How the hell did we get here?

The 2008 financial crisis was the culmination of decades of reckless policies by the federal government. The culprit was ever-loosening credit, to the extent that the entire financial system became overladen with toxic loans. The former chairman of the fed, Alan Greenspan, exemplified the naive belief that, by spreading risk, the over abundance of easy credit would not result in collapse. Whoops! But why was loose credit so necessary to our economy? Three words:

Stagnant Real Wages

Nominal wages are simply the dollar amount you bring home. Real wages are that amount compared to the prices of goods. Real wages matter, nominal wages do not. Since 1973, the real wage of the middle class has decreased. This raises serious questions. The most obvious question is why real wages have stagnated. But the most important question for this post is "how is it possible that real wages stagnated but our standards of living increased?"

Loose Credit
As wages stagnated, there was only one mathematically possible way to improve the standard of living of the middle class: loose credit. Politically, this was the only acceptable route. The fed is supposed to be politically independent, but decided that its job was to improve the standard of living of the American People rather than ensuring financial stability. Whoops!

With the collapse of the credit markets in 2008, we entered dangerous waters. Frozen credit combined with stagnant -in fact lower- levels of wages relative to 1973 puts the middle class in severe danger. Every single aspect of the American economy which relied on easy credit, such as retail, home buying, and construction, are now dependent on stimulus to keep them afloat. Why? Because without credit to prop up the economy, government spending must do the job. Infrastructure IE "shovel ready" projects are intended to fill in for construction. Tax credits prop up home sales. Tax cuts are intended to prop up retail.

Damage is being done not only to people and businesses that were on top of the credit bubble, but also to those that deserved to have good credit all along. Now, they can't get loans either because banks are risk averse. Banks are risk averse because there are still hundreds of billions, perhaps over a trillion, in toxic assets out there, and future uncertainty. So because of this, small businesses which pose nominal or moderate risk, and which should be the drivers of a recovery, cannot get the loans and investment needed to grow and hire more people.

Meanwhile, big businesses, which obviously are major sources of employment, are hoarding cash. This means that they are holding large amounts of cash on their balance sheets in lieu of spending on expansion and new employment. But of course they are: with personal credit in the shitter and falling wages, consumers will not be spending; in turn, big businesses have cut production; this means they have no reason to hire new workers or expand into new real estate.

Summary
Stagnant wages minus credit equals weak demand.