Simple and Clear Reasons the Next Economic Crash Will be Worse Than the Last
We’ve spent an unprecedented fortune trying to rebuild out of the rubble of The Great Recession; yet, we are building by the same architecture that caused our economic structure to collapse in the first place. We all recall how the buzz phrase of the Great Recession was “too big to fail.” The lynchpin that triggered the last collapse was this thing called “derivatives,” an investment vehicle that patched together junk loans with good loans and other things. I’m not going to get into technical talk about these things. The point is that banks are still doing the same thing, and the banks that were too big to fail so that taxpayers had to bail them out are all much bigger.
Reason 1 that the next economic crash will be worse than the last — behemoth banks!
The United States’ largest banks are on average 39% larger than they were before the economic crash of 2008. If they were too big to fail then, the government’s solution has been to make certain they become frightfully larger.
Bank of America received $45 billion in bailout loans. We had to put taxpayers on the hook for these loans because, if BofA collapsed, it would squash us all. The government’s solution to this problem has resulted in BofA growing faster than anytime in its history to now control nearly one in five of all home mortgages in the U.S. The bank’s exposure to derivatives is now about $50 TRILLION. Imagine that a monstrous tree towers over your house and you are concerned that, if it ever falls, it will destroy you. Your solution is to fertilize the heck out of it, rather than reduce it in size.
J.P. Morgan Chase, nevertheless, breezed past Bank of America in 2011 to become the United State’s largest bank. Having profited from $25 billion in taxpayer-guaranteed bailout money in 2008 plus continuous intravenous government subsidies worth about $14 billion a year, J.P. Morgan Chase has ballooned to more than one-tenth the size of all of England’s economy with $2.4 trillion in assets.
J.P. Morgan has paid over $900 million in fines due to various charges of fraud brought against it, but those penalties were just seed money compared to the fortunes the bank made from those same activities. Such fat prosperity from alleged crime explains why J.P. nearly doubled the pay of its CEO, Jamie Dimon, during these allegations.
Goldman Sachs got a $10 billion bailout loan backed by U.S. taxpayers in 2008 when it helped the economy crash. Just before the crash, its revenue was reported at $56 billion. Today Goldman Sachs reports $113 billion and is involved in $45 TRILLION worth of financial derivatives. Goldman’s sacks of golds are piling up. Imagine there is an enormous pile of sand beside your house, and you are afraid that someday it may sluff right over the top of your home, crushing and smothering you. The government’s solution is to double its size until the pile now has spread around the foundations of your house. Do you question the wisdom of this or accept that the government knows what it is doing because it is full of very smart people?
Wells Fargo. The U.S. government’s solution for solving the problems of one bank that was too big to fail in 2008 — Wachovia — was to let another bank that was too big to fail consume it. To help Wells Fargo digest Wachovia, the government awarded it $25 billion in bailout money. Other acquisitions followed, taking a bank that was once famous for its gold runs via stage coach from $604 billion in assets in 2008 to $1.4 TRILLION in 2013. That’s quite a gold run.
Citigroup is another bank that received $45 billion in bailout money because the government dared not let this leviathan languish, lest it settle over the global economy and smother us all. Citigroup’s assets have grown to $53 TRILLION, and it is exposed to $58 TRILLION in derivatives. By now, you should be wondering if the government has done anything at all to regulate the threats to your economic future.
Morgan Stanley came into being as a result of regulations that came out of the Great Depression. The Glass-Steagall Act forced J.P. Morgan & Co. to separate its investment banking from its commercial banking. So, in 1935 Henry Morgan and Harold Stanley formed Morgan-Stanley to take over the investment banking. In 1999, Glass-Steagall was stripped away by congress, and Morgan Stanley returned to doing both kinds of banking.
Eight years later, Morgan Stanley looked as dizzy and ready to topple as banks did in the thirties. To cure the vertigo of Morgan Stanley, the government encouraged it to feast on the even dizzier Smith Barney.
You cannot be surprised that our nation forgot the lessons of the Great Depression, given that it has so immediately and deliberately dodged the lessons of the Great Recession during the past decade. The fact is the U.S. government and U.S. banking industry have learned nothing from all of this because the road that led to the Great Recession was such a glorious ride. They all want to take that trip again, hoping without basis that this time they can somehow bypass the Great Crash at the end.
Over a thousand banks have disappeared in the last five years by being sucked into the nation’s largest banks. If the nation’s largest banks were, by the admission of every politician out there, “too big to fail,” why has the government that had to save their sorry asses allowed them to fatten their brutal butts by foraging on a thousand smaller banks?
