The narrative that President Trump has created a recent “economic miracle” is ridiculous fiction. Amid continually rising inequality and a recession that’s ongoing for a huge swath of people, living standards are either stagnating or worsening. For the average person, the supposed economic boom of the last two years hasn’t been materially perceptible. Real wage growth has fallen since 2006, and it only increased 1.9% in 2018. Around half of Americans are poor by modern standards, 6 in 10 don’t have more than $1000 in savings, and American household debt is at a record high. A recent study has even shown that 43% of American families can’t afford a monthly budget that covers housing, food, child care, healthcare, transportation and a cell phone.
In the near future, many of the people who are already financially strained will join this more severely impoverished section of the population. An economic crash is coming that in all likelihood will be worse than the one from 2008, and it’s going to be a massive stress test to a nation that’s already economically and politically vulnerable to crisis.
I’m going to be feeling the pinch from this crash, and it’s very likely that you will be too. It will also have profound consequences for our politics and our culture. It’s important that we discuss the looming crisis now, because we need to figure out how to prepare for it. So I’m going to examine the origins, the likely catalyst events, and the long-term implications of what will be the biggest financial disaster so far this century.
The failure to replace the system after the 2008 crash
Adam McKay’s 2015 movie The Big Short can actually give one a good idea of what caused the last recession. As the film explains, the corruption of the American banking system (as emboldened by financial deregulations from the Reagan and Clinton eras) created a situation where mortgage lenders offered increasingly risky loans to people whose investments could only benefit them if the value of their homes kept increasing indefinitely. This was solely the fault of the government and the banks, who’d carried out maybe the most epic scam in the history of capitalism.
But as the narrator of The Big Short Ryan Gosling says at the end of the film:
“Banks took the money the American people gave them, and they used it to pay themselves huge bonuses and lobby the Congress to kill big reform. And then they blamed immigrants and poor people.”
Even as movements like Occupy Wall Street and the European anti-austerity protests showed that society wanted a break from the paradigm of corporate capitalism, the bankers who created the crisis managed to both continue and expand their control over the economy. This made the world’s financial system even more prone to collapse.
A crucial fact to clarify while reviewing this history is that the Wall Street bailout wasn’t necessary. The narrative that big bank spokespeople and the corporate media spun about how the ATMs would become empty if the bailout didn’t happen was a lie. Unlike was the case during the bank runs of the Great Depression, a system now exists to prevent total banking dysfunction. It’s called the Federal Deposit Insurance Corporation, which would no doubt have successfully taken over any additional banks that had failed in 2008.
This big lie behind the bailout didn’t just help lead to crucial reforms being killed. It created a new situation where, as Matt Taibbi wrote in his account of Wall Street’s scams during the financial crisis:
“All the big banks have paid back their Troubled Asset Relief Program (TARP) loans, while more than 300 smaller firms are still struggling to repay their bailout debts. Even worse, the big banks, instead of breaking down into manageable parts and becoming more efficient, have grown even bigger and more unmanageable, making the economy far more concentrated and dangerous than it was before.”
Since the crisis, the assets of the biggest banks have also grown much larger, and the steps they’ve taken to become less risky haven’t undone the fundamental instability of the modern banking system. Under the Obama administration, the banks weren’t nationalized, broken up, or even regulated with a 21st century Glass-Steagall. And that’s set the global economy up for a crash that could be on the same level as the Great Depression. Versions of those bubble-creating mortgage schemes from the pre-2008 era are now in play around the world, as is the case with the UK’s Lender Option Borrower Option loans. LOBO loans attract investors through seductively low, but temporary, interest rates—then set them up for a situation where they’ll have to pay out more money when interest rates inevitably rise.
The notorious LOBOs parallel the global rise of collateralized loan obligations, whose severe lack of investor protection mirrors the collateralized debt obligations which created the last crash. Former banker Satyajit Das has argued that “over 70 percent” of CLOs are “lacking any covenants that would allow monitoring of financial condition and early intervention to manage problem borrowers. This exacerbates the risk of higher losses.”
This assessment is part of a piece that Das wrote this year, titled The Bomb That Blew Up in 2008? We’re Planting Another One. It argues that worldwide investors have:
“convinced themselves that collateralized loan obligations (CLOs) are much safer instruments than the collateralized debt obligations, or CDOs, on which they’re based and which helped precipitate the 2008 crisis. They’re wrong — and dangerously so.”
This denial about the lack of sustainability of our financial system, both within politics and within the business world, has put the economy back to where it was a dozen years ago. It’s clear that we’re in a new housing bubble, with the recent increases in renters and rent prices exacerbating a situation in the housing market that’s in many ways similar (though not as bad) as the one before the last crash. The stock market is also in a massive bubble, one which Bill Gates predicted last year is leading to a repeat of the 2008 crash. Not only is history repeating itself in many ways, but additional factors have appeared which will make the next crisis even worse than the last.
