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Post Did We Ever Really "Recover" from 2008?
Created by John Eipper on 07/02/20 4:24 AM

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Did We Ever Really "Recover" from 2008? (Tor Guimaraes, USA, 07/02/20 4:24 am)

Many months ago, WAIS had a discussion about the Fed creation (how a bunch of fat cats got together 100+ years ago at some ritzy beach resort in Georgia and wrote what they thought were their suggestions for the creation of the mighty Fed). It turned out that our strong principled and disciplined Congressmen just turned their suggestions into law. The "punchbowl" was created to supposedly control the scourge of inflation and to make sure the real economy operated smoothly.

That probably is just too boring for people trying to get rich quickly. This business of having the real economy, free markets, law and order, etc. being truthfully represented by financial markets and normal supply and demand for financial assets, is good enough for peasants but just not very exciting for financial engineering types.  We needed some artificially created financial bubbles to add to the excitement of regular business cycles. Thus we had a series of bubbles which created some undue millionaires but the Fed behaved professionally as much as required. Then government regulations and institutions became bad things to be dismantled and disrespected for the sake of American greatness: freedom, motherhood, and apple pie. People like Volcker became sticks in the mud, people like the now infamous Alan Greenspan opened the gates for all sorts of financial engineering with derivatives.

The result: The banks became willing to lend money for expensive house mortgages to people they would never have considered before because they knew the mortgages would be sold to other financial institutions which would bundle these garbage mortgages into "special securities" which, in turn, would be sold to unsuspecting institutional investors after the credit rating companies like S&P, Moody's, and Fitch declared them of good quality because they represented bundles of mortgages which would never all fail, would they? In 2008 when this tremendous fraud came to light, the Fed was forced to lower rates and pump in money to enable financial economic survival. Our intelligent and highly principled political leaders patched things up with band-aids.  They told everyone to please behave, promised to regulated the banks but forgave everyone for the massive fraud. We created the words too big to fail and too big to jail, and promised to do better.

As soon as possible after the economy supposedly recovered, the Fed tried to move rates up from the abnormally low levels, just in case we would have a future emergency and need to inject cheap money into the economy again. The financial system was now addicted to the easy money. Wealthy players needed more cheap money so they could buy more assets all over the world. Thus we have massive asset inflation in some areas. Meanwhile our national infrastructure in all forms continued to rot, the real economy increasingly detached from the financial system, the masses unplugged from the financial system got increasingly poorer and needing to borrow money to survive, corporations became addicted to borrowing money for financial engineering (buy their own shares, buy out competitors, etc.) rather than produce something valuable to sell which would require new plants and jobs, and grow the economy. In summary, we never fully survived the 2008 financial crisis, we just pretended we did. The Covid-19 pandemic is just another coup de grâce for our real economy.

That is our financial economic situation today. The Fed has been forced into a new mandate: keep the financial institutions alive by providing unlimited easy money. Don't worry about inflation because the US dollar is the world's reserve currency and we have the biggest military by far. But this is not sustainable. Our desperate problem now is deflation (not enough demand for goods and services because people have no purchasing power, thus no new jobs, no new taxes). Inflation will come later after we get closer to the ground, and our dollar becomes worthless. Today the Fed can do nothing about that except for providing the now famous "helicopter money" which they may be forced to do in the immediate future.

Right now we have tens of millions Americans without jobs and health care; trillions of debt by households, corporations, local and state governments, and our federal government can only print more money and give to the wealthy. God forbid, but that is looking to me like a check mate. And I have grandchildren, so it feels it is on me.

JE comments:  Ay, Tor!  Once again you send a wake-up call for the very few with a flicker of optimism left.  A few days ago I asked if political and financial decision-makers learned any lessons from 2008.  You raise the corollary question:  did we ever recover, even partially, from the Global Financial Crisis?

Also, let's talk about deflation.  Can it ever be "good"?  I've seen articles on Switzerland since it introduced negative interest rates in 2015.  The economy became deflationary but did not suffer--at least until the present pandemic.

