The business and mainstream press in September 2018 has been publishing numerous accounts of the 2008 financial crash on its tenth anniversary. The attention has been focused on the Lehman Brothers investment bank crash that accelerated the general financial system implosion in the U.S., and worldwide, ten years ago. We’ll no doubt hear more about the crash as it spread to the giant insurance company, AIG, and beyond that to other brokerages (Merrill Lynch), mid-sized banks (Washington Mutual), to the finance arms of the auto companies (GMAC) and big conglomerates (GE Credit), to the “too big to fail” banks like Bank of America and Citigroup and beyond. These “reports” are typically narrative in nature, however, and provide little in the way of deeper historical and theoretical analysis.
Parallels & Comparisons 1929 & 2008
It is often said that the initial months of the 2008-09 crash set the U.S. economy on a trajectory of collapse eerily similar to that of 1929-30. Job losses were occurring at a rate of 1 million a month on average from October 2008 through March 2009. One might therefore think that mainstream economists would look closely at the two time periods—1929-30 and 2008-09—to determine whether patterns or similar causes were occurring or to a deep analysis of the periods immediately preceding 1929 and 2008 to see what similarities prevailed. But they haven’t.
What we got post-2009 from the economic establishment was a declaration simply that the 2008-09 crash was a “great recession,” and not a “normal” recession as had been occurring from 1947 to 2007 in the U.S. But no clarification quantitatively or qualitatively as to what distinguished a “great” from “normal” recession was provided. Paul Krugman coined the term, “great,” but then failed to explain how great was different than normal. It was economic analysis by adverbs.
It would be important to provide this explanation since the 1929-30 crash eventually led to a bona fide great depression, as the U.S. economy continued to descend further and deeper from October 1929 through the summer of 1933 driven by a series of four banking crashes from late 1930 through spring 1933 after the initial stock market crash of October 1929. In contrast, the 2008-09 financial crash leveled off after mid-2009. Another similarity between the two crashes was the U.S. economy stagnated during 1933-34—neither robustly recovering nor collapsing further—and the U.S. economy stagnated as well from 2009-12. President Roosevelt introduced initially a pro-business recovery program, 1933-34, focused on raising business prices plus a massive bank bailout. That stopped further financial collapse but didn’t generate much real economic recovery. Similarly, Obama bailed out the banks (actually the Federal Reserve did) in 2009 but his recovery program of 2009-10, much like Roosevelt’s in 1933-34, didn’t generate real economic recovery as well.
Now the differences between Roosevelt and Obama began to show. Roosevelt turned during the 1934 midterm elections to promising, then introducing, the New Deal programs. The economy sharply recovered during the years 1935-37. In contrast, Obama doubled down on his business-focused recovery program in 2010 with $800 billion more business tax cuts plus $1 trillion in austerity programs for the rest of us in August 2011. Not surprising, unlike Roosevelt’s New Deal, Obama’s “Phony Deal” recovery of 2009-11 resulted in the U.S. real economy continuing to stagnate.
The historical comparisons suggest that both the great depression of 1929-33 (phase of continuous collapse) and the so-called “great” recession of 2008-09 share interesting similarities. But while Roosevelt broke from the business policies and focused on the New Deal to restore jobs, wages, and family incomes, Obama focused on further business tax cutting—i.e. another $1.7 trillion—$800 billion December 2010 plus another $900 billion in extending George W. Bush’s tax cuts for another 2 years and cutting social programs by $1 trillion in August 2011 to pay for the business tax cuts of 2010-11.
The policy comparisons associated with the recovery and non-recovery are clearly determinative of the comparative outcomes of 1935-37 and 2010-11, as are the comparisons of the business-focused strategies 1933-34 and 2009-10 that resulted in stagnate recoveries.
No less interesting are the political consequences for the Democratic Party. Roosevelt’s 1934 campaigning on the promise of a New Deal resulted in the Democrats sweeping Congress further than they did in 1932. In 1935 they could push through the New Deal that Roosevelt proposed. In contrast, Obama retaining, and even deepening, his pro-business programs focus during the 2010 midterms resulted in the Democrats experiencing a massive loss in Congress in the 2010 midterm elections. Thereafter, they were stymied by a Republican House and Senate that blocked everything. Obama nonetheless kept reaching out and asking for a compromise with Republicans, but the Republican dog bit his hand with every overture. Obama pleaded with American voters for one more chance in 2012 and they gave it to him. The outcome was more of the same of naïve requests for compromise, rejection, and continued stagnation of the U.S. economy.
