The Real Cause of the Economic Crash

Posted on 10. Feb, 2009 by in Featured

The elimination of a strong middle class. This is pertinent to an aviation based blog because no industry has felt it more than the Airline Industry. I’m not going to get into LIBOR or endless excel spread sheets of useless numbers. The cause is more sociological than economic; an unsustainable restructuring of American Society that has resulted in the crash of the economy.

I’m now fifty, I think back to my parent’s generation, a time when a middle class family had a house a new car and the bills paid, all on the father’s salary. Our Moms did not work. For me the contrast was stark and very apparent: after retiring from the Navy my Wife Laura and I moved back to the same 150 year old suburb outside of Saint Louis, Webster Groves, in which we grew up.

As we met new friends and connected with old I noticed a sociological shift. A profound shift that seemed to draw no attention; it now took two salaries for the average family to live in Webster Groves.

The suburb had changed too; it is now considered upper middle class. When I went to Avery Grade school in the sixties, many of my schoolmates fathers were Blue Collar. In fact most of them were; some were not even skilled union tradesmen. One of my close friend’s fathers worked at a car wash, another was the son of a Janitor. They worked hard and by doing so were able to raise their families in a safe suburb with great schools. If a man was able to get on with the Anheuser Busch Brewery or one of the Big Three car plants in town; then he was set for life.

Both my father and my Wife’s, bought the family home for less than what they made in a year. Our lives did not change much from generation to generation. Our children grew up in the same type house, went to the same private high school (Chaminade College Prep) and University (Missouri) that me and my siblings had attended. What had changed were the ratios, I made roughly twice what my father had. The costs however had spiked, the same house had gone up twenty fold, the high school and University almost tenfold.

How did my generation deal with it? Our wives went to work and the smart ones cut costs. It was a new age of women’s rights and in the euphoria nobody noticed it now took two salaries to live the American Dream.

As the nineties wound down a new sociological phenomenon entered the American economy. The Imperial Executive and their self ordained right to salaries hundreds even thousands of multiples above their employees. American Airlines founder, C.R. Smith had a policy; no executive would make more than three times Captain pay. Captain Sully (Hero of the Hudson) makes $125K a year at USAIR; do you think there is even one Corporate Officer that makes as little as $375K a year at USAIR? After running USAIR into bankruptcy and zeroing out the retirement funds, the former CEO and President took 35 million in cash on their departure. Everyone including Executives used to have an interest in making the company profitable and strong long term. My Grandfather retired a Senior Vice President at Sears and Roebuck after spending his entire working life there. His past, present and future livelihood depended on the success of the company.

But as the nineties took off, fueled by the ridiculous IT bubble, the Imperial Executive emerged demanding and receiving an Imperial ransom. They divorced their retirement funds from the employees and received such outlandish compensation that they divorced their interests, not just of the employees but the stock holders too. After a few short years, regardless of performance, they were set to live an Imperial life forever.

Pump and Dump became the mantra. Get the stock up and your butt out with as much cash as you could carry. To do that they slashed the pay of employees, out sourced everything they could and practiced the high religion of Productivity from their Ivory Towers. With fewer quality jobs, less and less compensation, more productivity and defined benefit retirement funds ravaged, eliminated or converted to 401Ks, two jobs were no longer enough for the American Dream. The WalMart-ization of the economy was nearly complete. The sons-in-law of Sam Walton cashed in, buying professional sport teams with the profits from their third world products, while their American employees couldn’t even get basic health care.

Enter the Pied Piper, Alan Greenspan, with his policy of borrowing the American Dream. Low interest rates fueled a housing bubble; but not just a bubble based on buying housing that couldn’t be paid for. No, a bubble that transformed what had been affordable housing into an economic death trap. The combination of retirement funds under Imperial attack, and constant pressure on labour costs, coupled with inflation pushed the economically weak into betting on the future. They literally bet the ranch, by borrowing on their homes to pay the bills.

Congress encouraged it; but that wasn’t enough they lifted the ban on derivatives allowing Wall Street to get in on the bet. Even that was not enough for the bought and paid for Congress, they turned the bet into a fools bet by ultimately completely eliminating the standards for loans.

As the false gold poured into the world economy it heated up red hot, and then white hot! The borrowed money bought flat screens and jetskis built in the worlds emerging economies. It was 1929 all over again, except instead of buying stock on the margin, America and the world now had bought their lives on the margin.

The emerging countries now flush with the developed world’s cash, lent it back, to let them buy more. All was fine, and the scoundrels cashed in on the game, until the bill couldn’t be paid. The law of unforeseen consequence suddenly reared its ugly head. Now superheated, the economy drove up the price of commodities. Paying the bill was getting harder and the emerging countries were lending less as they had to pay their own fuel bill. Prices went up, equity ran out, people bought less and stocks started down.

Yet again that was not enough for our Government’s “experts “ to get a clue and they continued to let Wall Street bet, this time on oil. The price skyrocketed as the world markets, panicking over the fall of stocks, jumped in and drove the price out of sight. At the same time those bad loans that congress had pushed on the country started coming due in waves. The middle class already stretched to the limit by the shell game, gave up and stopped buying as gas hit $4.00 a gallon.

One more ingredient was needed for economic Armageddon and that was provided by the Imperial Executive courtesy of ENRON. Mark to market accounting rules caused these dubious loans to be valued on the spot and since no value could be given due to bad loans bundled with good, they were zeroed out and the house of cards came down.

My Wife and I often wondered aloud; “how can people afford it”, even after she returned to work (3 salaries to match what my Dad had with 1). The answer now is clear; they couldn’t!

To be sure; bad policy, lack of government oversight, derivatives, pushing bad loans and profiteering allowed the Economic Tsunami to build. However it was the crushing of the middle class and then encouraging a borrowed, false American Dream, that was the tectonic shift and underlying cause.

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