Easy money days are here again?

Greenspan's post-dot-com-bust rate cuts spurred the biggest spending binge in recent American history. What will Bernanke's Fed accomplish?

Topics: Globalization, How the World Works, Federal Reserve, Ben Bernanke, Alan Greenspan,

If you found the chart featured in my last post alarming, you might be well advised not to have a gander at what Michael Mandel, chief economist at BusinessWeek, is calling “The World’s Scariest Chart.”

Mandel’s chart measures the ratio of U.S. household indebtedness to gross domestic product. And what it shows is that starting around the year 2000, Americans suddenly started piling up debt at a far faster rate than was true during the 1990s. According to Mandel’s calculations, the difference between where we are now and where we would have been if we had continued to borrow money at the same pace as in the 1990s adds up to about 25 percent of current U.S. GDP, or roughly $3 trillion. That $3 trillion of extra debt, theorizes Mandel, is one reason why the current financial crisis has been “so hard to solve.”

Mandel doesn’t offer any reasons for why Americans took Bush’s ascension to power as a cue to start borrowing like mad. I’m sure the answer rests in a confluence of many elements. But one factor has to be the easy-money policy of Alan Greenspan. Starting in January 2001, Greenspan orchestrated a series of 13 rate cuts that brought the Federal Funds rate all the way down to 1 percent. Rates didn’t begin to rise again until 2004.

You Might Also Like

Low interest rates equal cheap credit. So the nation went on a great spending binge, an orgy of credit that only now appears to be coming to an end.

But before the necessary hangover — you know, that miserable headache and nausea that’s supposed to remind us that there is a stiff price for wanton self-indulgence — has even gotten a chance to kick in, the Bernanke Fed has gone on its own rate-cutting rampage. Tuesday’s three-quarter of a percentage point cut brought the Fed Funds rate down to 2.25 percent.

Here we go again?

I don’t think so. For starters, there’s a big difference between now and 2000 — that extra $3 trillion worth of household debt. When you’re already up to your ears in unpaid bills, you might think twice before going to the mall. And when you can’t pay your mortgage, are you likely to draw down further on another home equity line of credit? The reason why Michael Mandel is on the money when he calls that household debt-to-GDP chart scary is that the trend line makes inescapably clear the reckoning that must come to pass. That piper must be paid.

Andrew Leonard
Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

More Related Stories

Featured Slide Shows

  • Share on Twitter
  • Share on Facebook
  • 1 of 8
  • Close
  • Fullscreen
  • Thumbnails

    7 ways Americans have defiled the hot dog

    Sonic's Bacon Double Cheddar Croissant Dog

    Sonic calls this a "gourmet twist" on a classic. I am not so, so fancy, but I know that sprinkling bacon and cheddar cheese onto a tube of pork is not gourmet, even if you have made a bun out of something that is theoretically French.

    Krispy Kreme

    7 ways Americans have defiled the hot dog

    Krispy Kreme's Doughnut Dog

    This stupid thing is a hotdog in a glazed doughnut bun, topped with bacon and raspberry jelly. It is only available at Delaware's Frawley Stadium, thank god.


    7 ways Americans have defiled the hot dog

    KFC's Double Down Dog

    This creation is notable for its fried chicken bun and ability to hastily kill your dreams.

    Pizza Hut

    7 ways Americans have defiled the hot dog

    Pizza Hut's Hot Dog Bites Pizza

    Pizza Hut basically just glued pigs-in-blankets to the crust of its normal pizza. This actually sounds good, and I blame America for brainwashing me into feeling that.

    Carl's Jr.

    7 ways Americans have defiled the hot dog

    Carl's Jr. Most American Thick Burger

    This is a burger stuffed with potato chips and hot dogs. Choose a meat, America! How hard is it to just choose a meat?!

    Tokyo Dog

    7 ways Americans have defiled the hot dog

    Tokyo Dog's Juuni Ban

    A food truck in Seattle called Tokyo Dog created this thing, which is notable for its distinction as the Guinness Book of World Records' most expensive hot dog at $169. It is a smoked cheese bratwurst, covered in butter Teriyaki grilled onions, Maitake mushrooms, Wagyu beef, foie gras, black truffles, caviar and Japanese mayo in a brioche bun. Just calm down, Tokyo Dog. Calm down.


    7 ways Americans have defiled the hot dog

    Limp Bizkit's "Chocolate Starfish and the Hot Dog Flavored Water"

    This album art should be illegal.

  • Recent Slide Shows



Comment Preview

Your name will appear as username ( settings | log out )

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>