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  • Did We Learn Anything from the 2008 GFC? On Deflation (Tor Guimaraes, USA 07/03/20 4:10 AM)
    John Eipper asked three separate questions in his comments on my post of July 2nd:

    1. [Have] political and financial decision-makers learned any lessons from 2008?

    Most politicians are just too dumb to fully understand economics. They need advisors, who are focused experts many times incapable of seeing the issues from various perspectives, and only too willing to promote what the political boss wants to hear, one way or the other. Most financially competent politicians promoted and enacted legislation to avoid a similar debacle. My earlier post mentioned the Volcker Rule. Against enormous odds, The Dodd-Frank Wall Street Reform and Consumer Protection Act, a series of federal regulations were passed in an attempt to prevent a future financial crisis. But as soon as it became law, the termites went to work, in the media and in the halls of Congress.

    Most of our financial experts are brilliant people.  I believe they learned powerful lessons but still managed to get trapped by the power of putting too much booze in the punch bowl. The "free money" party developed a life of its own and hell hath no fury like a bunch of frustrated billionaires financial engineers trying to see who becomes the first trillionaire in the world. Most financial experts know we are in trouble, members of the Fed know, but if they stop the easy money the stock market will crash big time, and so will the real economy. Yes, they will suddenly become matched again.

    2. Did we ever recover, even partially, from the [2008] Global Financial Crisis?

    Yes, we recovered at least partially. Without the cheap money injected by the Fed (and Central Banks all over the world), the crash would have been much more destructive to the financial engineers and the real economy. However, the cheap money is like cocaine and other drugs, and the financial speculators learned that they were correct in assuming that they can privatize their profits and socialize their financial disasters. That is an amazing deal. Similar to having a religion where you can do whatever you can get away with and still go to heaven, as long as you repent. We never fully recovered from the 2008 financial crisis, though many politicians and media pretend that we did.

    3. Can deflation ever be "good"?

    I don't think so. The Capitalist economy in very general terms should work this way:  People work productively, save money and develop capital. Government at all levels take some from the people to establish institutions which support and enable the people: education, transportation, police, etc. Entrepreneurial people develop new ideas for products and business processes, create companies which might sell shares of ownership to the people who saved money. This is important because the companies open products and services production facilities which hire new people, who in turn, have families, save money, etc. creating a virtuous cycle. A healthy economy is always mildly inflationary. If it heats up too much, the Fed raises money rates to slow down inflation. Deflation should never be a problem in a healthy economy, but to fight mild deflations generated by business cycles, the Fed can lower rates.

    The kind of deflationary spiral we have had should be blamed on the relative lack of demand for goods and services. Why is demand so low? Because people have low incomes, or no jobs, and instead are forced to borrow money to survive. Unless the Fed bails these poor people out instead of the wealthy financial engineers, these people will never have decent incomes to pay their debt and buy goods and services, etc. The financial system is now totally addicted to the easy money. Wealthy players need more cheap money so they can hopefully become trillionaires. Thus we have massive asset inflation in some areas, despite overall deflation. Meanwhile our national infrastructure in all forms continued to rot, the real economy increasingly detached from the financial system, corporations became addicted to borrowing money for financial engineering (buy their own shares, buy out competitors, etc.) rather than produce something valuable to sell which would require new plants and jobs, thus growing the real economy.

    JE comments:  Tor, I'll remember your termite analogy.  You don't notice them until your house becomes an expensive pile of sawdust. 

    Let's focus on Question 3 in the context of coronavirus.  Many experts are forecasting a deflationary period due to high unemployment and low demand, when (if?) we emerge from the pandemic.  Others predict the opposite, because of the near-zero interest rates and the additional stimulus (helicopter money) that will be required to preclude a meltdown.  In the real world, we're seeing both:  housing remains expensive, and the stock market is doing better than you would imagine it should.  Food costs more too, yet gasoline is cheaper than ever (low demand).

    So what say ye, WAISers?  Is deflation or inflation on the horizon?

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