The coming catastrophe
When will this crash come? Since at this point we’re well overdue for one of the recessions that the modern American economy routinely goes through, it will depend on how long Wall Street’s luck can hold. A survey from this year showed that most economists expect the U.S. to fall into a recession before the end of 2020, though there’s a chance that it will happen this year amid the sharp slowdown in corporate profit growth that we’re seeing right now. This slowdown may start triggering a sense of hesitation among investors, which could precipitate a market crash.
Another potential catalyst is the collapse of the housing bubble, which is already in progress in the form of a simultaneous worldwide series of housing market crises. But in this crash, the housing bubble won’t be as much of a defining factor; this time, there’s also a worldwide accumulation of dangerous loans that have been created through instruments like the LOBOs and the CDOs, which threaten many additional facets of the global economy. And the damage from this collapse will be even bigger.
It will be bigger partly because our economic system is now much more vulnerable to an upset than it was twelve years ago. This is the case both for the top of the system, and for its lowest levels; everyday Americans are generally lacking the resources to maintain a stable lifestyle amid such a crash, with 40% of adults not even having the savings to be able to cover a $400 emergency. This crash is going to cause unemployment, hunger, and homelessness on a larger level than the 2008 crash did, putting most Americans in a level of poverty that they haven’t experienced throughout their lifetimes. The very foundations of our economy are ready to fall out.
Another reason why the next crash will be worse is because this time, the government is much less equipped to address an economic crisis. The central banks are mired in the strategies that they used for easing the last crisis, having only the willingness and the ability to pump out a relatively small amount of money into an economy whose next crisis will happen largely beyond the reach of these banks. And above all, the current financial system is set up in a way that produces and exacerbates economic failure. As the Daily Reckoning’s Nomi Prins has written, the next financial crisis:
“will be worse than the last one because the system remains fundamentally unreformed, banks remain too big to fail and the Fed and other central banks continue to control the flow of funds to these banks (and through to the markets) by maintaining a cheap cost of funds.”
When the meltdown happens, it will be further exacerbated by the Trump administration’s weakening of the Dodd-Frank regulations that are designed to safeguard against some of the worst-case financial crisis scenarios. This will be the culmination of all the rot that’s been building up in our political and economic systems for decades.
A reckoning for capitalism
For Trump and his cabinet of billionaires and Wall Street executives, the crash won’t entirely be a catastrophe. It will also be an opportunity. The Trump White House is a collection of kleptocrats whose agenda can be described as disaster capitalism. Mike Pence played a major role in the mass privatization efforts in Louisiana that were carried out after Hurricane Katrina. The Trump administration has been using the influx of refugees that’s been created by foreign destabilization to enrich the private prison industry. Trump’s entire career has been defined by the exploitation of disaster, with Trump having used New York’s debt crisis in the 1970s to boost his own fortune. The people in power always try to exploit disasters, and if an economic crash happens during Trump’s term, corporate America will make a vast cash grab.
A new bank bailout will no doubt be attempted, and it will be used to increase corporate welfare and enrich executives in the same ways as last time. The Trump White House will try to further deregulate banks and corporations, slash the social safety net, and attack civil liberties amid the widespread panic that the moment will create. Trump’s inner circle isn’t interested in addressing the discontent of the masses by expanding social programs, or in reducing the control that the big banks have over the economy. They’re determined to defend corporate power, and in the event of an uprising they’ll be willing to use violence to maintain control. Trump has shown this by threatening to mobilize his supporters in law enforcement and the military to carry out violence on his behalf.
These events will start off the 2020s, a decade that the political historian Alfred McCoy has predicted will consist of “soaring prices, ever-rising unemployment, and a continuing decline in real wages.” For the average person, life is going to get a lot harder in the coming years, and unless someone like Bernie Sanders is elected in 2020, we’ll continue to have a government that will wage a war against its own people rather than make any effort to alleviate society’s inequality.
The upside is that this crash will present a threat to capitalism which surpasses the one it faced during the Great Depression. After almost half a century of increasingly concentrated global wealth, the world’s poor and working class people have started mobilizing for their rights with unusual intensity. Strikes and protests are becoming more frequent, as evidenced by the rise of the Yellow Vests in France and neighboring countries and the emergence of worldwide worker rebellions like the teacher strikes. We’ve entered the early stages of a revolutionary period, one whose development will be accelerated as the crash brings many more people to their breaking point.
When this crash comes, it will destroy the last shreds of popular support for Reaganomics, as well as make capitalism itself less popular. It won’t matter how much Trump and his right-wing media allies try to deny the reality of poverty or blame the country’s problems on foreigners; when the economy falls out, it’s likely that people will become angry at the system. Trump’s base may largely turn against him, a genuine populist protest movement may appear, and the government will lash out as it sees its power become threatened.
In short, America is headed for an unstable period. Our only recourse is to work towards building a strong and unified working class movement, one that can overcome the forces of capitalist repression and replace our failing system with socialism.
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Rainer Shea
