Epilogue

Debt as Choice, Debt as Structure

FORTUNE MAGAZINE, in an alarmist series of articles in 1956, declared that the “abnormally fast” rise in consumer credit since World War II would soon come to an end, since consumers “loading up heavily with fixed payments” and could afford no more debt.¹ Americans’ “debts increase[d]” while their “liquid assets . . . decline[d],” therefore, Fortune concluded, “everything portends a downturn in the long-term rate of debt increase.” Borrowing could not continue forever. Rarely has Fortune magazine been so wrong. The postwar rise in indebtedness inaugurated a long-term trend of credit expansion in which we still live. Fortune’s cautionary imagining of the end still looms over us. When this abrupt end to the “credit binge” came, Fortune foretold that “industries depending on it would be hard hit.”² The sudden contraction of spending would undo all the thousands of factories, the tens of thousands of shops, and the millions of workers depending on borrowed money to drive the businesses that employed them. The American economy had grown dependent on credit to sustain itself, and if the credit stopped, no one knew what would remain.

This dependence on credit was the creation, intentional and unintentional, of the sometimes unlikely choices of government, business, and consumers. Over the first half of the twentieth century, government and business fashioned a new legal network of credit institutions and offered most American consumers a choice of whether or not to use this debt in their daily lives. By the end of the century, however, the choice to opt out of the credit system no longer remained. Three corporations assigned every American a credit rating. Their opinions governed consumers’ ability to rent and to buy housing, to afford an education, to shop for clothes and food, to commute to work, and even to receive medical care—that is, the basic materials of daily life. Even to get a job, a worker needed good credit. The choice of whether or not to use credit ceased to exist for the American consumer.

Americans had to use credit and develop a “good” credit identity if they were to take part in mainstream commercial life. The Household Finance Corporation, reflecting this shift in thinking, issued an instructional book in 1971, Children’s Spending, for parents and teachers to help inculcate the virtues of this credit world and illustrate “the problems that can result from a poor credit rating.”³ Parents who were befuddled on how to deal with the deviant thrifty child who “hoard[ed] money and refuse[ed] to spend it for the things he want[ed],” could learn ways to reeducate their child by setting up a “realistic repayment schedule.”⁴ Being “good” and maintaining a good credit rating had become synonymous, and certainly more virtuous than saving. Children’s Spending argued that “saving for its own sake, dropping pennies in a toy bank which has no key, is outdated.”⁵ Saving could not provide evidence of character nearly as much as borrowing and repaying the debt. Such credit histories would prove necessary in this credit world, as credit rating became the key number to represent trustworthiness not only for borrowing for consumption but for all aspects of life.

While at earlier moments consumers could have lived without credit, by the 1970s it was no longer possible to be without credit and live in mainstream American society. Consumers denied credit in the 1960s had fought for greater access, not only because of credit’s convenience but because of its perceived necessity in achieving the American dream. Consumers’ achievement of the middle-class dream in the 1950s had been enabled by debt. Debt policies and practices underpinned a consumer order by the 1970s that made it difficult for consumers to extricate themselves from indebtedness even if they had wanted to. The lifestyle of debt was as inscribed in the built environment as it was in the habits of the shopping public. As the economy began to erode in the early 1970s, just after the federal census announced that the majority of Americans then lived in suburbia, the debt requirement of suburban living began to take its toll. Even if people wanted to reduce their borrowing, the very environment in which they lived made reduction difficult. Consumers needed mortgages to buy houses, and they needed installment credit to buy the cars required to travel the unwalkable distances created by suburban living.

While borrowing became more compulsory, paying back what was borrowed proved more difficult. The 1970s, while not the first time Americans worried about consumer debt in American history, was the first time that households became unable to repay their debt. The post-1970s debt expansion of unpaid debt differed from those that preceded it because late twentieth-century debt was borne not of business cycles but of unexpected structural changes. Although credit institutions continued to change, as they had for half a century, in response to the demands of capitalism and the state, the growth of debt in the 1970s resulted more from Americans’ decreasing ability to pay back what they borrowed than from an increase in borrowing. Instead of seeing extravagant spenders in debt, we should see underpaid workers trying to keep up.⁶ Americans’ personal debt problem resulted not from a choice to borrow but from the rising inequality of income and wealth that had occurred since the 1970s, even as capitalist expansion relied on increasing consumption in an era of declining wages. Personal debt was no longer a private choice, but a structural imperative.

