Kuttner: our current economic woes were created by the Reagan Revolution and Carter deregulation

Robert Kuttner explains why America is now facing the worst financial collapse since the Great Depression:

The solutions now—the Fed interest-rate cut, the stimulus package—is this enough, Robert Kuttner?

ROBERT KUTTNER: No, it’s not the beginning of enough. And I think the place to start is to recognize why this recession is different from all other recessions. This began and is continuing with a collapse in credit markets, and the collapse in credit markets is, in turn, the result of deregulation gone nuts. And it’s a repeat of a lot of things that happened in the 1920s, where there was too much speculation with too much borrowed money and a complete lack of transparency. The regulators, the public had no idea of what these bonds that had been created out of subprime mortgages really contained, what they were worth. The people who packaged them were not subject to any kind of regulatory scrutiny.

And when it turned out that a lot of these loans were never going to be paid back, the layer upon layer upon layer of bonds and then securities based on the bonds—you know, if you can picture the World Trade Center collapsing floor by floor or you can picture the collapse of the Ponzi schemes of the 1920s, that’s a good—or horrible—analogy. And when you have a credit contraction, it means that banks have less capital against which to make loans, and lowering interest rates doesn’t fix that.

There are two other things that lowering interest rates and an ordinary stimulus package won’t fix. One, you alluded to in your opening comments, Amy, and that’s the collapse in housing prices. At the current rate of decline in housing values, American homeowners—and that’s about 70 percent of Americans—are going to lose $2.2 trillion of net worth this year alone. Well, when you lose $2.2 trillion of savings, you’re not inclined to rush out and do home improvements, you’re not inclined to rush out and buy durable goods. And again, compared to that kind of a loss, a stimulus—and they’re talking about $140–$145 billion, that’s one percent of GDP—that’s a drop in the bucket.

Lastly, this occurs on top of thirty years of increasing insecurity on a whole bunch of fronts: the greater risk of losing your job, the greater risk of having your paycheck not keep pace with inflation, rising energy costs, rising tuition costs, rising health insurance costs. All of the things that make you middle class have become more difficult to attain in the past thirty years. So you’ve got a three-layer cake here. You’ve got this thirty-year history of flat or declining living standards for most Americans, you’ve got this terrible weakness in financial markets, and you’ve got this housing collapse.

AMY GOODMAN: Thirty years would take us back to the beginning of Reagan.

ROBERT KUTTNER: A little bit before, actually. I mean, the great experiment in deregulation really started under Carter in the late 1970s. It was Carter who started the deregulation of trucking and natural gas and broadcasting. And the whole ideology of deregulation and the practice of deregulation was unfortunately bipartisan.

So what has happened to the structure of the American economy?

Consider this. America's bankers and the movement conservatives have caused the removal of usury laws, the tightening of the bankruptcy law, and the allowance of refinancing and second mortgages to extract cash from the inflation and low interest rate driven housing appreciation are all just banking ways to farm the poor and middle class for money.

The working class and middle class are urged to spend, and the new money needed to expand consumption came from rising home prices because wages haven't gone up since 2000. Still the extraction of money from the poor and the middle class - the tax farming by bankers - continues. The mechanisms of the cash-farming are things like high-interest high-fee credit cards, sub-prime loans and student loans for the middle class and high-interest pay-day loans, sub-prime mortgage loans, super high interest rate loans on used cars, rapid refund loans that cost 500% annual rates on a loan that gets the money to a person two weeks earlier than the IRS would have, and so on.

The union busting program of the Reagan Revolution has made it possible for the economy to become more productive, but the additional profit from that productivity all goes to the wealthy. So not only has the extraction of money from the non-rich to be given to the wealthy expanded a lot, it has not been accompanied more cash going to the middle and lower classes. America under the Reagan Revolution has become a nation in which the poor and middle classes are taxed and farmed for money to give to the banks and the super-wealthy.

Then there is the deregulation of business and financial institutions during the Reagan Revolution to deal with. The deregulation of economy has returned to the boom and bust cycles that characterized America from about 1870 to the Great Depression. During the booms the rich get richer while the poor and middle class do not improve their lot. Then during the busts the poor get poorer, but the rich do not suffer. The absence of universal health care accentuates the lowering of the life styles of the poor and the middle class.

It's a system, planned to create a new vision of America. Welcome to the Latin American social model of a few very wealthy families surrounded by a lot of poor people and a struggling, small middle class.

When Condi Rice gives her speech that the American economy is strong and resilient, has she noticed that 70% of demand is consumer demand, and that since the failure of wages to rise along with productivity the only source of increased consumption has been rising home prices? Now that home prices will no longer rise, where does our economy get the demand that makes it function?

We are currently in a consumption-driven Recession, and the consumers have run out of new sources of funds to finance consumption. The structure of our economy is neither strong nor resilient. Instead it is the the design the Reagan Revolution has given us. Instead of competing with Europe and Japan, we are now competing with Mexico and Brazil.

This is not an accidental change in the American economy. Go look at The conservative opposition to government planning. The very wealthy and Wall-street Republicans want America to return to the Latin America style economy that characterized our economy as it first industrialized from just after the Civil War until it collapsed in the Great Depression. Those people will be happier in a more authoritarian theocratic America run by Pat Robertson's followers as in a middle class Republican where their money does not give them great power. As Sara Robinson points out

... that's why the largest department of strategic foresight in the country is now emerging at Pat Robertson's Regent University. They've got a vision for the future, and are getting very systematic about implementing it.

The Wall Street Republicans have had their vision since the earlier version of it collapsed in 1929, which is why they hated FDR so much. Their descendants still detest FDR, because he was the man who saved America from the Depression the free marketers created.

We Americans who still think that the vision of America that was rooted in 1776 and in the U.S. Constitution, enforced by the Rule of Law, and then updated to fit an industrialized society by FDR when the previous system failed completely, need to recognize the threat and eliminate it.