Higher prices for food and energy, rising unemployment and more businesses closing their doors all show that the global economy is in crisis. Most economists believe the economy is in recession or even a depression like in the 1930s. The poor are those who suffer the most in an economic crisis, with less money for basic things like food and housing. But in October, the U.S. government approved a bill to give $700 billion to big banks, not to the poor.

Here’s a look at why we have the current crisis and what it means.

Key Terms
Foreclosure (n.): When the bank takes the house away to sell because the homeowner cannot pay back the loan
Interest (n.): A regular fee, normally every month, the bank charges to take out a loan
Invest (v.): To put money to use by using it for something that will make a profit
Loan (n.): Any money borrowed from a bank
Mortgage (n.): A loan you get to pay for a house
Recession (n.): A period when the economy shrinks and unemployment rises
Regulation (n.): Rules

System Built on Borrowing

By C.S. Soong

Real Wages
Suppose you made $10 an hour, and a dozen eggs cost $2. You could buy five dozen eggs. Then five years later, you made $20 an hour, but eggs cost $4 a dozen. Even though you made more money, you could still only buy five dozen eggs. This means your “real wages” are flat.

How did the U.S. economy get into such a mess? University of Massachusetts economist Rick Wolff offers this big picture explanation. From 1820 to 1970, the amount American workers were paid kept rising. Advertising encouraged workers to use their ever-fatter paychecks to buy things, and workers came to measure success by how many and what kinds of items they owned.

But in the 1970s, workers’ real wages stopped going up. And they haven’t gone up since. Advertising still pushed workers to buy more things. How could workers do that when their take-home pay wasn’t rising? One key thing they did was borrow money.

Banks played a big role in this, claims Wolff: “They lured workers into charging more and more on their credit cards, and into taking out ever-bigger loans.” Many of these loans were designed to look easy to repay, but they actually got harder to repay over time.

Why did the banks make loans they knew might never be repaid? Because the banks made fast money: they sold the loans to other companies, without making clear how risky the loans were.

All the while, the message from this nation’s leaders to workers was that borrowing lots of money was a safe and good thing to do.

Now millions of workers can’t repay their loans, and the whole economic system is in trouble. “What else would you expect,” says Wolff, “from a system that makes it profitable for banks to push workers to borrow way beyond their means?”

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C.S. Soong hosts the program Against the Grain on KPFA (Pacifica) Radio in Berkeley, Calif.
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How does this happen?

Click on the image below for a closeup.

Illustration by Gary Martin

Illustrations by Gary Martin

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Other Solutions

Many economists point to other ways to help the economy and make life better for everyone, not just the wealthy.

  • Fix bridges, water systems and sewage systems and build public transportation. This creates jobs so that people have money and can spend more, which strengthens the economy.
  • Spend money on a “Green Economy” to build more efficient wind, solar and tidal power, build a modern network to spread  electricity around the country and encourage automakers to build cars that use little gas. This would also really help the economy because we  would spend a lot less money on foreign oil while creating many new jobs.
  • Create a national health-care plan. Businesses would save money by not paying for their employees’ health care, and families would not have to pay large amounts for drugs and services not covered by healthcare plans.

Illustration by Gary Martin

Illustration by Gary Martin

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Text by Amanda Vender • Illustrations by Gary Martin
This article relied on many sources, including This American Life’s “The Giant Pool of Money,” program #355. Arun Gupta consulted on this article.