A bailout for working families?
| Author | Montgomerie, Johnna |
| Position | Essay |
Most accounts of the current financial crisis depict an acute period of excess in the midst of a credit and asset bubble. Framing the crisis in this way legitimises government and central bank efforts to provide technical fixes that seek to restore 'stability and confidence' in financial markets.
The governments of the 'Anglo-American' economies at the heart of the crisis, the United States and the United Kingdom, have shown a surprising willingness to abandon long held principles of fiscal restraint, independent central banking and rules-based economic policymaking in favour of discretionary political interventions to stem the financial crisis. These include coordinated liquidity injections, nationalisation, asset buyback schemes, the mass selling of government bonds and quantitative easing. As it turns out, confidence and stability are neither objective standards nor something that can be measured, but a general feeling among investors and creditors that must be cultivated at great cost. These measures may have been necessary to prevent systemic financial collapse, but the long term consequences will most likely be borne by the average working family.
This article argues that policies for economic recovery need to focus on the financial crisis facing working households as much, or even more than, the problems in the financial services industry as a whole. Anglo-American households are now hugely indebted, are bearing the brunt of the economic downturn and, most likely, will disproportionately pay for the costs of recovery. Continuing to ignore the precarious financial instability of households takes for granted the socio-political importance of household consumption and its central role as the bedrock of economic growth. Taking issue with Anglo-American household indebtedness is not new, since debt levels have been consistently increasing for decades; but the recent credit and asset bubble has seriously compounded the problem and jeopardised the financial security of many working families.
For some, current household debt levels reflect households' lack of financial sophistication or education as they were too easily duped into taking on more debt then they could afford. For others the recent expansion in household borrowing is the product of rational responses to economic stimuli as households chose to take on more debts when nominal interest rates were low in order to benefit from rising property prices. Still others blame indebtedness on the loss of prudence within Anglo-American society as individuals seek to consume whatever they please without any consideration for the limits of income.
This article takes a different perspective by looking at the cumulative effects of two decades of political and economic restructuring combined with the most recent period of financialisation in Anglo-America as the causes of the financial crisis now facing the household sector. More specifically, I argue that slow income growth and the broader 'politics of abandonment' contributed to rising debt levels and financial instability for many working families.
Minimal real income growth, especially compared to rapidly rising debt levels, is an overlooked aspect of most analyses of household indebtedness. For many working families incomes have not kept pace with growing expenditures. In fact many of the staples of middle class life, such as homeownership and education but also cars and vacations, are now funded by ever larger loans. There is also evidence that many households use credit cards to pay for daily expenses such as food and utilities. The causes of stagnant real income growth are not straightforward; rather they are the product of interrelated trends such as the economic governance priorities of low inflation and the business community's efforts to constrain wage growth. The Anglo-American governments' longstanding commitment to maintain low inflation by specifically targeting 'wage expectations' curtailed income growth for most working households. During this same time the corporate sector pushed hard against wage concessions even as productivity and profitability increased.
The 'politics of abandonment' refers to the business community and government's changing priorities towards its workforce and citizens over the past two decades. For example, corporate governance priorities, extending out to the private sector at large, have been fixated on permanent restructuring. Even in the boom years the largest and most profitable corporations were continuously shedding jobs and rolling back non-wage benefits to improve shareholder value. Concomitantly government services, at all levels from municipalities to national governments, have been reduced or eliminated for the majority of working families and restricted to the small percentage of households with no other means. The reconfiguring of pensions and education funding and unemployment benefits have contributed to many families' need to borrow heavily in order to maintain what were previously considered middle class entitlements.
To substantiate this claim we begin with a macro picture of the growing scale of household indebtedness in both the US and the UK. In the US households' total debt outstanding doubled after 1999, reaching $12 trillion in 2007. UK household debt levels tripled over the same period reaching [pounds sterling]1.2 trillion. But importantly this figure vastly underestimates debt outstanding because it excludes securitised loans (or those moved off lenders' balance sheets). Significantly, this stock of debt represents an increasing proportion of total GDP output and consumer expenditure, making the financial crisis facing households as important as the one facing Wall Street or The City.
The second section examines how these macro trends translate at the household level. Using the US Survey of Consumer Finances, which has the most accurate and comprehensive data (there is no equivalent in the UK) we see the changing scale of liabilities and slow income growth faced by middle income families over the past two decades.
The final section considers potential ways forward by arguing for political, in addition to technical, reforms to the financial services sector and macroeconomic policymaking.
The financialisation of consumption
The concept of financialisation offers an account of present day capitalism in which financial accumulation and innovation are primary drivers of change; and, as a result, individuals, firms, and the macro-economy are increasingly mediated by new relations with financial markets (Parenteau, 2005; Montgomerie, 2008). The advent of 'shareholder value', the rise of institutional investors and other new financial actors in the 'shadow banking system', as well as the arrival of a mass investment culture are elements of Anglo-American financialisation (Froud, Leaver et al, 2007; Pinault, 2007). As such, financialisation is a framework for evaluating more comprehensively how social actors located at the privileged sites of accumulation accrue new political and economic power (Krippner, 2005). With the City and...
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