The new Federal Reserve numbers out on the calamitous drop in Americans' median net worth--we lost 20 years' worth of prosperity in the Great Recession, folks--only tell half of the tale of a lopsided economy whose fundamental problems still go largely unaddressed. The other half of the story can be found in the overall costs to this economy of subsidizing Wall Street's (largely) unreconstructed profit machine.
Consider: while a broad group of Americans loosely defined as the middle class saw its net worth plummet from a median of $126,400 in 2007 to $77,300 in 2010--largely because of the financial crisis--society as a whole was spending hundreds of billions of dollars to sustain the mortgage-bubble-engendering financial firms that cost us that middle-class income. And because Dodd-Frank and other fixes fell short, as a society we are doomed to continue to do so, again and again.
Here's proof. According to a 2010 paper by Andrew Haldane, head of the Bank of England’s financial-stability department, the financial crisis of 2008-09 produced an output loss equivalent to between $60 trillion and $200 trillion for the world economy. Assuming that a crisis occurs every 20 years -- just about what does happen -- the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year, Haldane says. What that means is that overall, our unrestrained financial sector does not add any net benefit to the economy—its repeated crises cost us far more than Wall Street brings to overall economic growth.
Others have made the same observation. Gerald Corrigan, the onetime head of the Federal Reserve Bank of New York, told me for an article on the deficiencies in Dodd-Frank last year that high-flying banks have tended to lose whatever they gain over recent decades. He was only echoing the fears of other experts such as former Fed Chairman Paul Volcker and Adair Turner, chairman of Britain's Financial Services Authority, who wonder whether financial innovation such as derivatives has added anything at all to the real economy over the past 20 years.
Haldane, pungently, compares the trading excesses of bankers to air pollution from the auto industry. "The banking industry is also a pollutant," he writes. "Systemic risk is a noxious by-product" not unlike the damage to public health from carbon monoxide, lead and so forth. The latter problems were dealt with through taxation and occasional prohibitions or restrictions on poisonous emissions. Why shouldn't we take the same approach to the excesses of over-the-counter derivatives (now back to more than $700 TRILLION in nominal trades), credit default swaps and other ultra-complex products that cause systemic risk?
"Banking benefits those producing and consuming financial services – the private benefits for bank employees, depositors, borrowers and investors," he writes. "But it also risks endangering innocent bystanders within the wider economy – the social costs to the general public from banking crises."
Yet no one -- no one -- in the Obama administration or the U.S. Congress has begun to talk in fundamental terms about the social costs of Wall Street.
This festering inequity at the heart of our economy is perhaps the main reason why Barack Obama may lose in November, I think. The president, quixotically, sought to save both the poor (with Obamacare, mainly) and the filthy rich (Wall Street)--but at the expense of the bigger victim, the middle class, particularly in failing to help underwater mortgage holders. And they will be the ones to vote him out.