Nothing symbolizes America's dream more than ownership, that fetish that politicians, culture and the media have glorified and inflated since the beginning of the 20th century. Former President Franklin D. Roosevelt once said that a country of homeowners would be "invincible." "Owning a home lies at the heart of the American dream," former President George W. Bush said. And former President Bill Clinton said that one of the most important goals of his presidency was to create 8 million new homeowners.
In the 1960s, two-thirds of Americans already owned a home. The goal was to increase that percentage. The industry and banks played along, because the government encouraged home buying with subsidies and tax benefits worth about $100 billion (72 billion) a year. Developers dreamed up entire neighborhoods in places with mild climates, like California and, most of all, Florida. There used to be 15,000 houses in Lehigh Acres, the Fort Myers suburb. By 2007, that number had jumped to 28,000.
"It was crazy," says Axel Jakobeit, a German by birth and American by choice, a real estate agent and investor in southwest Florida. Everyone was speculating in real estate, including secretaries, office workers and people who, as Jakobeit says, made $50,000 a year and were periodically up to $1 million in debt, because they were buying and selling multiple houses at the same time. When things were going well, that is. But, as always, things went well until they didn't.
Since prices have dropped, 11 million homeowners in the United States owe the banks more than their properties are worth. Houses are on the market for $80,000 that were built for $120,000 two years ago and have never been occupied. The unemployment rate is at 12 percent in Florida. Many people are leaving, running away and leaving everything behind, not just their dreams, but also their furniture, their keys and, most of all, their debt. Others are taking everything with them, from toilets to copper cable.
Americans Are Not Careful
"I had hoped that the Americans would change their way of thinking, that they would take responsibility and only spend as much as they made," says Jakobeit. But Americans aren't like that. Americans are not careful.
The political leadership, says Raghuram Rajan, deliberately made sure that people at the lower end of the socioeconomic scale were provided with low-interest mortgage loans, so that they would forget that their incomes were stagnating. "It was easy for people to get credit, and when home prices went up they felt rich, borrowed more money and spent it," says Rajan, who teaches at the University of Chicago. It's the old concept of bread and circuses. According to Rajan, this approach was easier for the people in power, on both the right and the left, than investing in education or health care.
But there are pain thresholds in every country, including one for debt. According to economists, that threshold is at 90 percent in the United States. When government debt reaches 90 percent of the gross domestic product, the country begins to feel sick. People lost confidence in a better future, investors stop investing, consumers stop buying and the economy stops growing. America reached its pain threshold in the second quarter of this year. Alan Greenspan, once the cheerleader of a society that lived beyond its means, is now urging the US to cut back on borrowing.
Greenspan was the first pop star of the economy, the face of what was then a new era, one in which the economy was shaking off government regulation and corporations no longer saw the state as a partner, but as an adversary. It was the phase of constant tax cuts, the stock market boom and the New Economy, a time economic liberals saw as an era of liberation. While Greenspan was in office, from 1987 to 2006, America experienced the biggest boom in its history and, at the same time, the economic, political and social triumph over the socialist model. US GDP doubled during that time. The only problem was that it wasn't real or robust, and that it was fueled by too much pretense and naļve hope of never-ending growth.
Weaknesses of the Old Order
When Greenspan came to Washington in 1967, as a campaign advisor to Richard Nixon, the old order of the New Deal was still in place. The unions were powerful. Big corporations like General Motors, General Electric and ITT controlled the market. But Greenspan felt that the old order was too sedate. He placed great stock in the experiences of his friend, the Russian immigrant and philosopher Ayn Rand, who wrote about the evils of collectivist systems. "What she did...was to make me think why capitalism is not only efficient and practical, but also moral," Greenspan said. "Parasites who persistently avoid either purpose or reason perish as they should."
Ronald Reagan was a rising regional politician in California at the time. He believed that the government was not the solution to all problems; rather that government was, in fact, the problem itself. In his biography, Reagan wrote: "People are tired of wasteful government programs and welfare chiselers, and they're angry about the constant spiral of taxes and government regulations, arrogant bureaucrats, and public officials who think all of mankind's problems can be solved by throwing the taxpayers' dollars at them."
The beginning of the 1980s offered conservatives the opportunity to reshape the country as they saw fit. Unions were suffering from a decline in membership. Technical advances enabled companies to produce smaller quantities cost-effectively and thus gain access to markets previously dominated by major corporations. Reagan took advantage of the weaknesses of the old order to deregulate the economy.
When air traffic controllers went on strike for higher pay, Reagan fired them and banned them from federal service for life. He also deregulated the telecommunications industry, the shipping industry, banks and commercial aviation, and he lowered the maximum tax rate from 70 to 28 percent.
The Need for Lower Interest Rates
The United States became a different country, a radical, free, forward-looking and bold country -- a triumphant country, or so it appeared.
Exporters from other countries surged into the American market, first from Japan and later from China and India. The Internet became popular. The deregulation of the financial markets awakened interest in stocks as a financial investment. The retailer Wal-Mart displaced automaker General Motors as the world's largest company. In this new order, the consumer was among the winners. The investment fund was the modern advocacy group. Banks became more important, and the banking industry had managed to double its profits since the 1970s. Shortly before the crisis, almost 40 percent of American corporate profits were made in the financial sector.
But was it healthy and sustainable?
Fast money was too sexy. In those days, before the crisis, 40 percent of Harvard graduates were taking jobs in the financial and business sectors, earning three times as much as their fellow graduates working in other fields. Trading in financial products had become more lucrative than producing goods.
But because this remnant of the economy still needed to be kept happy, consumers had to keep on consuming, buying bigger cars and bigger houses. Consumer spending made up more than 70 percent of total economic output. But consumers were also spending more than they made, and the savings rate was shrinking. Americans made up for their stagnating or declining earnings by borrowing money. This created a need for lower interest rates.
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