For those who control and regulate these structures today, the choices remain as they always have—within limits. The state has the power to make markets and guide the profitable flow of capital, as has been shown throughout this book. When policymakers acknowledged this flow, their policy ambitions have been successful. In the 1920s, small loan reformers helped channel capital to the working poor, to give them cheaper, yet still expensive, access to credit. In the 1930s, federal policymakers channeled this capital to create the suburbs, surpassing even the most grandiose of tax-funded programs. In the 1960s, Great Society reformers created mortgage-backed securities that expanded the lending pool for American home owners. Yet, when policymakers sought to dam the river of capital, to push back against it, to pretend it was something other than the callous miracle it is, they have realized only failure. Regulation cannot substitute for market discipline—all it can do is imitate market opportunity. Sticks without carrots do not work. Regulations need profits as much as rules to accomplish their goals. During the 1940s, Regulation W failed because it did not provide a profitable alternative for business, pushing the American economy toward the hybrid revolving credit. During the 1960s and 1970s, the Housing Act of 1968 provided new sources of mortgage funds, but it could not make the investment of those funds in the inner city profitable. Intervention is neither doomed to fail, nor is it guaranteed to succeed. Only by recognizing the limits of government’s administrative capacities, and the realities of capital’s tendencies, can government make successful and necessary interventions in the economy.

Even as legislators made policies to alter capitalism, the full consequences of these policies in an untidy market were not always understood at the time. Legalization of small loans drove out loan sharks, but expanded the numbers of Americans in debt and legitimated borrowing as an alternative to saving. Mortgage loans may have expanded available housing, but they also taught consumers to owe vast sums of money to impersonal lenders, to say nothing of the long-term devastation exacted on many American cities as whites fled to the subsidized suburbs. During World War II, policymakers sought to restrain consumer credit only unintentionally to promote a new form of credit—revolving credit—which ultimately enabled consumers to increase their spending to limits never before seen. Legislators of the Great Society program sought to help welfare recipients gain a stake in owning their housing, only to inaugurate the era of subprime mortgage loans. In the 1970s, seeking to end discrimination, state policies accelerated the creation of a centralized, privately-held credit information system with unforeseen consequences for American privacy rights. Most importantly, perhaps, in promoting credit for everyone, Congress never stopped to consider whether everyone ought to have credit. As the economy became more volatile and more unequal, the credit provided for everyone caused more problems than it solved. Instead of addressing the core problem of widening income disparities, legislators and businesspeople pushed consumer credit to rectify income inequality. Credit appeared to close the material gap between the American reality and the American Dream, but without rising wages the debts remained.

As the era of postwar growth ebbed, the consumer habits and business institutions predicated on growth led Americans down a path that none could have imagined and whose final consequences are still unknown. Born in a Fordist age of manufacturing, consumer debt remained for a post-Fordist age of service and finance. The credit regime that emerged from a time of stability persisted for a time of volatility. But many times in the past, as this book has shown, the alarm bells have rung out over a potential crisis of overextended consumers—and have always been shown to be in error. Perhaps doomsayers today are no different than those of earlier periods, but credit’s profits today are closer to the heart of capitalism itself than ever before. The relative danger of relying on consumer credit to drive the economy remains a macroeconomic puzzle to be solved. The increased demand caused by credit stimulates the economy, producing jobs along with all those borrowed-for goods and services. The long-run consequence of credit is not in the borrowing but in how the profits from that economic activity are invested. Invested productively, the wonder of capitalism continues its expansion. Invested unproductively, potential production is lost, never again to be regained. Whether capitalism, through its operations, contains the seed of its own destruction, or if its economy can grow forever, is the central question in the history of capitalism, debated by economists since Marx first popularized the question in the nineteenth century. Both sides of the debate agree, however, that to continue, capitalism must locate new places for money to be invested profitably.

The current financial crisis, rooted in those credit instruments, occurred not because capitalism failed, but because it succeeded. For the past forty years, profits for the owners of capital have soared while wages for most workers have stagnated. This is not a deviation from capitalism, but how capitalism operates. To expect otherwise is naïve and dangerous. Inequality, whatever its social justice problems, hampers economic growth because of an imbalance between the supply of capital for investment and the demand of income for consumption. These owners have accumulated vast savings, but with limited investment options. Workers can only buy so much without higher wages. Without greater consumption, savings cannot be invested in more production. Yet savings must be invested somewhere. Economic inequality ultimately hurts investors as much as workers by limiting productive investment opportunity. Without possible productive investments, investors, who still need to put their money somewhere, are drawn into asset-bubbles and speculations. Capitalism’s efficiency has wildly increased in the last thirty years, but the returns on that efficiency have gone to those at the top. Lending those returns to workers—by investing in credit card and mortgage asset-backed securities—rather than directly paying the workers, has caused our current crisis.

Investors in debt, whether loan sharks, banks, or bond holders, are always looking for a good return. The choice to lend was at the same time a choice to invest, and that choice was determined by a combination of risk and return. While new ways to make credit profitable appeared at various points in the twentieth century, credit’s profitability was always, as in all economic matters, relative. Relative to manufacturing, credit in the first third of the twentieth century was unprofitable, and undeserving of the monstrous capital that was required to fund its expansion. Only in the midst of depression, when deprived other more virtuous, more lucrative, more productive business opportunities, did bankers for the first time dip their fingers in the credit pie, and only through the encouragement of the federal government. Through the option account and then the universal credit card, retailers and financiers discovered ever-more profitable ways to lend to consumers and to borrow from investors. Always the choice to lend was at the same time a choice to borrow, and that choice was determined by a combination of risk and return—that is, yield on the investment. This process of investment is not unique to debt, it is the foundation of our capitalist system.

