Brad Delong (and other economists) are asking the wrong question

Since the economy crashed in 2008, Brad Delong has periodically wondered how the small losses seen recently in the securitized mortgage market have added up to the worst recession since the Great Depression. He's got such a post over on his blog today.

I am not an economist. But my big post-crisis question isn't how "a $2 trillion impulse in lost value of securitized mortgages has set in motion a financial accelerator that we do not understand at any deep level but that has led to ten times the total losses in financial wealth of the impulse."

My big question is: when did we become so dependent on debt at every level of our economy - consumer, banking, government? In 2008, leverage became the only pillar of our economy that was left standing, apparently, until it, too, crashed.

Brad Delong recognizes a key fact: "You need money to buy stuff. If you don't have money, you can't buy stuff--and so when you are short of money you cut back your spending because you must and so build your money balances back up."

For decades, our consumer-driven economy has been driven by consumers with shrinking budgets to work with. For me, the equation for our current crisis is thus:

Stagnant wages + rising health care costs + astronomical tuition that most consumers can pay for only by acquiring massive debt = consumers hanging on by a thread.

Add on a massive housing bubble, where the biggest asset for most Americans became a financial bomb that blew up their net worth = consumers terrified of losing everything + consumers who've lost everything.

Then add on a financial sector that proves beyond a shadow of a doubt to be corrupt and incompetent (all at once! And led by our best and brightest too, scores of Ivy-educated men who used their intelligence and training to create instruments of "innovation" that turned out to be weapons of mass destruction) and you've added the vivid and powerful emotion of panic into the recipe, which brings the cauldron of crisis to a boil. 

The problem, as I see it, is not in the numerical smallness of the loss. It's in the pervasiveness of the corruption that runs throughout our entire financial system. It's in the income inequity we've seen develop in the last quarter of a century. It's in the capture of our elected officials who cater to the lobbyists and not the voters.

In 2008, our financial sector failed. Capitalism in the most powerful nation on earth failed in 2008. Our entire banking system exists today only because of a massive and very costly federal welfare program. We privatized profit and socialized the losses of the biggest banks in America.

That's a terrible, horrible, no good very bad problem that cannot be summed up by a labeling it a "$2 trillion impulse."

Economists focused on numerical sums will never see this. And that's a big contributor to the "crisis in economics" that Delong has been also pondering.