Wall Street's tumult shouldn't matter as long as consumers keep buying stuff, so that companies will keep producing it and putting people to work. The worry is the financial crisis will leach into the real economy and cause consumers to stop buying as much as they were buying before.
You see, even before Wall Street went bonkers, consumer debt was at an all-time high and median wages were dropping. But most of us didn't have to face these unpleasant facts because loose lending and easy money pushed up the value of our homes. So we could treat our homes like bottomless piggy banks through refinancing and home equity loans, and pretend we were rich enough to go on splurging.
Now that the days of loose lending and easy money are over, home prices are dropping all over the country, and our piggy banks have gone bust. So we have to face the awful truth that, as the Census Bureau revealed last week, the median household is earning less than it did in 2000, before the last recession. Meanwhile, the costs of fuel and health insurance continue to rise. That same Census report showed that more middle-class Americans than ever can't even afford health insurance.
Add to this an estimated two million families who won't be able to meet their mortgage payments over the coming year, millions more who are afraid they won't be able to, a spike in the rate of credit-card defaults, and a new law making it harder than ever to declare personal bankruptcy, and what do you get? An American middle class suddenly aware it's been living way beyond its means, and can't do it any more.
The only group whose earnings last year were higher than in 2000 are households in the top five percent of the distribution. Even if you have no ethical qualms about the widening gap between the rich and everyone else in America, you gotta know the rich can't possibly buy enough to keep the economy going.
For that, we need a huge middle class with money in their pockets. And that's exactly the problem. Wall Street's crisis is shocking the middle class into realizing how little money it actually has. And that realization may push us smack into a recession.
This column is adapted from Reich's weekly commentary on American Public Radio's Marketplace.
