Posts Tagged ‘Debt Overhang’

Elizabeth Warren on the next recession

July 23, 2019

Elizabeth Warren wrote a good article about how another recession is on the way, and it will be as bad as the previous one because U.S. policymakers didn’t learn the lessons of 2008.

The economic cycle of growth and recession seems to be inherent in a capitalist economy that uses financial markets.  There are many theories as to why this should be so.

Elizabeth Warren

But the 2008 recession was much worse than the ones that came before because the economic expansion was based on debt that could not be repaid.  I give myself credit for foreseeing this.

My foresight, however, was of little value because I could not foresee when the crash would come.   When it happened, it was as big a surprise to me as it was to everybody else I knew.

The problem of debt overhang has not been fixed.  Nobody has really tried—neither Presidents Obama and Trump, the Democratic and Republican leaders in Congress or the supposedly nonpartisan Federal Reserve Board.

Instead public policy has been concentrating on propping up the financial markets, mainly by holding down interest rates.  People with savings are forced into the risky financial markets if they want to keep their savings from being eroded by inflation.

Everything that made the 2008 recession so bad has been left in place

Now there is an inverted yield curve—that is, interest rates on short-term debt are higher than for long-term debt.

Usually rates on long-term debt are higher because of greater risk.  An invested yield curve is almost always a sign that investors think a recession is coming soon.

We need public policy of debt forgiveness for individuals, limits on corporate debt to what’s repayable and investment in the real economy, especially manufacturing.