Republicans deepened control of state and local level governorships, legislatures, and local judiciary throughout the Obama period. The final consequence of all this was Trump in 2016 as the Obama Democrats promised more of the same in the 2016 presidential election.
Consequences for U.S. Midterm 2018 Elections
As yet another midterm election approaches, November 2018, we are once again inundated with mainstream media projections of a “blue (Democrat) wave” coming. But these were the same pollsters that were proclaiming in October 2016 that Trump had only a 15 percent chance of winning the 2016 election. What’s changed that we should believe the pollsters, the media, and the Democrats this time around? A few notable progressive victories in solid, highly urban constituencies does not ensure their optimistic projections.
A likely greater voter turnout in these Congressional districts must be weighed against the continued Republican-Trump efforts to deny millions of their voting rights, the continued gerrymandered reality of Republican-led governorships and legislatures, and the massive money machine of ultra-right wing billionaires like the Koch brothers, the Mercers, the Adelmans and other radical right billionaire families behind Trump. And let’s not forget those millions of phony religious-moral Americans who support Trump regardless of his misogyny, racism, attacks on the press and immigrants, and his obvious disregard for the even limited democratic institutions and precedents in the U.S.
Will Millenials now turn out to vote in 2018 when they didn’t in 2016? What’s the promise to them? Why should it be any different now? Will Latinos and Hispanics turn out, when the Democrats promised last February a “line in the sand” for a Dreamers bill or no approval of the U.S. debt ceiling extension—and then caved in once again? Women and professionals (independents) tired of Trump’s antics may come back to vote for the Dems, but will that be enough?
Most of America is not aware that the coming November 2018 midterm elections may prove to be a shock to the public consciousness no less dramatic than was Trump’s election in 2016. What will the public think and feel should Trump and his now converted radical Republican party maintain control of the House and Senate for another two years? What if that blue wave dissipates on the reactionary shore that has been deepening in America now for decades? The opposite outcome in November will have a similar “shocking” consequence. What will the far right do should it appear that the Dems win the House and open Trump impeachment proceedings? (Only a 50-50 chance at best even if they win). Trump’s 30 percent of the electorate are beholden to him only in large part—and not to the even limited democratic institutions of America.
The radical right will mobilize at the grass roots. Bannon and his ilk, fueled by the money of the Mercers et al., may well shift to popular right wing mass protests and demonstrations. They will want to “warn” the Dems and others that to proceed with impeachment will mean the advent of a proto-civil war in the country. A threat of such, if not actual. The linking of Trump, his wealthy backers, and releasing grass roots Trump supporters into a real street movement will mean yet another step toward a fascist-like phenomenon in the U.S. We are not there yet. Trump clearly has proclivities toward tyranny and dictatorship: he considers himself above the law (definition of Tyrant) as he has declared he would pardon himself if indicted. And he clearly is fond of other authoritarian strong men like Kim, Duterte, and others. But he is not yet a fascist (as so many progressives mistakenly declare). For that he needs a movement in the streets. Bannon, the Mercers and friends may yet give him that should he be impeached. All that may scare the timid liberals and Democrats in Congress from proceeding with impeachment in all but talk should they win the House in November. The leadership of the Democrats will back off, once again. It will be all talk and no action. We’ll hear instead the message, the real strategy: “complete the anti-Trump change by electing a Democrat president in 2020.” Once again, Trump and the right leverage grass roots movements while the Dems try to funnel all discontent into their re-elections.
But hasn’t that been the problem of the last several decades? Republicans go for the jugular, release the political demons in America always simmering below the surface, mobilize right wing money bags, pervert what remains of democratic institutions, block and thwart all progressive legislation, and “kick ass and take names” of the Democrats—who respond timidly, try to play by the old rules, and continually retreat in the face of the right wing onslaught.
