The always-provocative Christopher Caldwell has a terrific piece in the Weekly Standard that gets at the possible roots of 2008’s economic meltdown. It is a critique of essays by University of Chicago finance professor Raghuram Rajan. Caldwell writes:

 Most notably, in the course of this book Rajan offers a bold and convincing diagnosis of how a screw-up in the regulation of poor people’s mortgages in one country has brought the world to the brink of economic disaster, where it teeters still. He goes beyond the proximate causes of the problem-the subprimes and derivatives and trade imbalances and the like. The ultimate cause, Rajan convincingly argues, is a widening of economic inequality that American politicians of both parties found politically intolerable, and chose to fix by turning the credit market into an under-the-table welfare state.

 Income inequality has been increasing since the Ford administration, with the top one percent owning 58 cents out of every dollar. Interestingly, this has not produced an idle rich class-most rich people in America work. Indeed a job, for richer or poorer, is the key to economic success in the United States. Lose your job, and you are lost. Until recently, “losing a job was a calamity, but a calamity of short duration,” Caldwell notes. This is changing-since 1992, all recoveries have been “jobless” recoveries. Caldwell writes:

 Under such circumstances, any recession with the slightest perceptible effect on the public will end political careers by the score. And recessions are, alas, inevitable. The result, under both Democratic and Republican leadership, has been reckless government extension of credit.

 Politicians desire to save their jobs and so they enact policies that lead to giving credit to those who might not be able to repay loans. “This is an account of what ails us that is radically at odds with the familiar tale of greedy bankers in $5,000 suits,” Caldwell notes.  A study showed that by 2000, HUD required that low-income loans make up 50 percent of Fannie and Freddie’s portfolios. A study cited in the story found that,  if one examines the period between 2002 and 2005, one finds that the number of mortgages obtained in a given ZIP code “is negatively correlated with household income growth.”

Bankers were no longer allowed to make personal decisions about applicants. “The judgment calls historically made by loan officers were, in fact, extremely important to the overall credit assessment,” Rajan wrote. “It really does matter if the borrower is rude, shifty, and slovenly in the loan interview.” Bankers also had to keep in mind the necessity of making enough loans to minorities to reach a certain goal. The whole system proved unsustainable.

We didn’t get here overnight, but it’s undeniable that we are now at the fork in the road:

But long before Barack Obama came to power, the United States was pursuing, through tax cuts as well as easy credit, a program of nonstop Keynesian stimulus. In fiscal terms, in credit terms, the “change” that the president is delivering consists of pursuing the same fiscal policy his predecessors did, only more so. The debate over whether the country now needs a “second stimulus package” is in this sense deceptive. We ought to be arguing about whether it is wise to prolong an era of permanent stimulus that is now decades old.