The current financial crisis stems from the same source as the large capital poured into consumer credit: a frantic drive for yield. Capital sloshed about in the past few years from the technology bubble to the housing bubble, as investors sought safe (but always better than average!) returns on their money. Money poured into the riskiest tranches of mortgage-backed securities, not from malice, but for a simple increase in return over a treasury bond. As this book goes to press, the world’s great capital reserves have fled the equity markets for American federal debt. If this crisis is going to end, there must be more productive places to invest than in the U.S. federal government’s debt. Not only Chinese factories, but economies the world over, are hungry for capital to invest. Too much capital and too few places to put it, productively, is what classical economists called an overaccumulation crisis. Before the twentieth century, most economists believed that such an overaccumulation was inevitable, and in a sense they were correct. Economies with a stagnant level of technology eventually have too much capital and nowhere to put it.

Luckily for us, for at least the last five hundred years, as these cycles of overaccumulation have played out, this doomsday scenario has not occurred and for one reason only: innovation. Innovation, whether in new places, technologies, or ways of organizing labor and capital, has allowed us to harness the baleful overaccumulation of capital into growth. World War II did not get us out of the depression, having the ability to invest profitably in suburbia, aerospace, and electronics did. These investment opportunities were made possible by government-created investment opportunities. Productive and profitable investment is the only way to stem these crises. Regulating them out of existence is impossible, since wild profitability is capitalism’s strongest attribute. Again, this financial crisis occurred not because capitalism failed, but because it succeeded in doing what it does best: profits and inequality.

Helping capitalism succeed in ways that benefit the American people is the proper role of regulation. Using regulation to open up new industries, as in the New Deal and World War II, resolves these accumulation crises and allows the blockages of private capital to loosen. While innovation is clearly the only way out of such crises of capitalism, it is far less clear what industries and places should be invested in. Should we—the American government and its citizenry—create incentives to build electric automobiles the way we incentivized building suburbia? I must be agnostic regarding the best investments to make, but it is clear that an investment crisis is at the center of both the rise, and recent fall, of the credit economy.

The same financial innovations that brought this crisis to a head could also help us. If instead of directing investment to nonproductive assets, securitization could help us invest in new industries, like green technology, which like aerospace in the 1940s now seems to offer new opportunities to soak up tremendous amounts of capital, produce profits for business, and jobs for workers.⁷ The financial system coordinates the flow of capital, and as long as it coordinates it in a way that is both profitable and productive, the virtuous circle of capitalism continues. The diversion of capital into nonproductive investments is necessary for consumer capitalism to function, but it cannot be the central motor of the economy in a long-term, sustainable fashion. Housing markets must be liquid. Consumers ought to be able borrow against their incomes to buy that washing machine today. But the financial system loses its purpose when it attains mastery over the real, productive economy. Finance must help us work, not work us over.

Scandal and deceit were only superficially the cause of the financial crisis of the early twenty-first century. There were, no doubt, frauds and fabulists but, I would think, no more than in any other pursuit. Today’s financial crisis was not caused by a few con artists and cheats, but by lack of profitable opportunity. Had the investors desperate for yield been able to invest in anything that returned slightly more money, they would have. The more difficult truth is that it was not one individual that made this happen, but the collision between a hundred small decisions, often for other purposes, and one unstoppable river of capital, whose direction could be channeled, but desired or not, had to flow.

The current credit crisis is not really, at root, about credit at all, but about the opportunities for capitalist investment. Find a new industry as deserving of American ingenuity as the automobile or the internet. Use public policy, as the FHA did to create millions of modern houses, to align the interests of capitalist investment and public need. Channeling capital for the social good is not only possible, it is the best way to solve the distressing failures of the market economy. The choice is not between the government or the market. The only choice is how to use government to control the market for social good. Profit, prosperity, and policy are not incompatible. While making policies that actually accomplish these aims is challenging, this book has shown that government possesses the biggest levers of control over how capitalism actually works on the ground—and usually operates without spending any taxpayer money. Not everyone will be helped by these methods. There is no universal solution and for those left out we need to continue to have direct spending, but in the main, market solutions guided by public policy can work to transform the most basic aspects of our material lives. Credit will, necessarily, be part of future piecemeal solutions to the challenges of capitalism, whose basic operations tend to divide people and classes from one another, increasing inequality and friction. Recognized for what it is and what it does, however, capitalism can be controlled, as it has been successfully in the past. Credit itself depends on its economic context for meaning, whether in ancient Babylonia or contemporary America, and fashioning that context is the choice that we make together. American capitalism is America, and we can chose together to submit to it, or rise to its challenges, making what we will of its possibilities.