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reed magazine logoMarch 2010

Reediana Continued

Past Due

Peter S. Goodman ’89

Past Due: The End of Easy Money and the Renewal of the American Economy Times Books, 2009


In November 2008, a hospital administrator named Dorothy Thomas was pulled over by a police officer in San Jose for driving with expired tags. Two years earlier, Thomas had neglected to pay the $10 registration fee for her 1996 Toyota Corolla, and had already been fined once. Since this was her second offense, the officer wrote her another ticket and had her car towed.

Unfortunately, Thomas was strapped for cash. She couldn’t afford to pay the fines that day. Or the next. Or the next. With each passing day, the fees climbed further out of reach until they ballooned to $1,600—a sum Thomas simply couldn’t afford. For years, she had relied on credit cards and loans as an integral part of her finances, overextending herself to the breaking point. Without her car, she lost her job. Without her job, she lost her apartment. Before long, Thomas—who had put two daughters through college—found herself sleeping in a bunk in an Oakland homeless shelter. For her, and for millions of Americans like her, the pyramid of debt had finally collapsed.

The Evolution of God

Peter Goodman

In Past Due, Peter Goodman ’89 provides a masterful account of the causes and consequences of the financial crisis of 2008—the worst economic convulsion since the Great Depression. The driving force behind the meltdown, he argues, was a titanic surge of borrowing. Consumer debt swelled to $2.56 trillion by 2008, up 22 percent from the start of the decade. Both individually, as consumers, and collectively, as a sovereign nation, Americans racked up vast quantities of debt, entranced by the Neverland fantasy that the value of our underlying assets—be they shares of or condos in Florida—could only increase.

To understand how we wound up in this fix, Peter revisits the dot-com mania of the 1990s, when irrational exuberance over the internet drove technology stocks to absurd heights. At one point, Ariba, a Silicon Valley startup that specialized in esoteric business-to-business networks, was worth more than $40 billion, despite never having turned a nickel in profit. When the bubble finally burst, investors sought refuge in something solid and reliable—the American home.

One might imagine that, having just lived through one investment craze, with its attendant pixie dust, breathless hype, accounting scandals, and ugly consequences, we would be skeptical of the next. But in reality, the psychology of the housing boom was hard to resist because the apparent benefits were so widespread. You didn’t have to be an internet guru or a software engineer—all you had to do was own a house! Banks fueled the bonfire by offering teaser-rate mortgages to anyone who could sign their own name. Swank developments sprouted in the desert while Americans borrowed vast sums on the fatal premise that housing prices would never fall.

Meanwhile, Wall Street devised new ways to profit from the housing fever through exotic financial instruments such as mortgage-backed securities and credit-default swaps. Unfortunately, these instruments were totally unregulated—free-marketeers such as Federal Reserve Chairman Alan Greenspan and Treasury Secretary Larry Summers blocked attempts to impose government oversight—and their inherent risks went unheeded. When the music stopped in the fall of 2008, the financial system of the entire world was infected with so-called toxic assets. Lending froze overnight, just as more Americans were deeper in debt than at any time in history.

It is tempting to wag an admonitory finger at free-spending consumers who used their houses as giant ATMs. But as Peter points out, our reliance on debt is a direct consequence of structural changes in the U.S. economy. Over the past two decades, the costs of fundamental pillars of middle-class existence—owning a home, going to college, and health insurance—have soared, while average paychecks slid backwards. Americans plugged the gap with debt.

As a national economics correspondent for the New York Times, Peter is the ideal narrator of this sobering tale, with a reporter’s knack for explaining complicated subjects in clear language and an instinct for piecing together jigsaw puzzles. How do we climb out of this hole? Instead of waiting for the Next Big Thing, we must rebuild an economy that produces goods and services, create jobs with decent paychecks, and restore intelligent oversight to the banking sector. In short, it’s time to dust ourselves off.—Chris Lydgate ’90

Excerpt: When housing prices fell in 2007, and mortgages began going bad in large numbers, the Wall Street bankers picked up their phones in unison, seeking out payments from the institutions responsible for covering their losses via their credit default swaps. And then they figured out that no one had actually provisioned for this unfortunate day. It was as if your neighbor—unbeknownst to you, and unwatched by any regulator—had been collecting payments from everyone on the block for the same promise to use the same hose in event of a fire. . . . Now suppose that everyone on the block—confident in their hose contracts—dispensed with smoke detectors, sprinkler systems, and fire extinguishers, and that community leaders, certain that the threat of fire itself had been tamed by your neighbor’s brilliant civic spirit, dismantled the fire department. This is essentially what the people in charge of the American economy did . . . Then they sat back and watched Wall Street build a bonfire big enough to burn down the whole neighborhood.—From Past Due, by Peter Goodman ’89

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