Nine Years After the Lehman’s Collapse, How’s the U.S. Economy Performing in 2017?
Nine years after the Lehman Brothers collapse and the beginning of the Great Depression, the media headlines would have you believe the global recession is over. The world is growing again. After all, the Dow Jones recently hit a record of 21,000 points. Indeed, there’s no question that “irrational exuberance” continues inflating the stock market bubble.
But what is happening with the real economy, the one that has little or nothing to do with finance, in the strictest sense? For starters, banks have tightened their purses, contributing greatly to having slowed the real economy. Yet private and public debt weigh heavily, acting as a ballast against growth. Nobody should discount the risk of a veritable credit crisis in 2017.
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To recapitulate, the Lehman Brothers’ bankruptcy officially occurred on September 15, 2008. Yet, the markets were already displaying the symptoms of a much wider crash already in 2007. The 2008 Lehman Brothers financial crisis, as the trigger of the recent global recession might be called, gave off plenty of warning signs.
In 2006 and 2007, the first signs of what became known as the subprime mortgage bubble emerged. The “great recession” that resulted, affecting the whole world, was part of the aftereffects of the Lehman Brothers’ collapse. Historians will look at that single episode as the very fuse for the explosion of the financial markets and global economy in 2008 and 2009.
Lehman Brothers triggered a chain reaction in the global financial markets. But even more important was the damage it caused to real economies around the world. Few seem to be asking now where the world stands after such a prolonged storm. The past nine years have been to the economy what a nuclear winter might be to a nuclear conflict.
The U.S. economic outlook 2017 still suffers from the effects of the devastating and enduring financial crisis. Lehman Brothers merely played the role of lead domino. Now, almost a decade later, the fundamental problem of the recession remains. The general impression is that there has been a shifting consumer spending power.
The U.S. Economy in 2017 Is the Calm Before the Storm
It has focused ever more away from the purchase of goods and services that drive the real economy to the payment of interest and fees to banks. The great novelist Joseph Conrad might describe the present economy thus:
Do you know how I would call the nature of the present economic conditions? I would call it cannibalistic. That’s what it is! They are nourishing their greed on the quivering flesh and the warm blood of the people – nothing else.”
As for me, I might describe the present economic conditions as the calm before the storm.
The real estate market, which catapulted the 2008 crisis, remains a focus of concern. Home prices are rising too quickly, and way beyond the ability of most Americans to afford them. Then there’s the risk of another recession marked by major job cuts in 2017. Similarly, consumers are only slightly less indebted than they were in 2007 and 2008.
They may have incurred fewer new debts. Yet most people are still struggling to pay back the debt and interests from a decade ago. Thus, they are unable to spend and sustain the economy. American economic health might only appear to be improving when considered from a European vantage point.
Surely in Greece, the American economy appears to have strength. In fact, even Germany, the Eurozone’s traditional economic locomotive, may have lost steam in a context of difficulties that has affected the many EU member states. But appearances, especially appearances of strength, often deceive.
The job numbers appear to be improving. On April 5, a much anticipated jobs report from ADP, a major payrolls processors, brandished buoyant statistics for the March employment numbers. The economy added 263,000 jobs. (Source: “U.S. companies hire most workers in over two years: ADP,” Reuters, April 5, 2017.)
But, as ADP admits, that’s merely the highest number since 2014. That means jobs growth had declined since then. Notably, the job growth rate declined in the past two years, even as the Federal Reserve upheld the lowest possible interest rates. The most important effect of the higher employment numbers for March will, actually, be for the Fed to raise rates at least twice again in 2017.
The Employment Report Is Better on Paper Than in Reality
But the U.S. unemployment forecast for 2017 does not warrant much optimism. The job increases occurred under the policies of the previous administration. President Obama favored free trade. He created a climate that allowed many goods to be imported cheaply into the United States. But it also created markets for American products overseas.
President Trump wants to enforce a new tighter border regime, imposing a border tax adjustment and other tariffs on foreign goods. That will provoke retaliatory measures. China can use its considerable holdings of U.S. treasuries to increase the value of the U.S. dollar. That would magnify the effect of the Fed’s rate increases on the dollar, making American goods less competitive.
