It's The Wages, Stupid.

As the presidential candidates debate how "fundamentally sound" our economy is, Scott Lilly points to a bigger problem that is getting buried under the mess on Wall Street:

It is clear to any detached observer that the travails on Wall Street are not simply a superficial kink in the circulation of the nation's money supply. There are deep-seated problems here that will impede growth, and accelerate business failures and job losses if not objectively identified and forcefully addressed. While we have recklessly disregarded the need for prudent supervision of our banking and financial systems, the real problem is even deeper.

For eight years we have papered over the fact that American consumers do not have the purchasing power to sustain economic expansion. As a report I authored a little more than a month ago details, the wage and salary increases that have occurred since 2000 have not been sufficient to even maintain the level of income that most families enjoyed at the beginning of this decade. Employment has not kept pace with population growth. And even though worker productivity has increased by nearly 20 percent over this period, weekly wages are barely higher than they were on the day the current president took office.

Under normal circumstances, we would have seen the effects of slow wage and job growth much sooner in the economic cycle. But the Bush administration and their enablers at the Federal Reserve Board found a way to inoculate the economy temporarily from the fact that the paychecks which Americans were taking home were insufficient to buy the goods and services the economy was capable of producing. The prescription was easy credit—car loans, credit cards, and most importantly, mortgages.