Consumer debt crunch and division by two

[Thomas Mertes]

My thinking is that consumer credit rose especially swiftly in the 1920s,
in part, to reduce excess industrial capacity. The failure of consumption
to rise high enough in the Twenties had a lot to do with low wages, weak
unions, and "over-investment" in plant annd market rigidities in durable
goods.  In part, the New Deal tried to put consumers back into the
wages-consumption-production-profit-investment circuit.  Since most
corporations in the US fund their own investment and are not as dependent
on banks (esepcially after Glass-Steagall), consumers provided an excellent
new source of borrowers for bankers. I think that all of the talk about
savings and investment by US is kind of a red herring. What are we going to
invest in that does not already have over-capacity? Though I am not
advocating increased consumption!

The expansion of credit card debt in the late eighties and early nineties
and the wide differential between the prime rate and credit card rates was
critical for saving many commercial banks from the vicissitudes like the
Savings and Loan debacle. So credit card debtors bailed out the banking
industry where taxpayers were penalized for the debauchery of Keating et al.  

Is it Schumpeterian to advocate more bankruptcies as a form of creative
destruction? 

Thomas E. Mertes, Administrator
4355G Public Policy Building
Center for Social Theory 

	and Comparative History
Box 951484, UCLA
Los Angeles, CA 90095
office (310) 206-5675 fax 206-4453