Tuesday, February 1, 2011

The Divergence in the US Economy

The rich are partying. The poor are in distress. That's the essence of Robert Reich's latest post on his blog. Here is the key bit:
Put your ear to the ground and you can almost hear the bulls stampeding. The Dow closed above 12,000 Tuesday for the first time since June 2008. The Dow is up 4 percent this year after increasing 11 percent in 2010. The Standard & Poor 500 is also up 4 percent this year, and the Nasdaq index, up 3.7 percent.

“The U.S. economy is back!” says a prominent Wall Streeter. Not quite.

Corporate earnings remain strong (better-than-expected reports from UPS and Pfizer fueled Tuesday’s rally). The Fed’s continuing slush pump of money into the financial system is also lifting the animal spirits of Wall Street. Traders like nothing more than speculating with almost-free money. And tumult in the Middle East is pushing more foreign money into the relatively safe and reliable American equities market.

It’s simply wonderful, especially if you’re among the richest 1 percent of Americans who own more than half of all the shares of stock traded on Wall Street. Hey, you might feel chipper even if you’re among the next richest 9 percent, who own 40 percent.

But most Americans own a tiny sliver of the stock market, even including stocks in their 401(k) plans.

What do most Americans own? To the extent they have any significant assets at all, it’s their homes.

And the really big story – in terms of the lives of most Americans, and the effects on the US economy — isn’t Wall Street’s bull market. It’s Main Street’s bear housing market.

According to the Wall Street Journal’s latest quarterly survey of housing-market conditions, home prices continue to drop. They’ve dropped in all of the 28 major metropolitan areas, compared to a year earlier. And remember how awful things were in the housing market a year ago! In fact, the size of the year-to-year price declines is larger than the previous quarter’s in all but three of the markets surveyed.


So don’t be fooled. The financial economy isn’t the real economy. The American economy isn’t back. While Wall Street’s bull market is making America’s rich even richer, most Americans continue to be mired in a housing crisis that’s worsening — and in which the Wall Street banks seem blissfully disinterested, and the Administration incapable of stemming.
If you want to understand why this divergence is such a tragedy for the US, you should read Robert Reich's Aftershock or, if you want a more lurid and graphic account that emphasizes criminality and not just economics, read Matt Taibbi's Griftopia.

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