Signs of the Coming Economic Crash
Eight years after the worst financial crisis since the Great Depression, the economy is doing much better in many important ways.
We have now seen almost 80 straight months of job growth, unemployment is down below 5 percent, and some numbers suggest that wages are ticking upwards, however slowly.
But make no mistake: The next crash is coming.
It’s not a question of “if,” it’s a question of “when.”
And that’s because the underlying cause of the 2008 crisis is still with us today -- the economy is too financialized.
According to government statistics, the financial services sector of our economy -- i.e. Wall Street, the big banks and all their various tentacles -- only employ about 4 percent of our workforce, but now account for something like a quarter of all corporate profits.
In 2015, no other individual industry came even close to matching finance’s dominance over the economy.
This is just not sustainable.
Although there is a role for banks to play in the economy -- they facilitate commerce, after all, when just doing "normal banking" -- 30-plus years of Reaganomics have made banks increasingly vulnerable and prone to crisis.
Giving banks this kind of powerful role to play in the economy is just asking for trouble. Wall Street is literally a ticking time bomb, and when it explodes it will take the rest of the economy down with it.
This is not hyperbole -- it’s fact, and we’re seeing more and more evidence every day that the moment when the Wall Street time bomb will explode is rapidly approaching.
As Greg Ip points out in the Wall Street Journal, stock prices, housing prices and stock prices are now hovering around decades-long highs.
The last time they were this high?
You guessed it: 2007, right before crash.
Meanwhile, net wealth is now equal to about 500 percent of America’s national income. As Ip also points out, “net wealth has reached that level only twice before: from 1999 to 2000 during the Nasdaq bubble, and 2004 to 2008 during the housing boom.”
In other words, history appears to be repeating itself in the worst possible way.
So what’s the endgame here?
Now that we know that the next big financial crisis is probably on its way, what do we do about it?
Well, one thing we shouldn’t do is “let a good crisis go to waste,” as Rahm Emanuel once warned President Obama against doing.
The Crash of 2008 was one of the biggest missed opportunities in American history.
But, instead of overhauling our financialized wreck of an economic system, we tweaked around the edges, leaving the economy in much the same position as was before the crash, plus or minus a few regulations here and there.
The Economic Royalists who brought us Reaganism are still in charge.
Dodd-Frank, the crowning achievement of the post-2008 reform push, is a perfect example of this.
Although it set up the Consumer Financial Protection Bureau and put in place new rules for big banks, it didn’t break those banks up, and now they’re back and bigger than ever before.
Ironically, 2008’s failure could be 2016’s success.
Because we didn’t completely overhaul the economy last time around, the Crash of 2016 is probably going to be a lot worse than the Crash of 2008.
Things will be bad for a bit, but if the crash is as disastrous as it’s likely going to be, that also opens up opportunities for big change.
Once people realize the dysfunction that governs our economy, they’ll fight back, just as they did in the 1930s during the New Deal.
History is cyclical - especially American history.
At different points in our country’s history the mass of We the People have come into conflict with "They the Billionaires and Economic Royalists."
It happened in 1800 when Thomas Jefferson was elected - it happened in the Progressive Era when the Robber Barons were taken down - and it happened in the New Deal when FDR picked up the pieces after the crash of 1929 put and literally built modern American democracy.
After 2008, we avoided going to war against the Royalists, which is why the next crisis is inevitable.
But if the next crisis is inevitable, our response to it is not.
This generation’s fight against the Royalists is coming -- let’s get ready to win.
If the economy crashes before the election, you can bet that a large sector will blame it on Obama and Clinton. And they will be correct in this respect. Unfortualty, they will likely turn to Trump. Although he is a liar and a thief, he will play up Clinto's ties to Wall Street and pretend that he is an outsider. His propensity to bankrupt the intitutions he is running will get as little notice as Bush's need to be bailed out of every enterprise he worked on.
Unfortunately, Thom, our response to the next crisis is inevitable because our political leaders and their key advisers are unwilling to come to terms with the systemic problems that plague our society. Their fiscal and monetary tools are insufficient to generate sustainable economic growth, but the same tools are relied upon again and again.
Twice each year I compile published statistics into a series of lectures on "The State of the U.S. Economy and Society." I have been doing this for over a decade since retiring from my position as a market analyst and business manager at Fannie Mae. Many of my colleagues and I saw the 2008 crash coming. The evidence was right in front of anyone who cared to look at the data without blinders on. The fundamental problem is that our systems of law and taxation have been crafted by special interests to reward many forms of rent-seeking over the actual production of goods and services. What I saw (and continue to see) is that our land markets are structured to benefit rentier interests by an almost universally low effective rate of taxation on the potential annual rental value of locations in our towns and cities and on land with highest, best uses other than urban development. Also, gains on the sale of land and financial claims to real wealth are taxed at rates lower than on earned income, as so-called "capital gain," when, in fact, there is no such thing as a capital gain -- at least not on actual capital goods.
Anyone who would like to be added as a subscriber to the above analysis can send me an email at: firstname.lastname@example.org. It is prepared using PowerPoint and sent out in 7 parts so that email servers do not reject the attachments.
