The inevitability of economic collapse: the flaws that were not fixed after 2008

The forecast for 2017 took a different form from the year before. Instead of predicting the events of a year, it listed the structural flaws in the American and global economy that had produced the crisis of 2008, asked which had been fixed, and answered: none, or nearly none. The list is reproduced here in substance, because it is a checklist that can be run in any later year, and because its premise, that trends determine ends, is the premise of the whole section.

The setting

Two forces were pulling against each other in early 2017. The institutions that had spent decades building a globalised economy were not going to stop, and the populations that had risen against them in Britain’s referendum and the American election were not going to stop either. Internal conflict on that scale interferes with commerce, and it was happening inside an economic structure that had not been repaired.

The list

• Banks too big to fail were larger than in 2008. They were somewhat more solvent; the damage if one failed would be greater.
• The bankers who ran them through the crisis had been paid, not prosecuted, and remained in place with every incentive the first outcome created.
• Derivatives, the instruments that turned a mortgage problem into a global one, had grown in notional volume at the rescued banks rather than shrunk, which is the moral hazard everyone warned about in 2009 arriving on schedule.
• Goldman Sachs held three senior positions in the new administration, at the Treasury, the National Economic Council and the securities regulator, against one under the previous one.
• Glass-Steagall remained repealed, so banks could still invest deposits in risky assets, and the Federal Reserve had discussed buying stocks directly as a future tool. Dodd-Frank, the partial substitute, was to be rolled back.
• Trickle-down, thirty years of it, had shifted wealth to the top one per cent and thinned the middle class to the point where a market economy that depends on a middle class was running on credit instead, and a class conflict was being added to the cultural and political ones.
• The national debt, absurd at 10 trillion dollars in 2009, had doubled to 20 trillion, and the new administration’s infrastructure and military plans were estimated to add 5 to 10 trillion more over a decade: a trillion-dollar annual deficit continued under a different party.
• Corporate debt was at record levels and had been used, in large part, to buy back shares, which is what had kept the stock market rising in the absence of earnings.
• The stock market was, on this reading, already a bubble, now inflating further on the expectation of deficit spending.
• Housing was back at 2007 prices in most of the country, on credit terms loosened again to get it there, and adjustable-rate mortgages were being written as though rising prices were a law. Prices had begun to slip at the top of several markets.
• Interest rates on all of that debt, though historically low, had begun rising at a historically rapid pace in the months since the election, before the Fed had moved, on the expectation of the borrowing to come.
• Demographics: the ageing of the population and its effect on Social Security and Medicare, discussed for twenty years and addressed by nobody, was beginning to be felt.
• Europe: two of the oldest and largest banks on the continent were near failure, the whole Italian banking system carried the bad loans of 2008 because it could not afford to write them off, and Greece was still on its edge.

Trends determine ends

Every item on the list existed before 2007 and contributed to what became the Great Recession. Nothing, or very little, had been done about any of them, and nothing was being proposed except measures that would make several worse. A system that has not corrected the flaws that broke it will break again along the same lines, later and larger. The forecast did not name the year. It named the certainty.

Later note. The list can be run again in 2026. Banks are larger still; the national debt is above 36 trillion; corporate debt, buybacks and housing prices all passed their 2017 levels; Social Security’s trust fund is scheduled to be depleted in the 2030s; Dodd-Frank was partly rolled back in 2018 and three of the largest bank failures in American history followed in 2023. Two items improved: Italy’s banks worked through most of their bad loans by 2022, and Greece regained an investment-grade rating in 2023. The premise of the list has not been tested by the collapse it predicted, and the flaws it listed are, with those two exceptions, intact.