The stricter tariff climate will put pressure against the “real economy.” But the danger of a U.S. economic collapse in 2017 or 2018 comes from the fact that Trump wants to make Wall Street an even more central player in the economy than it already is. Trump wants to repeal President Obama’s all-too-soft measures to control banking speculation such as the Dodd–Frank Wall Street Reform and Consumer Protection Act.
That will cause a major distortion from the real economy to the risky economy of Wall Street. The risk is that the U.S. GDP forecast for 2017 will have to come to terms with more speculation and less actual—or organic—growth.
One of the effects of the combination of more restrictive international goods exchange regulations and a deliberate effort to promote Wall Street instead of Main Street is that Europe could overtake the United States as the engine of global economic growth. European banks were exposed to the subprime crisis and suffered from the effects of the Lehman Brothers crash.
But Europe remains a continent whose economic fate still relies more on making and exporting goods than on speculating in finance. In fact, even at the expense of credit and growth, European banks have steadily been returning to a kind of normalcy. As the U.S. pulls away from the current system of globalization, it increases opportunities for European companies.
Credit in Europe remains expensive and difficult to obtain, but, compared to the United States, the banking system faces fewer risks of another collapse as in 2007. In other words, it faces fewer risks of another Lehman Brothers crash. It should concern many American investors that eight years after Lehman Brothers went bankrupt, very few bankers have footed the bill for causing the financial crisis.
The Main Problem Has Not Been Resolved: Impunity
Not surprisingly, very few of those responsible for an economic depression, which has topped the Great Depression of the 1930s itself, have paid the price for their crimes. Instead, Americans are surely, and not even that slowly, recreating the very economic and regulatory conditions that allowed the subprime crisis to occur.
Now, nine years later, the American public has had few reasons to ease their resentment of the establishment. Too many, on both sides of the Atlantic, are still struggling with the consequences of the unprecedented recession that started in 2008. It’s true that some banks have paid heavy fines for the damages they caused through their excessive risk-taking, such as the subprime mortgage crisis.
But the actions they took entered the realm of criminal responsibility. The resulting impunity is allowing that same banking class to play Monopoly with their customers’ money again. It was recent news that eight of the world’s top billionaires own half of the world. The risks to the U.S. economy, or rather to the world economy, stem from this basic problem.
The wealth of the one percent comes from the 99%. It’s not hard to see why that is. Wages for the vast majority have remained low and stagnant at best—declining at worst. And that’s for those lucky enough to have kept their jobs after 2008. The reason this has happened is not accidental.
Low wages have had to deal with high prices. Inflation vs. deflation used to be a classic problem of economics. It’s no longer so, because everything is upside down. Wages have not increased. Under normal economic order, this would have implied that prices for most goods—especially housing—would also not have increased.
Chart courtesy of StockCharts.com
Instead, the cost of living in the advanced economies has increased and shows no sign of slowing. But wages are at lower levels than nine years ago. The problem is that most of us, the proverbial 99%, end up redistributing our wealth through indebtedness. To live with a certain decency—we’re not talking about luxury here—a vast majority of the 99% has debts.
They pay off their interest—rather than the principal—and finance their houses, cars, or even run their small businesses. Most people are slaves to debt. It’s an ancient problem that came long before the industrial revolution. But it’s a pattern that has become more prominent today and it’s the main effect of the infamous Lehman Brothers crack of 2008.
Thus, the risks of a financial crash or an economic collapse in 2017 are even greater now than they were in 2007. The economy has not yet recovered from the biggest malaise since the Great Depression, but the markets are experiencing euphoria. It’s an unwarranted jubilation. There’s nothing to celebrate other than huge risk.
The euphoria, especially in America, has caused investors to believe that the worst is over and that it won’t happen again. Instead, it’s more than possible. A major market crash is probable. Probability expert and philosopher Nicholas Nassim Taleb taught us in 2007 the concept of the black swan and its significance in the financial markets.
A black swan indicates an unexpected and unpredictable event, whose impact disrupts the global status quo. The 9/11 attacks were a black swan. The Lehman Brothers crash was also a black swan, but the Great Recession that started in 2008 was not. The signs were in the air, it was only a matter of deciding which bank or institution would fail first and what effects it would have.
The world in 2017 is a munitions depot; it’s full of explosive risks. There are potential wars and many triggers of another economic collapse on the horizon. The question is merely what will trigger the next big catastrophe.
