Symptoms of depression

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Steve Fraser is a writer and editor. His new book, "Wall Street: America's Dream Palace," will be published by Yale University Press in March. A longer version of this article appears at

No one wants to utter the word “depression.” But the truth of the matter is that the American economy may be entering a state of free fall. Every day brings more bad news about the sub-prime mortgage debacle, about home foreclosures, construction industry slowdowns, a credit drought for consumers and businesses, oil price shocks and the open-ended devaluation of the dollar. Where is it all leading?

Together with the debacle in Iraq and the political implosion of the Republican Party, this economic collapse could make the presidential election of 2008 a turning point in American political history. Conservatism first triumphed over New Deal liberalism thanks in part to the same deadly combination in the late 1970s: a lost war and an economic crisis. The Vietnam War plus stagflation and deindustrialization gave us Ronald Reagan. Now history is returning the favor, as the free-market conservative political order of the last generation faces a systemic crisis from which there is no easy escape.

Even the soberest economy watchers, pundits with doctorates -- whose dismal record in predicting anything tempts me not to mention this -- are prophesying dark times ahead. A depression, or a slump so deep it’s not worth quibbling about the difference, appears to be on the way, if indeed it is not already underway.


Start with the confidence game being run out of Wall Street. The sub-prime mortgage crisis occupies newspaper front pages day after outrageous day. Certainly, these tales of greed and financial malfeasance are numbingly familiar. Yet precisely that sense of deja vu -- of Enron revisited, of an endless cascade of scandalous, irrational behavior affecting the central financial institutions of our world -- suggests just how dire things have become.

Once upon a time, all through the 19th century, financial panics -- often precipitating more widespread economic slumps -- were a commonly accepted, if dreaded, part of “normal” economic life. Then the crash of 1929, followed by the New Deal Keynesian regulatory state called into being to prevent its recurrence, made these cyclical extremes rare.

Beginning with the stock market crash of 1987, however (and followed by the collapse of the savings and loan industry at the end of the 1980s and the near-meltdown of Long Term Capital Management in 1998 that required an emergency, government-assisted bailout), financial panics have become ever more common again. Most notorious -- until now, that is -- were the dot-com implosion of 2000 and the Enronization that followed. Enron seems like only yesterday because, in fact, it was only yesterday, which strongly suggests that the financial sector is now out of control.

At least three factors lurk behind this new reality. Thanks to the Reagan counterrevolution, there is precious little left of the regulatory state -- the repeal of the Glass-Steagall Act separating investment from commercial banking is a prime example -- and what remains is effectively run by those who most need to be regulated. (Despite bitter complaints about it in the business community, the Sarbanes-Oxley Act, passed in the wake of the big corporate and accounting scandals of recent years in an effort to restore public confidence in the capital markets, has proved weak tea indeed, as the current financial meltdown indicates.)

More significantly, for at least the last quarter of a century the whole U.S. economic system has lived off the speculations generated by the financial sector -- sometimes given the acronym FIRE (for finance, insurance and real estate). It has grown exponentially while, in the country’s industrial heartland in particular, much of the rest of the economy has withered away. FIRE carries enormous weight and the capacity to do great harm. Its growth, moreover, has fed a proliferation of financial activities and assets so complex and arcane that even their designers don’t fully understand how they operate.

Today’s Wall Street fabricators of avant-garde financial instruments are actually called “financial engineers.” They got their training in “labs” much like Dr. Frankenstein’s, located at Wharton, Princeton, Harvard and Berkeley. Each time one of their concoctions goes south, like the bewildering “security investment vehicles” that helped precipitate the mortgage industry collapse, they scratch their heads in bewilderment -- always making sure, of course, that they have financial life rafts handy, while investors, employees, suppliers and whole communities go down with the ship.


What makes Wall Street’s latest crisis so portentous, however, is the way it is interacting with, and infecting, healthier parts of the economy. When the dot-com bubble burst, many innocents were hurt, not just denizens of the Street. Still, its effect turned out to be limited. Now, because of the sub-prime mortgage meltdown, Main Street is under the gun.

It is not only a matter of mass foreclosures. It is not merely a question of collapsing home prices. It is not simply the shutting down of large portions of the construction industry (which is inspiring some of the doom-and-gloom prognostications). It is not just the born-again skittishness of financial institutions that have, all of a sudden, gotten religion, rediscovered the word “prudence” and won’t lend to anybody. It is all of this, taken together, that points ominously to a general collapse of the credit structure that has shored up consumer capitalism for decades.

The equity built up during the long housing boom has been the main fallback position for ordinary people financing their big-ticket-item expenses, from college educations to consumer durables, from trading up in the housing market to vacationing abroad. Much of that equity has suddenly vanished, and more of it soon will. Also drying up fast are the lifelines of credit that allow all sorts of small and medium-size businesses to function and hire people. Whole communities, industries and regional economies are in jeopardy.

All of that might be considered enough, but there’s more. Oil, of course. Here the connection to Iraq is clear; but, arguably, the wild escalation of petroleum prices might have happened anyway. Certainly the energy price explosion exacerbates the general economic crisis, in part by raising the costs of production all across the economy and so abetting the forces of economic contraction. In the same way, each increase in the price of oil further contributes to what most now agree is a nearly insupportable level in the U.S. balance-of-payments deficit. That, in turn, is contributing to the steady withering away of the value of the dollar.

Finally, it is vital to recall that this tsunami of bad business is about to wash over an already very sick economy. While the old regime, the Reagan-Bush counterrevolution, has lived off the heady vapors of the FIRE sector, it has left in its wake a deindustrialized nation, full of super-exploited immigrants and millions of families whose earnings have suffered steady erosion. Two wage-earners, working longer hours, are now needed to (barely) sustain a standard of living once earned by one. And that doesn’t count the melting away of health insurance, pensions and other forms of protection against the vicissitudes of the free market or natural calamities.

This perfect storm will be upon us just as the election season heats up, and it will inevitably hasten the already well-advanced implosion of the Republican Party. The congressional elections of 2006 registered the first seismic shock, and since then, independents and moderate Republicans have continued to indicate in growing numbers in the polls that they are leaving the Grand Old Party. The Wall Street Journal has reported on a growing loss of faith among important circles of business and finance. Hard-core religious right-wingers are airing their doubts in public. Libertarians delight in the apostate candidacy of Ron Paul. Conservative populist resentment of immigration runs head on into the corporate elite’s determination to enlarge a large pool of cheap labor.


All signs are ominous for the GOP. The credibility and legitimacy of the old order are operating at a steep discount. Faced with dire predicaments at home and abroad, they essentially do nothing except rattle those sabers, captives of their own now-bankrupt ideology. Anything, many will decide, is better than this.