded, growing 30% in 25 years.
The old rule of not spending more than 25% of disposable income on a mortgage was abandoned. By 2005, people were spending 50% of their income on house payments. Bankers, home buyers, investors, rating agencies and regulators share responsibility for the housing bust. In 2007, 1.7 million homes went into foreclosure. Over $30 trillion had evaporated from the economy by 2008.
The enormous economic downturn and slow recovery made many people fearful. They now tend to view things in a gloomy context. China is the rising power, the U.S. is slumping. The current dollar is worth 5 cents when compared to the value of the 1913 dollar. The U.S. has moved from being the world's largest creditor to being the world's biggest debtor. The dollar was fixed to gold at $35 per ounce between 1945 and 1971. Gold now sells at around $1,446 per ounce. The dollar is becoming worthless.
Tea Party conservatives should acknowledge that the recession caused massive economic dislocations. The ability of the economy to generate economic growth has sputtered. Real wages have stagnated. The growing income inequality threatens stability. In the U.S., around 28 million households (about 37% of the total) do not have a retirement account of any kind. They are solely dependent on Social Security.
Tea Party obstruction in Congress hinders the entrepreneurial sprit that the Tea Party says is needed to revive the economy. It is stifling the job-creating investment the recovery needs. It prevents Congress from committing to reducing federal budget deficits over the medium-term through a combination of gradual tax hikes and spending cuts.