With more than 100 of its Democrat National Committee, DNC, composed of business CEOs and business lobbyists, there’s little chance the Democratic Party will really directly confront Trump and his minions. Should the Democrats even win the House in November, it will be mostly talk of impeachment and token moves for the media, while re-directing discontent to electing still more Dems in 2020 as the real strategy. Meanwhile, Trump and the radical right will continue to mobilize in defense—legislatively, financially, and at the grass roots in increasingly confrontational ways.
The Next Crisis
The next financial crisis—and subsequent severe contraction of the real economy once again—is inevitable. And it is closer than many think, mesmerized by all the talk of a robust U.S. economy that is benefitting the top 10 percent and not the rest. Why so soon, then?
The answer to that question will not be provided by mainstream economics. They are too busy heralding the current U.S. economic expansion—which is being grossly overestimated by GDP and other data and which fails to capture the fundamental forces underlying the U.S. and global economy today, a global economy that is growing more fragile and thus prone to another major financial instability event.
The forces which led to the 2008 banking crash were associated with property bubbles (U.S. and global) and the derivatives markets which allowed the bubbles to expand to unsustainable levels, derivatives which then propagated and accelerated the contagion across financial markets in general once the property bubbles began to collapse. The 2008 crash was thus not simply a subprime housing crisis, as most economists declare. It was just as much, perhaps more so, a derivatives financial asset (MBS, CMBs, CDOs, CDSs, etc.) crisis.
More fundamentally than the appearance of a collapse in prices of subprime mortgages, and even derivatives thereafter, 2008 was a crisis of excess credit and debt that enabled the boom in subprimes and derivatives to escalate to bubble proportions.
But subprimes and derivatives were still the symptoms of the crisis. Even more fundamentally causative, the 2008 crash had its most basic origins in the massive liquidity injections by the central banks, led by the U.S. Fed, that occurred from the mid-1980s to the present. The massive liquidity provided the cheap credit that fueled the excess debt that flowed into subprimes and derivatives by 2008. (And before than into tech stocks in 1998-2000, and before that into Asian currencies (1996-97), into Japanese banks and financial markets and U.S. junk bonds and savings and loans in the 1980s, and so forth.
Excessive debt accumulation is not the sole cause of financial crises, however. It is a precondition. Enabling the debt in the first place is the excess liquidity and credit. That liquidity-credit-debt buildup is what occurred in the 1920s decade leading up to the October 1929 stock crash. It’s what occurred in the decades preceding 2008, especially accelerating after the escalation of financial derivatives in the 1990s and after.
Excessive debt creates the preconditions for the crisis, but the collapse of financial asset prices is what precipitates the crisis, as the excessive debt built up cannot be re-paid (i.e. principal and interest payments serviced). So if liquidity provides the fuel for the crisis, what sets off the conflagration? It’s the collapse of prices that lights the flame.
The collapse of stock prices in October 1929 precipitated the subsequent four banking crashes of 1930-33. The collapse of property prices (residential subprime and also commercial) in 2006-07 precipitated the collapse of investment banks in 2008, thereafter quickly spilling over to other financial institutions (brokerages, insurance companies, mutual funds, auto finance companies, etc.) after the collapse of Lehman Brothers investment bank in September 2008.
Today, in 2018, we have had a continued debt acceleration since 2008.
As estimated by the Bank of International Settlements (BIS) in Geneva, Switzerland, total U.S. debt has risen from roughly $50 trillion in 2008 to $70 trillion at the end of 2017. The majority of this is business debt, and especially non-financial business debt. The U.S. government also increased its federal debt by trillions, as it continued to borrow from investors worldwide in order to “finance” and cut business-investor taxes and continue escalation of war spending since 2008. U.S. household debt also rose, as the lack of real wage and income growth over the post-2008 decade has resulted in $1.5 trillion student debt, $1 trillion plus in auto and in credit card debt, and $7-$8 trillion more in mortgage debt. Globally, according to the BIS, business debt has also been the major element responsible for accelerating debt levels—especially borrowing in dollars from U.S. banks and investors (i.e. dollarized debt) by emerging market economies as well as business debt in China issued to maintain state owned enterprises and finance local building construction.
