Matt Taibbi warns of the next financial crash

In this interview, Matt Taibbi pointed out that all the signals that warned of the 2008 financial crash are flashing red today.

A financialized economy based on borrowing.  Check.  Financial manipulation out of control.  Check.  “Too big to fail” institutions.  Check.

The response of the federal government to the 2008 financial crash was to bail out the Wall Street companies whose recklessness and fraud created the problem in the first place.

The excuse was that these financial institutions were so vital to the U.S. economy that their failure would bring down the rest of the U.S. economy.  But the bailout gave the speculators assurance that they need not fear either bankruptcy or prison.

Any company that is too big to fail or too complicated to regulate is too big and complicated to be allowed to exist.  The big Wall Street companies should be broken up so that the failure of any one of them will not jeopardize the economy. 

Instead they have been allowed to grow even bigger by mergers. The huge profits they make draws capital away from manufacturing and the rest of the real economy.  Taibbi summed up the situation very well.

He pointed out that the Federal Reserve System is conducting a more-or-less continuing bailout, pumping money into the economy by buying up assets every time the financial markets falter.

This means that, when the day of reckoning comes, it will be so big that bailouts will be impossible.

Twenty years onward: the coming bad years

Sometimes I wish I could live for 20 more years to see what the future brings.  Most of the time I’m glad I’m 82 and almost certainly won’t.

I envision a USA very different from today—one shaped by a catastrophic climate change that can’t be averted, and by an economic collapse that can be averted only by drastic economic and political reforms that seem highly unlikely today.

If you want a picture of the future, imagine New York City during the Great Depression being hit by Superstorm Sandy.

Catastrophic climate change is usually discussed as a doom that will full upon us unless we accomplish X things by the year Y.  In fact, catastrophic climate change is already upon us.

We can by our actions influence how bad things are going to get, but existing greenhouse gasses will produce increasing numbers of floods, droughts, heavy snow storms and power outages.

We the citizens of Rochester N.Y., located as we are on the southern shore of Lake Ontario, are fortunate. Cities such as Miami and New Orleans will meet the fate of Atlantis, but we have a good chance to survive.

We’re not in danger of tidal waves.  We have had relatively few severe storms compared to other regions.  We have access to a relatively abundant supply of fresh water which, however, we are not caring for.

Climate crisis is likely to be combined with financial crisis.  Starting with the Reagan administration and especially since the Clinton administration, the U.S. government has turned over management of the economy to the financial markets.

There have been a series of financial crisis, each one worse than the one before.  The response of the U.S. government has been to rescue failed financial institutions, and allow the cycles to continue.

At some point, there will be a financial crisis too big to resolve.  Instead of financial institutions being “too big to fail,” they will be “too big to bail.”

Adam Tooze on the global financial crisis

The great economic historian Adam Tooze, in his just-published book, CRASHED: How a Decade of Financial Crises Changed the World, showed me things I hadn’t known, and made me rethink things I thought I understood.

Above all, he jolted me out of thinking of the 2008 financial crisis as primarily an American crisis.  It was global in nature, its consequences are still rippling through the world economy and its basic causes have not been dealt with

It is a kind of bookend to his earlier book, THE DELUGE: The Great War, America and the Remaking of Global Order, 1916-1931. 

In the earlier book, Tooze described the continuing debt crisis following World War One, with Germans unable to pay reparations and the Allies unable to pay their war loans, and how the ongoing debt crisis shaped international relations and governmental policy in that era.

The United States, as the world’s top industrial power and top creditor nation, dominated the world financial system, but American leaders lacked both the understanding and the political means to resolve the crisis.  All the United States could think to do was lend money to Germany to keep the system from crashing.  In the end the financial system crashed anyhow..

Prior to the 2008 crash, the United States was in the opposite situation.   U.S. industrial power had been hollowed out and the United States was the world’s top debtor nation.  Economists feared the “twin deficits”—the U.S. trade deficit and government budget deficit—would cause runaway inflation.

This didn’t happen.  The U.S. dollar continues to be the medium of world trade, and the financial markets continue to consider U.S. Treasury bonds the world’s safest financial asset.

American financial leaders such as Ben Bernanke, Timothy Geithner and Larry Summers acted boldly to meet the crisis. They bailed out banks, stabilized the financial system and averted a 1930s-type great depression, which was a real possibility.

That was no small achievement.  What they failed to do was to reform the system so as to reduce the possibility of a second crash.

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I had put the blame for the crash on Clinton-era deregulation, which gave free rein to speculation and to unethical and illegal (but unprosecuted) manipulation of the subprime mortgage market.   Financial markets have always been subject to cycles of expansion and recession, but removing the brakes made the crash a disaster instead of just a problem.

What I learned from Crashed is that deregulation was international.  Prime Minister Margaret Thatcher’s government completely deregulated British financial markets in 1986, in what was called the “Big Bang.”  Her hope was to make the City of London, the British equivalent of Wall Street, the world financial center, and she succeeded.  American, European and Asian banks all made London their major hub, even though they did business in dollars.   The purpose of Clinton-era regulation was to enable Wall Street to catch up with the City of London.