The Next Financial Crisis Will Be Worse Than 2008 Because Nothing Has Changed
Ten years ago, a financial crisis began, one so ominous that it triggered the Great Recession. It was simply the worst economic calamity to affect the West since the 1930s.
The 2008 financial crisis fueled a process of political and economic resentment that, in America, culminated in the election of Donald Trump.
The current stock valuations on Wall Street, as they reach for the roughly 26,600-point record set in January 2018, suggest that the world has gotten past the effects of the last financial crisis. Yet, closer observation and analysis lead to a different assessment.
The big banks are more concentrated and are gambling with even greater abandon today than they were a decade ago.
The Main Result of the 2008 Crisis: The Rich Got Richer
Not everybody lost in the financial crisis. For a lucky few, there was no recession.
The global elite, the “one percent,” not only remained fabulously rich; they’re now richer than ever.
Meanwhile, millions of people around the world, who may still entertain such outlandish notions as the fairness or desirability of democracy and free markets, will remember the 2008 financial crisis as a definitive and tragic moment for the rest of their lives.
While the elites have become more elitist, the debt and regulatory environment that prompted the credit crunch and Wall Street implosion in 2008 have only gotten more precarious.
The 2008 financial crisis can be explained in the most general terms as one emerging from too much borrowing and too much spending. In other words, it was a crisis of too much debt. Then again, when is a crisis not about debt?
The solution, known as quantitative easing (QE), has also involved too much borrowing. In the United States, for instance, the Federal Reserve has increased the money supply—or made it seem as such—by buying securities (mortgage-backed securities and Treasuries) from member banks.
The Fed added some $2.0 trillion to the U.S. money supply through QE between 2012 and 2014 alone. (Source: “Quantitative Easing Explained,” The Balance, last accessed September 18, 2018.)
Governments in the countries most affected by the 2008 financial crisis hoped that QE would help stimulate the real economy. Instead, the most notable effect of this operation has been to inflate stock values (on Wall Street in particular), fueling yet another asset bubble.
This Time, the Bubble Is Bigger
The investors, homeowners, average employees, and even the analysts on Wall Street who watched their worlds collapse in September 2008 as the “too big to fail” banks failed, have never even received an adequate explanation for why they lost their savings, jobs, and security.
The government famously bailed out Wall Street to the tune of trillions of dollars of taxpayers’ money.
This precluded any Washington-sponsored plans to revive the economy, as happened under President Franklin Delano Roosevelt in the 1930s to stimulate growth in the wake of the 1929 crash.
Despite all the money on Wall Street, none of the private institutions came to the aid of the banks.
It was a case of “socialism” for the mega-rich and capitalism for the average person. The richest one percent have benefited immeasurably from QE and the longest bull market in history.
In capitalism, losers—in other words, those who go bankrupt—are allowed to fail. They don’t get bailed out. It’s part of the system.
At no time have there been more billionaires, even while almost a third of all Americans were forced to endure the foreclosure of their homes.
Too Big to Fail Became Too Big for Jail
No big Wall Street players were indicted. Lehman Brothers Holdings Inc. was not charged.
A handful of minor players were identified, but for the most part, the big banks—Troubled Asset Relief Program (TARP) and all—carried on as if nothing had happened.
There was no Mueller investigation into the all-too-real corruption, involving real people with first and last names, that led to the ruinous events of September 2008.
Conveniently, Trump, whether you like him or not—and who, for all his faults, had nothing to do with any aspects of the sub-prime mess—has been made to look like its culprit. (Source: “As financial crisis shook the nation, Trump’s team saw payoff,” Politico, September 15, 2018.)
The rules of the game that allowed the Wall Street mortgage-backed security derivative bubble to burst have stayed the same.
Nothing Has Changed
In 2018, the Republicans started to dismantle the meek Dodd–Frank Wall Street Reform and Consumer Protection Act banking regulations that tried establishing limits on speculative behavior.
Unsatisfied, some senators want to further ease liquidity and key capital rules. (Source: “Why Do Republicans Want To Gut Bank Regulations Even More?,” Forbes, August 22, 2018.)
Meanwhile, if you hadn’t yet figured out who’s really in charge of politics, consider that Wall Street bankers were as ubiquitous in President Barack Obama’s administration as they are in Trump’s.
So far, the consequences of the failure to address the causes and principal offenders in the 2008 financial crisis have fueled the phenomenon of so-called populism.
Soon enough, historians will redefine that term, which many in the media, political, and economic establishment arrogantly dismiss.
The full economic impact has not yet introduced itself, but it has sent plenty of hints.
The one percent who benefited from the Pamplona-like bull run in the markets used Trump’s tax cuts for stock buybacks. That’s how, for example, Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN) achieved their trillion-dollar market caps.
The middle class, which Trump was purportedly trying to help, has gained almost nothing. They continue to bear the brunt of the last 10 years of austerity and debt-infused “growth.”
The Stock Market Is Confused
Those who remain investors, seeking opportunities, must understand the one crucial aspect of the stock market today. In simple words, it’s confused.
The confusion stems from the fact that nobody can predict the outcome of the various tensions that almost a decade of QE-infused liquidity has produced.
That concern is as valid for the financial markets as it is for the economy in its entirety.
Investors who look for long-term “set it and forget it” stocks (to quote a popular TV commercial) must consider big pictures and long-term outlooks, far beyond finance.
They must understand where the world, and especially the United States, is heading.
The 2008 financial crisis has been far more political in impact than the 1929 stock market crash.
That’s because the various affected governments looked for solutions, which turned out to be flawed.
Because of the highly skewed results, the full political and social impact has not materialized yet. Trump and similar phenomena in the European Union are the first symptoms of the malaise. And they are by no means the last or the most impactful.
Protectionism and its Effects on the Market
What is clear—and, therefore, what can arm investors with better instincts to navigate the markets—is that Trump represents the tip of a sociopolitical phenomenon that refutes free trade and globalization.
Therefore, the issue of tariffs will be the central nexus of an attempt to transform the economy. Just how far the tariffs will go—and how high those tariffs will be—remains unclear.
But, for each of Trump’s tariff salvos, China has produced a reply. In other words, Beijing has not budged.
The United States service and retail sector relies on cheap imports from China. So does the tech sector. China also happens to be the United States’ most prolific foreign creditor.
China can respond to Trump by concentrating on building domestic consumption to unload its surplus production.
Exploit the International Tension
Meanwhile, important elements of the American economic landscape—and political support—will suffer. For example, look at American farmers’ business compared to that of their South American competitors (soybean/corn).
Similarly, American protectionism, along with the U.S. government’s penchant to sanction those who resist its political influence, will accelerate the emergence of new trade blocs and new economic-political alliances.
China is advancing the development of a new Silk Route. It will move resources and goods swiftly from the Far East of Asia to the Far West of Europe via railway.
In turn, tensions with Russia will exacerbate—apart from and beyond what issues such as Syria and Ukraine have already done.
This will ensure one shining beam of light amid the fog: the defense sector will continue to benefit from heavy military funding. Companies like Lockheed Martin Corporation (NYSE:LMT) or Northrop Grumman Corporation (NYSE:NOC) should continue to produce wealth—or at least preserve it.
Of course, the current atmosphere is most suitable for gold. But that will be a topic for future articles.