Denial is a powerful emotion, especially when coupled with an avalanche of media hype and feel-good sensationalism.
Our economy has just weathered the most severe downturn in 70 years, and it’s business as usual for Wall Street and bankers. The increasing disconnect between the pain of Main Street and Wall Street’s prosperity is numbing, given the increasingly dour news befalling consumers. The current pain merely illustrates that for average Americans, the last 8 years was a mirage, an episode of magical thinking where debt became income and homes became assets.
Truth be told, though, this illusion has been repeated in every asset bubble of the last thousand years. The resulting collapse, was, sadly, completely predictable. Because humans have such short memories, the past repeats itself in almost eery lock-step, just ask the Dutch about those thousand-dollar tulips.
The housing debacle was an especially prominent episode of magical thinking in our country, which caused wide-spread hysteria and illogical consumerism. Wall-Street, which required vast quantities of loans to bundle and securitize, was happy to oblige in this spectacle. Once banks shredded their loan underwriting processes sufficiently, and loans became available to nearly everyone, the “American dream” became enshrined as a rite of adulthood, and homes became commodities.
The banks, which no longer held these loans on their balance sheets, provided loans to vast segments of the population which could not afford to carry these loans under typical loan underwriting criteria, but which were given “magic” options such as negative amortization loan payments, interest only loan terms, and other Orwellian terms. These magical terms ensured that their owners could remain in the homes long enough to enable the homes to sufficiently rise in market value before they would have to sell the house, at a gain, of course.
As housing values increased exponentially, consumers also tapped their home loans for massive cash withdrawals, falsely fueling our economy to staggering heights. The only fly in this ointment was the expectation (indeed homeowners were financially at the mercy of this increase) that home values would always increase and had never before decreased, another grand instance of magical thinking. Again, the result of this asset bubble was predictable and completely foreseeable: Home values collapsed and homeowners had no higher-price “bailout” to liberate them from their albatross. Game over.
The long-term horizon does not portend good fortune for our medical system, either. Our health-care “reforms” are full of magical thinking and fairy dust. Runaway medical costs will ensure that insurance will, within 5 years, cost each family an average of $30,000 per year. Yet none of the health care reforms being proposed address the issue of cost containment, which is the third-rail of our “free-market” medical system. Without cost containment, price-caps or massive volume discounting, the medical reforms being proposed will fail within 5-10 years, and are merely a band-aid.
Cost containment, as a category of reform, is anathema to the free market advocates, which reason that the markets are more efficient and can lower costs through free market competition. This is false, as many studies have demonstrated that communities having excess medical providers also have extremely high medical costs. But cost containment and price-caps have been removed from the national dialogue on health care reform, and remain off-limits due to their purportedly anti-free-market attributes. Americans continue to be seduced by advocates of the free-market into believing that only free-market reforms will ensure a healthy, viable and unrestricted medical system for all.
What do the housing bubble and the proposed medical reforms have in common? They are both the product of magical thinking, illogical reasoning and America’s seduction by large, multi-national corporations who do not have our best interests at heart. The unregulated, uncontrolled housing free-market caused the single-greatest asset bubble in the history of the world, and it will likewise bankrupt American families anew with a similarly flawed, yet “reformed”, medical system. Unless we acknowledge our individual and collective failures and our responsibilities to future generations, we will soon face another economic debacle foisted upon us.