Reason 2 the next economic crash will be worse than the last — the banks learned we will bail them out!
One of the concerns about bailout money at the beginning of the Great Recession was “moral hazard.” The problem with bailing out failures is that they are not chastened in their ways but are enabled to continue their foolhardy behavior. When the remedy offered to failed banks is to make certain they become even bigger and to feed them on government cash to help them grow, they only become bolder in the risks they take.
Imagine you gambled your home and lost, and the government gave you a $25 billion interest-free loan for four years to help you recover. Even though you have to pay the money back, think of how much you can make off of 25 billion while you have it! You get to keep all the profit and pay back the principal after you’ve made the profit. You’ve got nothing to lose and everything to gain. You’ll almost wind up hoping you lose a house again someday so you can repeat that ride.
In short, the nation’s behemoth banks may have once thought the government would bail them out if they failed, but they now know it. They have seen that the U.S. government is paralyzed at the prospect of any one of them crashing because of how they will impact each other and fall on average citizens. Banks are certain this fear will drive the government to bail them out again if needed. It’s simple: the net result of being too big to fail and engaging in reckless banking is that the banks that exist now are the ones that took that risk. It is the wild risk takers that got to procreate and become bigger than ever because of it all. With a risk payoff like that, they are as excited to be tied to derivatives as they ever were.
Why does the risk of bank failure today mean a greater economic crash than we’ve seen in the Great Recession?
Here, again the reasoning is straighforward. First, of course, there is the obvious fact that these banks are now much bigger than they were, so the impact of their collapse has to be worse. But there is a second lurking reason: Bailing out the banks was not the greatest cost to the U.S. government. It invested an unparalleled fortune into rebuilding the economy that the banks destroyed. U.S. government debt is astronomically higher than it was before the 2008 economic crash. Therefore, the government has much less capacity to provide bailout relief to the banks and stimulus to the economy when the next economic crash happens. It has, in short, used up its resiliency. At the same time, the resiliency of the average citizen has been largely used up, too, having already endured a decade of higher unemployment and diminished asset values.
Moreover, there is little to no chance of a solution. Republicans believe businesses should be left alone by the government, so they are not about to split these big banks up or regulate their involvement in the murky world of derivative investments. One Federal Reserve Bank president has said, to the chagrin of colleagues, these large banks should be split up. Both Republicans and Democrats are courted with so much money from these megabanks, however, that they’re not about to close the purse. So, there is little interest in Washington in actually doing what it takes to resolve our economic flaws. The exact same flaws exist in the exact same banks … bigger than ever.
If all of these major banks were split up for the safety and security of the global economy, think of how much more competitive banking would become and how much better that would be for the average citizen than having so much controlled by an oligarchy of so few. But no one cares about you.
Who could possibly buy into the idea that, as banks have grown larger in recent decades, consumers are getting more and better service at a lower cost? Our own experience tells us that the more banks have conglomerated, the worse bank customers have fared. We pay more and higher fees for everything and get far less interest on our money. We now pay the banks to hold our money for us and to let us use it, whereas, banks used to entice us to bring our money into to their coffers.
Think also about how much less influence each diminished bank that comes out of a breakup would have over the politicians in Washington if the banking industry were carved up into many smaller pieces.
I think I can safely predict you won’t see the government take banks that it has pronounced as “too big to fail” and make them smaller. That was just a rallying cry to get dopey citizens to go along with bailing them out. Instead, politicians will continue to hope without basis that their bailouts and economic stimulus work together to strengthen the economy to where they never have to face the failure of the debauched banks they are helping to build. That’s pretty dumb. Its so easy to see that the results of bailouts are universally bigger banks and more investment in cloudy derivatives because there has been very little change so far in banking regulations. You cannot solve a problem by doing a lot more of the same!
And that is why the banking industry will fail again and be worse when it finally does. Government has denied the lessons it needs to learn, and banks have been enabled by a government in denial to continue their same sick behavior. Greed is a sickness that leads to economic crashes. It’s true that, without regulation, Capitalism will correct this foolish behavior … and that’s how it corrects it — it crashes. So, you can see it coming and regulate the behavior that creates it, or wait for Capitalism to make the correction for you by crashing. Of course those very capitalists who profited will be the first to ditch Capitalism. They will all immediately become socialists when it comes to spreading the costs of their failure just as they did in 2008 and 2009. While stridently against welfare to the poor, they have no issue ever with welfare to the rich. It’s what got them from where they were in 2008 to where they are today!
More reading on the next economic crash:
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Read a humorous series of articles about the last economic crash — the bailouts of the Great Recession as they happened — in Downtime.