The Looting of America
Chelsea Green Publishing
There are many theories about why we went into the current economic nosedive. One commonly heard explanation is that the Community Reinvestment Act (https://www.federalreserve.gov/consumerscommunities/cra_about.htm) forced banks to make bad loans to people who couldn’t realistically afford their houses, and that this, in turn, took the world down. While this is an attractive theory, there are a few flaws with it.
For a start, this is the Community Reinvestment Act of 1977, and if something were flawed with the Act, it certainly should have taken less than thirty years for this to come out.
Second, the Act was designed not to encourage loans to the unqualified, but to stop redlining, the practice of arbitrarily denying or limiting financial services to specific neighborhoods (draw a red line around the area), generally because its residents are people of color or poor. In fact, the Act specifically says:
“Safe and sound operations. This part and the CRA do not require a bank to make loans or investments or to provide services that are inconsistent with safe and sound operations. To the contrary, the Board anticipates banks can meet the standards of this part with safe and sound loans, investments, and services on which the banks expect to make a profit. Banks are permitted and encouraged to develop and apply flexible underwriting standards for loans that benefit low- or moderate-income geographies or individuals, only if consistent with safe and sound operations.”
Third, as chance has it, only twenty percent of the sub-prime loans were issued by institutions subject to regular examination or supervision. Eighty percent of the sub-prime loans were made by institutions not subject to regular examination or supervision.
Finally, losses attributed to sub-prime loans and Alt-A loans from all sources were less than $300 billion.
So if the CRA isn’t responsible, what is?
In The Looting of America, Les Leopold presents an alternative theory, which we will try to summarize here, without commentary. This will be a longer than usual review, because the subject matter requires some elucidation.
Leopold says that in the past it was believed by economists that real wages were tied to productivity: As productivity rises, wages rise. This held true until the mid-1970s, at which point the two diverged, with productivity roughly doubling in the last three decades, and real wages falling almost twenty percent from a high of $746 per week in 1973 to $612 in 2007.
So if productivity indicated that wages should be $1,171 but were only $612, where did the extra $559 per week per wage-earner go? It went to what we will refer to as the investor class. In 1973, when productivity and wages were roughly in synch, the top one percent of earners took in eight percent of the nation’s income. By 2006 the top one percent of earners took in almost twenty-three percent of the nation’s income.
So, what did the investor class do with this money, which, were it in the hands of employees, would have been spent on goods and services? They invested it.