15 Years Ago, We Predicted the Financial Crash. We Think Another Is On Its Way.

In These Times called for real bank regulation back in 2003—it still hasn’t happened.

In These Times Editors November 14, 2018

(Photo by Ralf Hiemisch/Getty Images)

Through­out our 42-year his­to­ry, In These Times has often played the role of Cas­san­dra. Per­haps the most unhap­py instance is our pre­dic­tion of the burst of the hous­ing bub­ble, and the dev­as­tat­ing fore­clo­sure cri­sis that fol­lowed. In his 2003 arti­cle, Burst­ing Bub­bles,” econ­o­mist Dean Bak­er warned that the pop­u­lar pro­gres­sive expla­na­tion for the 2001 reces­sion was wrong. Bill Clin­ton may have boast­ed in 2000 of the best econ­o­my in 30 years,” but George W. Bush’s dis­as­trous tax cuts and mil­i­tary profli­ga­cy only part­ly explained the sub­se­quent slump.

The Clin­ton-era eco­nom­ic boom, Bak­er wrote, was built on three unsus­tain­able bub­bles”: the stock bub­ble, which had already burst, and the dol­lar and hous­ing bub­bles, which were sure to. It was these bub­bles, Bak­er argued, that cre­at­ed the basis for the 2001 reces­sion and the economy’s con­tin­u­ing peri­od of stag­na­tion.” Bak­er pre­dict­ed that the hous­ing bub­ble had reached its peak, with trou­bling con­se­quences. The rise in home prices was out­pac­ing infla­tion, and fam­i­lies were count­ing on that rise in home val­ues to off­set high unem­ploy­ment and stag­nant wages. The result was sky­rock­et­ing mort­gage debt:

This sit­u­a­tion is fright­en­ing for two rea­sons. First, as a short-run mat­ter, if hous­ing prices fall sharply in some of the areas where the effects of the bub­ble are largest (for exam­ple the Boston, New York, Wash­ing­ton, and San Fran­cis­co areas), new home buy­ers (and those who recent­ly refi­nanced their mort­gages and took mon­ey out) could find they have neg­a­tive equi­ty in their homes.

If some­one bor­rows $270,000 to buy a $300,000 home, and the price falls by one-third, this leaves them owing $70,000 more than the home is worth. When this hap­pens, there is a huge incen­tive to just let the mort­gage hold­er fore­close on the home. If this were to hap­pen on a large scale, the sur­vival of many banks and finan­cial insti­tu­tions would be at risk.

That’s just about exact­ly what came to pass: Five years lat­er, amid sky­rock­et­ing fore­clo­sures, some of our largest banks and finan­cial insti­tu­tions collapsed.

In Decem­ber 2008, as an account­abil­i­ty-free bailout was under­way, David Moberg called for an econ­o­my beyond casi­no cap­i­tal­ism.” That would entail finan­cial reforms includ­ing the ban­ning of many types of deriv­a­tives and the cre­ation of a finan­cial prod­ucts pub­lic safe­ty com­mit­tee, stricter cap­i­tal reserve require­ments on banks, and a glob­al finan­cial trans­ac­tion tax. But fix­ing the casi­no econ­o­my involves more than bet­ter con­trol over cap­i­tal mar­kets,” Moberg wrote. There’s also a need to rebal­ance the real econ­o­my.” That includ­ed imme­di­ate relief for under­wa­ter home­own­ers, as well as a robust fed­er­al invest­ment plan:

A mas­sive stim­u­lus plan is also need­ed. But to cre­ate new jobs, it should down­play tax breaks and instead invest in infra­struc­ture repair and new con­struc­tion, sup­port hard-pressed state and local gov­ern­ments, pro­vide more mon­ey for edu­ca­tion aid and basic research, and lead an ener­gy effi­cien­cy cam­paign, with pub­lic and pri­vate employ­ers retro­fitting homes and pub­lic buildings. 

Ten years lat­er, as you prob­a­bly know, we haven’t got­ten around to doing most of these things on any mean­ing­ful scale. An $800 bil­lion stim­u­lus pack­age under Barack Oba­ma did cre­ate an esti­mat­ed 3.3 mil­lion jobs, but it was too small to spur a sus­tained recov­ery and was quick­ly fol­lowed by a down­ward spi­ral in pub­lic invest­ment. Those reforms that we did imple­ment — impos­ing stricter cap­i­tal require­ments, for exam­ple — are being rapid­ly undone by the Don­ald Trump administration.

So, we find our­selves play­ing Cas­san­dra once again and warn­ing, like many oth­ers, that we’re head­ing straight into more of the same. On the occa­sion of the 10-year anniver­sary of the finan­cial cri­sis, InThe​se​Times​.com pub­lished an omi­nous fore­cast from The Democ­ra­cy Collaborative’s Thomas Hanna:

There will be anoth­er finan­cial cri­sis. That much is cer­tain. Only when and how destruc­tive it will be is up for seri­ous debate. The finan­cial indus­try is more con­sol­i­dat­ed than it was in 2007 — dom­i­nat­ed by banks still too big to fail. Bank lob­by­ists and their con­gres­sion­al allies have sys­tem­at­i­cal­ly under­mined the weak reg­u­la­to­ry reforms put in place after the cri­sis, demon­strat­ing again that the tremen­dous polit­i­cal and eco­nom­ic pow­er these finan­cial insti­tu­tions wield makes strong reg­u­la­to­ry and insti­tu­tion­al reforms (such as break­ing up the banks”) improb­a­ble, if not impossible.

But if the past 10 years have seen piti­ful­ly lit­tle action from those respon­si­ble for reg­u­lat­ing the banks, we’ve also seen a groundswell of pop­u­lar action to name and shame those respon­si­ble for crash­ing the econ­o­my — from the Occu­py movement’s refrain of banks got bailed out, we got sold out,” to Bernie Sanders’ insur­gent cam­paign and call to break up the banks, to the reemer­gence of social­ism as a seri­ous force in Amer­i­can pol­i­tics. It’s in this con­text that Han­na pro­pos­es a rad­i­cal solu­tion: pub­lic own­er­ship of banks.

When the next cri­sis hits, the pub­lic will once again be called upon to step in and bail out Wall Street. We need to start seri­ous­ly prepar­ing an alter­na­tive response. …

Opin­ion polls have repeat­ed­ly shown that a sol­id major­i­ty of Amer­i­ca ns across the polit­i­cal spec­trum detest bank bailouts and that, in fact, they would rather sup­port some form of pub­lic ownership. 

We won’t try to pre­dict what hap­pens next. But, as Han­na put it, The future of bank­ing is far too impor­tant to be left to the bankers.”

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