Mike Konczal has been a leading analyst of the financial crisis, and his argument here, like elsewhere, is penetrating. He is correct that we won’t be able to accelerate growth without addressing the ongoing deleveraging of household balance sheets. Nor will we achieve broad economic security and opportunity without reducing households’ reliance on risky personal borrowing. Yet, in placing so much emphasis on the norms and politics surrounding debt, Konczal neglects the broader political transformations that have propelled these developments—transformations that suggest pathways for reform somewhat different than his own.
After all, it is not just the treatment of debt that has changed. Over the same period that Konczal discusses, American society has seen much broader changes in the financial sector—and in the political system that governs it. The “financialization” of our economy was driven by changes in laws and their enforcement that substantially predated the 2005 bankruptcy law. Wave after wave of deregulation championed by the financial industry, culminating in the effective repeal of the Glass-Steagall Act in 1999, increased the power of financial institutions relative to consumers and opened up new highly leveraged markets for banks and lenders, while weakening protections against systemic risks.
The industry also changed policy in less obvious ways. Thanks primarily to the influence of banks, the Federal Reserve has focused on controlling inflation rather than pushing for higher employment. Meanwhile, the resources of the Securities and Exchange Commission have remained anemic as finance has expanded. Indeed, much of the industry’s success has come from preventing government developing rules for new areas of finance such as the mortgage-backed securities that Konczal discusses. The increased political gridlock of the past two decades has been very good for Wall Street—and very risky for the economy. These trends suggest a dangerous cycle in which the financial sector uses profits to control political outcomes, generating even greater resources and influence.
This is the larger transformation about which Konczal says surprisingly little: the interwoven expansion of economic and political inequality. As we argue in our recent report, “Prosperity Economics,” the security and opportunity of the middle class are increasingly threatened by the translation of market power into political power. As wealth has grown more concentrated at the top, affluent donors and industry lobbies have grown more sophisticated and powerful. With labor unions in steep decline and many traditional civic organizations in disrepair, the voice of middle-class Americans has quieted to a whisper, while the affluent and corporate lobbies speak in a roar.
We don’t need to change views about debt; we need a responsive democracy.
So Konczal is right to question the widespread view that individuals should be held harshly accountable for indebtedness. Yet by focusing so much on debt, he makes the challenge of reform appear both smaller and larger than it really is. Smaller because providing write-downs for households with underwater mortgages, while valuable, would not be enough. We also need to increase spending on infrastructure, R&D, and other public goods, and to invest in education and training with the seriousness that we mustered after World War II. Given the abject failure of 401(k)s to supplement Social Security for middle-class workers, we also must figure out a new model for private retirement security. And we have to tackle rising health costs as we continue to broaden coverage. These policies would not only spur growth, but would also create broader opportunity and security for Americans who have seen more and more risk shifted onto them.
This is an enormous task. And it will be impossible to meet if we don’t begin to limit the power of the financial industry and other moneyed interests. But the good news—and here is where we think Konczal sets his sights higher than necessary—is that we do not have to change people’s conception of debt or personal responsibility. Not all need see debt as a “matter of public concern” or shared social responsibility. Americans just need to demand a strong economy and responsive democracy. Some of those who are mobilized will be united by debt: witness the role of indebted students in Occupy Wall Street. But a broad coalition will be based more on effective organizing than on consciousness-raising or cultural change around debt.
Without such a movement, we will not only leave debtors at the mercy of lenders. We will leave the middle class at the mercy of money-dominated politics.