Bob Cropf

This American Life – Bad Banks Episode

In 1 on March 2, 2009 at 10:39 PM

This American Life had another episode about the economy this weekend. This explained the whole “bad bank” phenomena. It really is a must listen. There is a part in there where the read a memo written by a Deutsche Bank economist about the US government’s options at this point. Hosts Adam Davidson and Alex Blumberg classify it is a ransom note and the bank’s economist doesn’t really disagree!

Adam and Alex speak to Simon Johnson (Baseline Scenario blog), a former IMF office who says to “stop whining” and nationalize the banks. It is was the US would have made other countries do in the 1990s with the same set of facts.

They also looked at a graph of total personal debt to GDP… the only other time it got this high (100% by the way) was 1929… This brings us back to the question of equity and is it good to have so much disparity between the high and the low.

One reason to answer “no” is the high end having a lot of money drives up the cost of living for everyone. How? Take a nice coastal community that is mixed-income, primarily low to middle. Then it becomes the new Martha’s Vineyard because you have all of these newly and increasingly wealthy (hedge fund managers, bankers, etc.) that have money to burn but can’t buy a place on Martha’s Vineyard, there are none to be had. This drives up the price of real estate: locals start to see deals too good to pass up, landlords fail to renew leases because they are upping the rent, converting to condos, or selling out. You throw in a questionable eminent domain where a low income neighborhood is bulldosed for the new promenade, and you’ve converted a low/moderate mixed income community into a high-priced second home “community” where lots of people who used to live there have to commute into work. And voila, the price of living increased for those “locals” because now they spend a lot more transportation and/or housing – that is without a spike in gas prices, not to mention that Aldi’s lost its lease, the strip mall was razed, and WholeFoods went in to the new shopping plaza that replaced it.

I won’t dispute that we spend a lot of money on “things” that are nice to have but not necessary and that is an important source of our current woe. But I question how much is due to that. To hear this discussed, it is all because low and middle income people bought iPod and McMansions. But there are a lot of people carrying a lot of debt because of (1) medical expenses and/or (2) student loans. These were not huge burdens a generation ago… a generation ago many state universities were still free or charged only a nominal fee. Now, the average (lumping staters together with ivies) undergraduate leaves college with almost $20,000 in student loan debt… some are upwards of $100,000. Medical costs are the number one reason for personal bankruptcy (note: student loans are NOT a reason for personal bankruptcy because student loans are not subject to bankruptcy). How much can these increases in debt (and decreases in savings) be attributed to increasing disparity? I think in both cases a fair amount.

-KC

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