I tend to get around to listening to podcasts long after they were recorded (other than the all-important Deutsche Welle Nachrichten podcasts, which have the advantage of being only 5 minutes long), so it was only on this morning’s subway ride to work that I got to last week’s semi-notorious Planet Money shouting match between Harvard law professor and TARP oversight chief Elizabeth Warren and NPR’s Adam Davidson.
To my surprise—since I’m a fan of Davidson and generally consider him to be a kindred spirit—I found myself agreeing with Warren. I mean, I get Davidson’s narrow point: That the Congressional Oversight Panel (that’s its formal name) might have been more effective in overseeing the bank bailout, narrowly defined, if its five members hadn’t been appointed along partisan lines and had included more financial experts (Charles Calomiris and Nouriel Roubini were two of his suggestions). I actually do think the three Democratic appointees all qualify as financial experts, but at least two of them (Warren and the AFL-CIO’s Damon Silvers) came in with pretty clear agendas that didn’t have much to do with recapitalizing the banking system. The Republicans, meanwhile, appointed two politicians with only borderline financial-system expertise, the more qualified of whom (Jeb Hensarling), I would have to label an extremist (not that I’m saying that’s a vice). So the panel’s deliberations have come across more like a cable-TV-news shouting match than a reasoned assessment, which means its conclusions aren’t given all that much weight at Treasury, the White House, or in the media.
But Davidson was way off when he labeled Warren’s focus on the “war on middle-class America” as some sort of out-of-left-field topic that has nothing to do with the financial crisis. You don’t have to buy into Warren’s rhetoric to see that the current crisis had a lot to do with the confluence of (1) stagnating middle class incomes and (2) a financial system obsessed with increasing lending.
I was at a debate a few weeks ago between Jeff Madrick and Niall Ferguson, and one of the things they really couldn’t agree on was whether the rise in household leverage during the ’00s was the result of struggling families borrowing to get by (Madrick’s argument) or affluent families borrowing to keep up with the Joneses (Ferguson’s). In fact, according to the Federal Reserve’s Survey of Consumer Finances, it was the middle class, broadly defined, that levered up. Between 1998 and 2007, those in the bottom 20% of the income distribution and those in the top 10% saw their leverage ratio (debt/assets) go down, while the rest of Americans levered up. The biggest increases were in the 20% to 40% quintile, with the 40% to 60% group coming in second. I think this means Madrick is closer to being right than Ferguson is, but what it really indicates is that Warren is on to something. Middle-class Americans got much deeper into debt over the past decade—for whatever reason—and that overindebtedness landed us in a financial crisis.
The fact that the financial experts Davidson talks to (most of them economists or finance professors) don’t really discuss this cause of the crisis has far more to do with the narrowness of academic research than with the validity or importance of Warren’s concerns. With a very few exceptions, financial economists don’t know much and don’t care much about the income distribution, bankruptcy law, or fair lending laws and regulations. These are all subjects that Warren knows a lot about it. And while—as Warren herself says in her conversation with Davidson—it probably made sense to ignore all these concerns last fall when the banking system was about to collapse, there’s really no excuse for not focusing on them now.