Given that this country in its wisdom and greed nominated two people who made their millions (or is it now billions?) through the very mechanisms that are killing our democracy, we will reap what we have sown. I have no sympathy for those who are broken on the wheel of this turn in the economy. They could have learned the lesson of 2008, but they fell in love with those with money and connections, and turned against the only one not already bought and paid for by the money men. The only hope for this country, or probably the world, is that Bernie keeps the fire to Hillary's feet and doesn't let her get away with her natural tendencies to make money. That will only happen if the berners keep active and engaged and ensure that Bernie is not a lone voice crying in the wilderness of Washington, D.C.
So will president Hillary or president Trump handle the over financialization
of the US economy better?
Seems clear to me.
Financial capitalism has the characteristic of entrophy, that is, it is inherently unstable. It builds to an unsustainable degree of instability and then collpases, only to begin the cycle anew. In other words, boom-bubble-bust is not a bug of financial capitalism, it is a feature.
Constraints on finanical capitalism, like high marginal tax rates, regulations on corporations and financial markets, and a social safety net, continually recycled accumulated wealth and prevented end stage climaxes. Beginning with Carter, and then with Reagan and ever since, we dimantled those mechanisms. We let the markets "free" again. And it's been boom-bubble-bust ever since.
Glass-Seagal is the only way to deal with it.
The real evil in all of these "Wall Street time bombs" is the extreme, almost overnight, 401k loss to honest hard working people.
My first response would be to quickly replace those 401k losses with a fine/taxation on the relative handful of Fascist banking institutions responsible for the crime.
My second response would be to upgrade Social Security to a living retirement amount so amateur 401k investors no longer need to be at the mercy of the GD greedy Fascists in the first place.
Bernie is right....break em up!
In 1982 I wrote a book titled "Inflation The Economy Killer. Appreciation is another word for inflation. It is high appreciation of asset prices that create bubbles in our economy. The primary housing bubble was high appreciation. The dot com bubble was high appreciation. The high inflation of the 1970s was high appreciation/inflation. High appreciation feeds itself with increases of credit use until it cannot grow any further and it implodes, bringing down the economy with it.
Are you fed up with the status quo. Do you want to stop this roller coaster ride.
If anyone is interested in a proposed solution to our bubble economy go to: http://wp.me/p42WQA-7c or www.taxpolicyusa.wordpress.com
How can we know if Jill Stein has what it takes to deal with important economic matters if she's excluded from much of the "media" and not permitted to "debate"?
...suppose we could check out this site: http://www.jill2016.com/
Some say that back when Major General Smedley Darlington Butler, U.S.M.C., a genuine American hero, foiled an overthrow of the government of the United States of America, the whole affair was hushed up because the perpetrators threatened to crash the economy...
...of course, times have changed.
Comedian Lenny Bruce, who went to jail for saying [f-word], maybe would have been proud that one of his fellow comics, Sarah Silverman, was able to address the national convention of one of our four mjor political parties... ....sure, they probably made sure she didn't pull out any of her "your mama's [p-word] lips..." material and such.
Much of the angst of the right wing white power is related to their feeling a loss of power. I never thought I could see the U.S. de-evolve into a fascist state. The simple truth is that history repeats itself. I can remember the authoritarian 1950s as a child. Women were pregnant and in the kitchen, children were to be seen and not heard, gay people did not exist (openly). If you can remember those days when most people were disenfranchised, then you are probably grateful for the change if you are in any other sub-group but white Euro-male. It is never easy to get off the stage when your season under the spot light has ended.
One would think we humans would recognize these boom and bust cycles and adjust our lives accordingly. We recognize that we have to preserve food for the winter. We should have learned long ago that a BOOM cycle is a predictor of a BUST cycle.
After reading the book by economist Michael Hudson "Killing the Host" it becomes clear that the agenda of the One Percent that comprise the ruling class is based on predatory debt creation and rent collection of the workers and industry that comprise the real economy. Classical economists did not include interest payments and rent payments as part of GDP as these were wealth transfers from servants to their economic masters and did not constitute wealth creation in the form of products or services.
Once one realizes that bankers have never in world history financed new businesses but only loaned money to those buying existing companies (most infamous of our time being Carl Ican) then it becomes obvious how this financial strip minining by FIRE (finance, insurance, and real estate) companies like Goldman Sachs, extract wealth and income while gutting companies and workers' pensions and increase the cost of goods and sevices and have made manufacturing much less competitive when stock buybacks change shareholder equity into bank debt.
For not even a penny on the dollar the FIRE industries can buy a politician like Barrack Obama and have trillions of dollars paid to cover their speculations and losses. We have the banksters in control of the Federal Reserve and the US Treasury department and the IMF and the EU.
We have entered an era of neo-feudalism with landlords and serfs. College students graduate to become indentured servants of the One Percent as they spend the next two decades paying off loans, and they pay more money to the banks than they paid to the universities for their education. Charter schools are extending debt and privatization of public institutions so that all students and their parents will need to incur debt and as free education becomes a part of American history the competiveness of the United States will continue to rapidly decline.
So long as neoliberal economists continue to include debt and rent extraction in the GDP, this decline will not show up in the "numbers" and it will look like there is growth in the real economy when the opposite is occurring.
Our response will be dictated by who is in charge when the crisis hits us. If the agents of the financial giants are in charge, the response will be much like it oas in 2008. Then heaven help our alleged democracy.