The story of the credit crunch has been told many times, but this six-graph slideshow from HPSinsight is one of the clearest explanations I've seen. To understand why credit card, student loan and mortgage debt exploded in the 1990s and 2000s, you have to ask some hard questions. Why did income stagnate for middle class families who felt like they had to borrow money to enjoy a middle class life? Why did banks agree to lend so many billions of dollars to families who couldn't pay it back? Why didn't the government and regulators intervene to make it more difficult to families with poor credit to borrow so much money? There isn't much debate about the substance of the pictures below. The debate is about how we got there, and how to get out.
So, how should we get out? I think slide number five provides a useful piece of show-and-tell for those of us who think more government spending helps the recovery. In a vicious cycle of deleveraging, families cut back on their spending together, tipping the private sector into a recession, which reinforces families' decision to cut back. If you let this cycle go by itself, you can end up with years of negative growth and skyrocketing unemployment. The White House believes that more spending helps to break that cycle by replacing money that families and business are taking out of the economy. I understand that story. I've also heard some economists say that what we really need is a dose of inflation. More liquid assets for banks and businesses would lead to so much lending and buying that we'd actually see a race between prices and wages, which would make it easier for debtors to pay back their loans. I don't know if that's the right story, but at least it's an ethos. What I haven't seen yet is a cohesive story from Republicans that looks at Slide 5 and says, "Here is the cycle of deleveraging, and here's why austerity will help to break it."
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