“Having previously endured a stock market collapse, recession, terrorist attacks, and corporate scandals, this year the economy showed strong growth and robust job creation,” the president boasted in his economic report to Congress, “this is the result of the hard work of America’s workers, supported by pro-growth tax policies.”
This rosy—if not superficial—picture of the economy in the wake of low unemployment and aggregate prosperity aptly describes the contemporary American economic climate. However, that report was issued in 2006 and the “pro-growth tax policies” in question are the Bush tax cuts. Of course, the realities of what furnished this optimistic fiscal atmosphere would only come to light two years later, when the housing market crashed and the United States experienced the worst economic recession since the Great Depression.
The similarities between today’s economic conditions and those in 2006 may not be limited to these surface-level observations and the optimistic attitudes they have evoked. Several economists, including Alan Greenspan, who chaired the Federal Reserve in 2006, have warned of bubbles belying the current economic boom in the stock and bond markets. Other concerns have been more intuitive, like those of David Rubinstein, founder and chairman of The Carlyle Group, who simply stated that his primary fear was that, “no one thinks there’s a chance of a recession this year or next… The conventional wisdom is usually wrong.” Superstitious as it may seem, the cyclical nature of economic ups and downs in an under-regulated capitalist market means that he could be right.
At the World Economic Forum in Davos this past January, William White, head of the OECD, lamented the fact that “All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten.” Indeed, it has been a decade since the last financial crisis, but it took far fewer than ten years for the fabled lessons of the crash to whither. In fact, the gravity of 2008 hardly resonated beyond the minds and wallets of those who had suffered worst—including the 2.6 million people who lost their jobs and the 1.2 million people who lost their households. For the legislature and the justice system, however, the collapse of the housing market was a minor blip with minor consequences.
While many economists agree the crash was due in no small part to the lax regulation of Wall Street and could have been prevented by more stringent oversight, the paltry congressional response to the crisis did little to address the glaring trouble spots in the financial system. Dodd-Frank, the most significant piece of legislation aimed at grappling with the fiscal revelations of 2008, was never fully implemented, and may very likely be repealed via the Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs (CHOICE) Act, which has already passed through the House of Representatives and received approval from the president.
Furthermore, a dangerous precedent was set in the aftermath of the crisis when only one Wall Street executive was convicted of financial crimes for his part in the “largest man-made economic catastrophe since the Depression.” The rest remained relatively unscathed as big banks were allowed to pay large settlements to the government—using shareholders’ money, that is—and, in exchange, the government did not publicly disclose the banks’ criminal activities.
If bubbles in today’s economy do exist, the question is not if, but when they will burst, as “the cycle of booms followed by deregulation, crises, and re-regulation has repeated itself over the past 300 or so years.” And when they do, the economy will be sent into a tailspin which could be as large as, if not larger than, the recession that we experienced in 2008. Without the proper regulatory institutions put in place and without sufficient precedential deterrents, Wall Street’s culture of “permissiveness, cheating, and abusive behavior” has permeated and proliferated, recreating the dangerous and oft-times criminal conditions that ushered in the devastation of the Great Recession.
A potential crash would be exacerbated by a number of new economic factors. Increased globalization and financial interdependence has led to further synchronization of global business cycles, meaning that, were a financial crisis to occur, its breadth would not only greatly expand, but so, too, would its depth as instability abroad would render recovery tactics based on relative market imbalances—such as the devaluation of currency—ineffectual. Further, the recent Trump tax cuts have been lambasted by critics who argue “the last thing the economy needed was a fiscal stimulus that might stoke fears of inflation and bring the bond vigilantes out of the woodwork.” Consequently, economists theorize that we are on the cusp of a burst which could see the stock market plummet by as much as 10% in the near future.
Even if the economists are wrong and we are currently enjoying a boom with no bust, without proper oversight, the bubbles will eventually reform as they always do. And, we will continue in this tortuous cycle of forgive, forget, and abet in which we give unto big banks the instruments of our own destruction, then express shock and indignation at their employ, if only for the fact that we must rebuild them yet again with the same doomed structure. So it goes.
We have indoctrinated ourselves so thoroughly with the idea that economic cycles are inevitably drastic that we have never even allowed ourselves to experiment with a solution, and our reigning economic policy has become “que sera sera.” Perhaps we are rooted in this stubborn inaction because the highs are so high that we can hobble through the lows on their memory alone and the promise that they will return. However, with the overwhelming majority of profits during the highs being reserved for a small fraction of those at the top and with the immense burden of the lows being relegated to the rest of the public, governmental inaction may be more a commentary on economic power differentials than a testament to the allure of fiscal booms.
No one has suffered economic amnesia in the past decade—far from it. Wall Street executives and big bankers remember quite vividly the soaring profits they made with their unsavory business practices. They remember being not only comfortable, but still fabulously wealthy in the wake of the crash. But most importantly, they remember that only one amongst hundreds of them was genuinely penalized for his crimes, and their practices were never efficiently condemned legislatively.
Meanwhile, millions of Americans remember losing their livelihoods, struggling to provide for their families, and suffering the trauma of being denied justice, accountability, and future protection from the crimes committed against them.
Without deviation from this unhealthy pattern, history is destined to follow the course of economic cycles and repeat itself habitually and unflinchingly as we continue to load the guns, hand them to our executioners, and call it God’s will—or, in this case, it’s the invisible hand of the free market pulling the trigger.