Thursday, December 14, 2017

Are We Heading for Another 2008 (or worse) Meltdown?

The economic numbers are looking good. Confidence abounds. It sounds a lot like 2007 just before the US ran off a cliff taking the global economy with it.

Writing in The New York Times, Desmond Lachlan, former IMF deputy director of policy development now with the American Enterprise Institute, contends that the global economy is again riding on bubbles, most if not all of which are becoming high risk.

The so-called Great Recession, which had begun in late 2008 and would run until mid-2009, was set off by the sudden collapse of sky-high prices for housing and other assets — something that is obvious in retrospect but that, nevertheless, no one seemed to see coming.

Are we about to make the same mistake? All too likely, yes. Certainly, the American economy is doing well, and emerging economies are picking up steam. But global asset prices are once again rising rapidly above their underlying value — in other words, they are in a bubble.

While in 2008 bubbles were largely confined to the American housing and credit markets, they are now to be found in almost every corner of the world economy.

As the former Federal Reserve chairman Alan Greenspan recently warned, years of highly unorthodox monetary policy by the world’s major central banks has created a global government bond bubble, with long-term interest rates plumbing historically low levels.

He might have added that this bubble has hardly been confined to the sovereign bond market. Indeed, stock values are at lofty heights that have been reached only three times in the last century. At the same time, housing bubbles are all too evident in countries like Australia, Britain, Canada and China, while interest rates have been driven down to unusually low levels for high-yield debt and emerging-market corporate debt.

One reason for fearing that these bubbles might soon start bursting is that the years of low interest rates and avid central bank government bond buying that spawned the bubbles now appear to be drawing to an end.

Other reasons for fearing that the bubbles might soon start bursting are the fault lines in a number of major economies. Italy has both a serious public debt problem and a shaky banking system. Brazil is experiencing political turmoil while its public finances are on a clearly unsustainable path. China has a housing and credit-market bubble that dwarfs the one in the United States at the start of this century. And both Brazil and Italy will be holding contested parliamentary elections next year.

This is not to mention the economic dislocation that could result from a termination of the North American Free Trade Agreement, or from the accentuation of other protectionist tendencies, whether by the United States or by another big country. Nor is it to mention the risk that events in the Korean Peninsula could spin out of control.

It is too late for policymakers to do much to prevent bubbles from forming. However, it’s not too early for them to start thinking about how to respond in a manner that might free us from the boom-bust cycles that we seem to be experiencing every 10 years.
It’s unclear, however, whether the world’s largest economy can take the lead this time. The Trump administration’s budget-busting tax cuts risk overheating markets even further and limiting the government’s ability to respond when the bubbles pop. This heightens the risk that when the bubbles burst, we’ll be forced to rely yet again on artificially low interest rates, which will set us up yet again for another boom-bust cycle.

Meanwhile, over at The Reformed Broker, Josh Brown has an item reminding us that the history of "unified Republican governments" in which the Repugs controlled the House, the Senate and the White House - as they do today - led to a financial crash.

In fact, the ONLY 3 PERIODS of extended unified Republican governments going back to 1900 ALL DIRECTLY led to banking crises….Arguably the 3 worst in US History. To be clear, I am defining ‘extended’ unified governments as anytime they control the House, Senate and White house for at least 4 years. This does not include short 2 year stints since it’s hard to screw things up that quick (FYI there was only 1 period of that anyway, 1953-1955). You can look up the periods yourself here and more detail here.

The list of Unified Republican Government crises include the Panic of 1907, The Great Depression, and the Financial Crisis of 2007-2008. Interestingly, the record of extended Republican control of Congress has also only led to crises. There have only been 4 periods of extended Republican control of Congress (3 of which overlap with the periods of full unified control just mentioned). However, the 4th period (I KID YOU NOT) ended in the 2000 DotCom Bust where the Republicans controlled the House and Senate from 1995-2001.

In short, full Republican control has NO history of making America great…let alone AGAIN. 

Ain't life grand.


Toby said...

"Are We Heading for Another 2008 (or worse) Meltdown?"

Probably. MY guess is worse. There are so many really big problems coming down the pipe that an economic meltdown may be coincidental. As with everything else, our leaders, elected and otherwise look to be unprepared and ill equipped to cope. We will be on our own as the rich and powerful retreat to their gated communities.

Have a nice day.

The Mound of Sound said...

The problem with gated communities, Toby, is how a refuge can rapidly become a gaol. It can also be put under siege, cordoned off.

Anonymous said...

Partisan bigotry is the problem. A Democrat president set up the 2000s global financial Bust Out by deregulating the banks and fostering an anti-regulatory culture.

In the aftermath, a Democratic president saved corrupt bankers from prosecution, and bailed them out with trillions - including $2T in QE toxic-asset purchases.

Neoliberal weasels say the Republican party is evil. Neocon weasels say the Democrat party is evil. Both are upper-crust minions dividing and conquering the populace.

Many neoliberal weasels even say neoliberalism is the problem while supporting the neoliberal status quo ever step along the way.