America can’t afford to live beyond its means

Friday’s job numbers from the Bureau of Labor Statistics are just another one of the many painful reminders of the recent economic collapse and ensuing recession.

In the month of August, three times as many workers left the job market as found jobs. There was no wage growth and the vast majority of jobs gained were low-paying, and most were jobs serving alcoholic drinks, indicating a trend towards escapism. This is the fourth month in a row of dismal jobs numbers that on the surface seem hopeful (the unemployment rate fell from 8.3 percent to 8.1 percent), but are discouraging when you look into them.

This begs the question: Why is the economy still so bad?

Our president is very fond of saying that Republican presidential candidate Mitt Romney and the Republicans want to “take us back to the policies that got us in the mess in the first place.” What typically follows is empty rhetoric about letting Wall Street write its own rules and cutting taxes for the 1 percent. That all sounds great, but that’s actually not what got us here.

Everyone has heard the narrative before. A bunch of people bought houses and got mortgages. The banks then gambled with these mortgages, packaged them up, and invested on them in a very risky way. When some people defaulted on these mortgages, the whole thing went south, some banks failed, more people defaulted on their mortgages due to the economy, companies laid employees off, the ailing auto industry was hit by a lack of demand, and the whole economy cascaded into stagnation.

The second half of the previous paragraph is pretty much true. Once the initial shocks hit, everything imploded and a lot of weak sectors and companies were shaken up. But I don’t buy the supposed root cause: greedy Wall Street investment bankers took risky investments on the backs of hardworking Americans.

I’m not really a fan of Wall Street so I’m not about to defend it, but the housing market has been the surest bet in the American economy since the ’50s. Home values have always consistently increased, according to U.S. Census data, and people typically try to pay their mortgages because they need a place to live. Realistically, these investments weren’t as risky as they’re made out to be.

The real cause of the recession lies in people living beyond their means.

Government programs such as Fannie Mae and Freddie Mac made it easy for low-income people to get low interest loans, whether they were qualified for them or not. They were all about helping people become homeowners. There’s no deeper-rooted American value than property ownership, and these programs reflected the great intention to give everyone a shot at owning a home.

They did this by creating a secondary mortgage market for mortgage-backed securities which would then increase the attractiveness of mortgages for banks to incentivize lending to low-income or even no-income people.

Realistically, however, some people just weren’t good candidates to take on the debt and responsibility that comes with owning a home and financing a mortgage. They shot too far when they weren’t ready and came up short. They defaulted on their mortgages en masse and started the vicious cycle that got us where we are today.

Romney and the Republicans want to rectify the problem of living beyond our means. Entitlement reform is crucial to this goal. If we stay on this course of borrowing 40 cents of every dollar we spend, according to North Dakota Democratic Senator Kent Conrad, we will eventually default on our debt.

We need to practice budget austerity, otherwise the entire U.S. economy will follow the trajectory of the housing market with consequences to scale.

The original article can be found here.


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