The Dangers of Ignoring Massive Imbalances

A wise economist once remarked that nothing grows exponentially forever. A corollary would be that rapid exponential growth of anything will not be sustainable for very long. It would have been wonderful if politicians, analysts and reporters had called attention to developing problems associated with excessive and out of balance growth in mortgages during the last 15 years or so and especially the 2001 to 2007 period. In 1980 home mortgage debt was about half of total business debt. By 2000 it had risen to 70 percent and then surged through 2006 to actually surpass business debt. Only with the collapse of the industry in 2008 did business debt move higher than home mortgage debt.

The private business sector is the driving economic force in the country. Growth in business debt is in part a reflection of the success the sector is having, although too fast growth can lead to problems there as well. The point is the massive increases in mortgage debt relative to the jobs producing part of the economy should have alerted regulators and analysts to a developing danger. Speculation of ever higher home prices in sections of the country and the efforts to get everyone who wanted one a mortgage were driving home loans to the stratosphere. A day of reckoning was inevitable. That day has come and it will take years to undo the damage caused by the failure of the Federal government to rein in the ludicrously imprudent lending practices fostered by Fannie Mae and Freddie Mac.

More locally, at the state level we see the consequences of year after year of big jumps in government spending and irresponsible pension promises. When hard times come, there are no choices but raising taxes, which makes recovery from recession harder, and cutting spending deeply. More pain is sure to come for Pennsylvania as a result of financial imprudence. In Pittsburgh, we see the effects of excessive generosity in labor contracts by the City and the Port Authority. They are scrambling for more revenue in an already extremely taxpayer pinched economy.

And still, there is no political will to seriously address the root cause of their problems, only incomprehensible hope that a miracle will happen and the bad situation they find themselves in will somehow magically disappear.

Some have foreseen the consequences of ignoring the imbalances that were building up and tried to warn of the coming disaster. But sadly, politicians and too many participants benefitting from the growing imbalances were all too willing to let the goods times roll, hoping not to avoid paying a high a price when the inevitable train wreck occurred.