So the debt driver has continued unabated since 2008, and has even accelerated. Financial asset bubbles have appeared worldwide—not least of which is the current bubble in U.S. stocks. This time it’s not real estate mortgages. It’s non-financial business and corporate debt that is the likely locus of the next crisis, whether in the U.S. or globally or both.
Since 2008, U.S. and global debt bubbles have been fueled once again—as in the 1920s and after 1985—by the excess liquidity provided by the U.S. central bank, and other advanced economy central banks. The central bank, the Fed, subsidized U.S. banks and investors to the tune of $6 trillion from 2009 to 2016 from its QE and near zero interest rate policies.
Since 2008, excessive and sustained low interest rates for investors and business have resulted in at least $1 trillion a year in corporate debt buildup, as corporate bond issues have accelerated due to ultra cheap Fed money. The easy money has allowed countless “junk” grade U.S. companies to survive the past decade, as they piled debt on debt to service old debt. Cheap money has also fueled corporate stock buybacks and dividend payouts to investors, which have been re-funneled back into stock prices and bubbles. So has the doubling and tripling of corporate profits from 2008 to 2017 enabled record buybacks and dividend distributions to shareholders.
Now, in 2017-18 the subsidization locus has shifted to Trump tax cuts that have artificially boosted U.S. profits by a further 20 percent and more. As data has begun showing in 2018, most of that is now being re-plowed back into stock buybacks and dividend payouts—this year totaling more than $1.4 trillion, after six years of $1 trillion a year in buybacks and payouts. That’s more than $7 trillion in distribution by corporate America in buybacks and dividends to its wealthy shareholders. Where’s it all gone?
Certainly not in raising wages for their workers. Certainly not into paying more taxes to government. It’s been diverted into financial markets in the U.S. and globally—stocks, bonds, derivatives, currency, property, etc. Or sent into emerging markets (financial markets, acquisitions, joint ventures, expanding production, etc.) when they were booming between 2010-2016.
So where will the financial asset prices start collapsing in the many bubbles that have been created globally and in the U.S. so far—and thus precipitating once again the next financial crisis? The BIS has been warning to watch U.S. corporate junk bonds and leveraged loan markets. Watch out for the new derivatives replacing the old “subprimes” and CDSs—i.e. the Exchange Traded Funds, ETFs, passive index funds, dark pools, etc. Watch also the U.S. stock markets responding to U.S. political events, to a real trade war with China perhaps in 2019, a continuing collapse of emerging market economies and currencies, to a crisis in repayment of non-performing bank loans in Italy, India and elsewhere, or a tanking of the British economy in the wake of a “hard” Brexit next spring, or Asian economies contracting in response to China slowing or its currency devaluing, or to any yet unseen development. Collapsing prices in any of the above may be the origin of the next financial asset contraction that will spread by contagion of derivatives across global markets. And the even larger debt magnitudes built up since 2008 may make the eventual price deflation even more rapid and deeper. And the new derivatives may accelerate the contagion across markets even faster. The financial kindling is there. All it takes is a spark to set it off. The next financial crisis is coming. The last decade, 2008-18, is eerily similar to the periods 1921-1929 and 1996-2007. Only now it will come with the U.S. challenging foreign competitors and former allies alike as it tries to retain its share of slowing global trade; with a U.S. economy having devastated households economically for a decade; with a massive U.S. federal debt now $21 trillion and going to $33 trillion due to Trump tax cuts; with a U.S. crisis in retirement income, healthcare access and costs, and a crumbling education system; with an economy having created only low pay and mostly contingent service jobs; with a virtually destroyed union movement; with a big Pharma-initiated opioid crisis killing more Americans per year than lost during the entire 9-year Vietnam war; with a culture allowing 40,000 of its citizens a year killed by guns and doing nothing; with an internal transformation and retreat of the two established political parties; and with a Trump and right wing radical movement ascendant and poised to move to the streets to defend itself.
Z
Jack Rasmus is the author of the forthcoming book The Scourge of Neoliberalism: US Policy from Reagan to Trump, Clarity Press, 2019. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. For a more detailed analysis of the similarities and differences between 1929 and 2008, and how Roosevelt and Obama treated the crisis differently, read the except from Dr. Rasmus’s 2010 book, Epic Recession: Prelude to Global Depression, Plutobooks, now posted on his website, kyklosproductions.com.