The Great Depression: The sequel

The first frightening aspect of how the global economy is currently structured that should be made clear is the extraordinarily fragility of the edifice of modern capitalism. "Systemic risk" is a phrase we've heard frequently from bankers and regulators and economists in recent months -- almost to the point of not stopping to think about what it means. The possibility of "systemic risk" is the possibility that markets and the banking system could collapse, that the amazing disintegration of a company like Enron or Bear Stearns could be duplicated on a systemwide scale. The speed with which Bernanke and Paulson rallied the troops to force Bear Stearns to sell itself to JP Morgan provided ample proof of how scared they were that the bankruptcy of just one investment bank could set off a chain of falling dominoes that would take down scores of other major financial institutions, and result in a market sell-off rivaled by only, you guessed it, the crash of 1929. This is no left-wing Marxist fantasy. Ben Bernanke made his academic bones studying the Great Depression. He has taken every possible opportunity to backstop the banking system and markets, with rate cuts, easy access to credit, and billions of dollars in liquidity in exchange for dubious collateral, precisely because he knows exactly how close to the brink we are. If we don't fall over the edge, kudos to him, but let's not try to pretend that the cliff was never there.

Now, once you've digested just how slender are the threads upon which modern financial markets hang, here are some more numbers to chomp on: Last October, citing Internal Revenue Service data, the Wall Street Journal reported that the top 1 percent of Americans earned 21.2 percent of all income in 2005. That's the highest measure of income inequality since, you guessed it, before the Great Depression. The numbers may be off that peak for 2008, given the carnage on Wall Street, and all those investment bankers trying to sell their weekend homes in the Hamptons into a sagging real estate market. But not by much.

However you slice it, it's an appalling statistic. It may not carry the same visceral visual punch as a Hooverville, but it sends the same message: The richest Americans are gobbling up the lion's share of the fruits of economic growth, while for everyone else, wages barely keep up with inflation, good jobs become increasingly scarce, and making ends meet gets tougher and tougher.

Right-wing economists tell us that allowing the rich to grab such a huge percentage of national wealth rewards the most "productive" sector of society and encourages them to create even more wealth, which eventually trickles down to all Americans. So who cares if the income inequality chasm has widened to historically unprecedented heights? Poor Americans now are rich compared with poor Americans in the 1920s. They've got their fancy TVs and access to an extraordinary array of cheaper-than-cheap products at the nearest Wal-Mart. Are they starving? No, the big social problem is rampant obesity! So let the good times roll, and make those tax cuts permanent.

There are some holes in that logic. The average American family carries upward of $8,000 in credit card debt. The personal savings rate has never been lower. Healthcare costs are inconceivable for anyone who doesn't have insurance. And right now, home prices, which represent the largest chunk of net worth for most Americans, are dropping at a rate of 10 percent a year.

Never mind how these statistics make a mockery of the thesis that encouraging the top 1 percent of Americans to gorge themselves on 20 percent of the pie breeds prosperity for all. The truly discouraging aspect to all this is that if the current economic woes deepen into a severe recession, or if a systemic shock seriously rattles financial markets, Americans are less equipped to weather the storm than they have been since, well, the Great Depression.

That last point to underline is that the hands-off-Wall Street, deregulatory impulses unleashed by Ronald Reagan and expanded by all his White House successors have directly contributed to the precarious state of today's average American. The housing crisis offers a terrific example. Yes, speculation by housing flippers played a role in fueling the boom, and so did fraud on the part of both lenders and borrowers. But Wall Street's hunger for high-yielding complex financial instruments, that alphabet soup of CDOs and CMOs and countless other inscrutable derivatives, created the fundamental incentive that encouraged lenders to provide credit without restraint. The voracious demand for the junk encouraged the creation of more junk. And nobody asked any tough questions, all the way down the line. Worst of all, the hedge funds and investment banks that bought and sold these derivatives did not operate under the same levels of government scrutiny that traditional banks must face. Quite the opposite -- the more complicated the financial innovation, the less likely it was to fall under any government oversight. And that was no accident -- that was done on purpose. During both the Bill Clinton and the George W. Bush administrations, Wall Street got exactly what it asked for -- a light hand on the reins, but with the tacit assurance that if the shit really hit the fan, the government would bail it out, because, of course, the awful consequences of systemic collapse would be too devastating to risk.

We are not totally bereft. As Slate's Daniel Gross cogently explained last week, the institutions created during the Great Depression, despite persistent Republican efforts to dismantle them, still provide a sturdy bulwark protecting Americans from abject, 1930s-style levels of misery and poverty. But those relics of the "nanny state" are under constant attack by starve-the-beast radicals whose explicit goal is to roll back the New Deal. And now we have Hank Paulson telling us that a new regulatory system needs to be even less onerous for Wall Street's innovators to bear, while John McCain lectures Americans on how Wall Street deserves a bailout if financial meltdown looms, but individual Americans who screwed up deserve to stew in a soup of their own irresponsibility.

We shouldn't have to require a depression, or even a severe recession, to send the discredited approach embraced by the current administration and the Republican aspirant to the throne into the dustbin of history where it belongs, there to malinger until today's 18-year-olds celebrate their own 97th birthdays. The events of the past few months should be lesson enough. But we'll have to wait until November to see just how many Americans are paying attention.

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