The End of the Great Moderation, the Bailouts of Freddie & Fannie and Wall Street, and the Tattered Safety Net for Everyone Else
by Robert Reich
As we bail out Wall Street along with Freddie and Fannie and all the top financial executives who have been pocketing tens of millions a year, yet allow millions of homeowners and jobless Americans to sink, it's worth contemplating what's happening to the American economy and to our social safety nets.
What economists have called "The Great Moderation" - a period when the business cycle evened out, and neither inflation nor recession posed much of a threat- began in the mid-1980s, and now appears to be over. It was good when it lasted. But it led the nation to think we didn't need much by way of social insurance.
No one knows for sure what caused the Great Moderation. Some had credited increased sophistication of financial markets and the wisdom of the Federal Reserve Board. Hindsight suggests it was more luck than anything else.
Well, folks, it turns out the great moderation was something of a fluke, and now tens of millions of Americans are in trouble with no safety net to help them.
That's because the apparent end of the boom and bust cycles led us to assume the economy would no longer impose huge, unexpected, and arbitrary losses on large numbers of Americans. So we basically got rid of the safety nets. We abolished welfare, let unemployment insurance wither, and paid scant attention when corporations eliminated defined-benefit pensions and cut health insurance benefits. We even stopped worrying about the safety of small investors, allowing federal deposit insurance to shrink as a proportion of total savings (witness the recent bank run in California).
But now we have to rethink safety nets. Right now, nets are being spread for the wrong people. The giants of Wall Street along with Fannie and Freddie get bailed out but there's still no relief in sight for most homeowners who can't pay their mortgages. Corporations that don't deliver on their pension obligations are helped but there's nothing for retirees and small investors whose savings are drying up because of Wall Street's decline. Small investors are losing their shirts but the Fed stands by to help the biggest.
Yet I have to believe the end of the Great Moderation will eventually result in a broader safety net. Maybe not the old forms of social insurance, but new ones like universal health insurance, earnings insurance, and savings accounts in which the dollars you put away are supplemented by government dollars.
The very rich, fattest investors, and the biggest corporations don't need safety nets. Now that the booms and busts are back, the rest of us do.