Stunting A Recovery

The consumer won't be coming to the rescue this time.


    Tens of millions of Americans have suffered job loss, reduced incomes, loan delinquencies, foreclosures, and even homelessness over the past two years.  All of these things continue today, and are expected to continue for the foreseeable future.  This situation represents long-term damage to purchasing power, property values, credit scores, and households in general.
   Many of the unemployed will find it much more difficult to find gainful employment, not only because of economic conditions, but as a direct result of their damaged credit histories.¹⁵  They will have ongoing difficulties finding necessities like affordable housing and car insurance. These people will also be subject to aggressive collection practices that include lawsuits and wage garnishments that will make their ability to fully participate in the economy take much longer.  
    Even those who have weathered the recession fairly well have seen significant decreases in purchasing power in the form of stagnant wages, loss of job security, and the vaporization of the equity in their properties.  Since the overall riskiness of lending has increased due to a weak economy, many have seen their credit scores damaged through no fault of their own when lenders unilaterally reduced their credit lines or closed their accounts.  Those who seek even modest lending have less access to credit, and the credit they do find will be more expensive.  The combination of all of the the hardships faced by both the victims and the survivors of the recession will depress consumer spending and economic growth for some time to come.    
     In the short term, we need to reinforce the idea the financial industry exists to serve customers and not the other way around.  Congress can make abusive lending practices much less profitable by capping the interest rates and fees that lenders can charge.  A ban on the use of credit scoring for anything but lending will put the act of borrowing money back in its rightful place as a choice instead of a de-facto requirement.  Restricting the acquisition and use of our private information would do more to protect us from identity theft than any product the credit bureaus want to sell us, and would also begin to restore the boundary between public and private information   Thousands of homeowners could be spared from foreclosures if they are given the ability to have their mortgage principal reduced in bankruptcy proceedings.  These things will empower consumers, bring them some much-needed fair treatment, and bring us closer to a sustainable economic recovery than we are now.
    Long term, we must acknowledge that our economy’s heavy reliance on consumer spending is a structural weakness.  If an investment portfolio contained mostly just one type of investment, conventional investment theory would would call for the portfolio to be diversified.  There are too many eggs in one basket.  Our economy is nothing if not a long term investment portfolio, 70% of which consists of consumer spending.  On the surface, the economic meltdown was brought about by a convoluted mess of greed, fraud, political corruption, and regulatory negligence.  But at it’s base, the credit/mortgage bubble was nothing more than Wall Street’s collective decision to invest in consumer spending rather than tangible things like industrial production, research and development, or infrastructure.  Much like an oil company sells the gasoline and diesel that fuels cars and trucks, Wall Street sold money, the fuel of consumption.
    Unlike a business that has the potential to grow and increase revenues year by year, and even quarter by quarter, households are essentially on fixed incomes.  Now, a business’ profitable growth is by no means guaranteed, but a household’s potential to increase revenue is inherently restrained.  Households do not have the ability to sell their product (work) to more than a few customers (employers) at a time.  Moreover, households do not have the ability to set the price (wage) for their product (work).  In fact, households have had three decades of steadily diminishing revenues in the forms of anemic wage growth, rising medical costs, low interest rates on savings,  overall poor returns on retirement funds, and inflation.  Seen in this light, consumer spending was just another high risk investment waiting to blow up in our faces.

    Our economy is trapped in a self-defeating circle of irony.    Our growth depends on consumption.  Consumers need jobs in order to buy the goods and services that our economy produces.  The shareholders of the companies that produce these goods and services demand that wages be held down and fewer people employed.  Consumers lose income, buy less, or borrow more.  Companies shed more workers, and the cycle continues anew.   Recent economic history strongly suggests that as long as wage reduction continues to be incentivized and consumer borrowing remains a requirement of economic participation, our heavy reliance on consumer spending and consumer debt will prove to be a barrier to the very growth we seek.