The Aftermath of 2008
I remember being one of many people discussing our fear of imminent civil unrest in the immediate aftermath of the financial crisis. Every economist understands that the economy is intimately tied to human behavior (something most people understand as well, albeit intuitively) and given the severity of the crisis many of us feared civil unrest as people's wallets got squeezed by a massive recession which I was convinced would resemble Japan's Lost Decade (now Lost Three Decades). But that civil unrest never came despite a recession that beat most of the optimistic predictions from academics and central bankers. The media even discussed the surprising decrease in crime that ensued.
Years passed and so we believed that somehow we had solved this problem of economically-instigated civil unrest just as the neo-liberal economists believed (right up until 2008) they had figured out how to avoid recessions. Then, about 7 years later something funny happened: civil unrest. And what is our reaction? Is it, "Well, I guess it was too good to be true. I guess it was unreasonable to assume that the moment economists accepted that we were in recession people would immediately start rioting." Or do we pretend that this has nothing to do with the fact that 8 years ago unimaginable wealth was vaporized when a massive portion of the economy (all the capital which was supposedly contained within the various mortgage-backed derivatives, a form of private money) was revealed to be nothing more than a mirage?
The Timeline
What I failed to realize is that the chain of events that result in civil unrest obviously take years to unfold. A recession means that a population is no longer sufficiently productive, not that all the individuals consciously perceive this fact. Take, for example, subprime mortgages. Many people (seemingly most) believe that subprime mortgages CAUSED the recession. This is obviously far too simplistic. The problem with mortgage backed securities was that they were built on the assumption that recessions would not happen. I know, pretty stupid. And yet, that is exactly the case.
They assumed that mortgage defaults were disconnected from one another, meaning that one person defaulting on their mortgage was an independent variable from another person defaulting on their mortgage, which is generally the case. Except when the first person is defaulting on their mortgage because we are in recession. In other words, if Person A is defaulting on their mortgage because the economy is in recession, then it is now far more likely that Person B will default on their mortgage. However, if the American economy had continued to be sufficiently productive, a recession would not have happened, the majority of people would have been able to afford their (admittedly high) adjustable rate mortgages, a random percentage would have defaulted but the majority would not have.
The Mysterious Case of the Disappearing Money
Put another way, mortgage backed securities are just like gold-backed money. As long as gold has value, gold-backed money has value. Mortgage-backed money (a/k/a securities) is valuable as long as mortgages have value. In 2008 too many mortgages lost too much value, and so hundreds of billions of dollars in wealth that was wrapped up in mortgage-backed money (securities, derivatives, insurance instruments) vanished from the American Economy. But it didn't vanish from your wallet. The stock market would crash and then we would wake up the next day, walk outside and be surprised that the sky had not fallen, failing to realize that the world we were looking at had been constructed back when we thought we were richer. All the layoffs had not yet occurred. All of the government programs had not yet been cut. All of the necessary readjustments that would have to take place in order to realign the population's demand for products and services with its ability to actually produce those goods and services had not yet occurred.
Central Bankers Save the Day
The only way a Central Bank can respond to a monetary crisis (a crisis like 2008 where billions of dollars vanish from the economy) is to replace those dollars with new dollars, which is exactly what the Federal Reserve did. I used to be far more critical of the Federal Reserve's actions, though I am certainly no apologist for Central Bankers. That it was all they could do is not the same as saying that doing it accomplishes anything meaningful or even that it is not harmful. Yes, the argument could be made that refusing to print new money would have been momentarily uncomfortable (for a few years) but it would force the population to more quickly and accurately respond to their new reality. That is not what was done.
Instead, central bankers moved us from the pre-2008 world where we believed we had wealth we did not in fact have, to a world where that wealth hole was filled with newly minted currency, predominantly so that balance sheet problems could be solved. Have $100 million in worthless mortgage backed securities? We'll take them and give you $100 million brand new United States Dollars! That bank doesn't have to go bankrupt, it doesn't have to layoff any employees, lower wages, and most importantly: can keep issuing new loans which is itself printing new money. But, of course, only the balance sheet problem is solved. The "books" look fine, but we don't live in the books. We live in the real world where wealth is created not from a printing press but from productive enterprise, and while the bank may still be able to make loans, that doesn't mean there is anyone to make loans to.
The Missing Counterfactual
I suppose if one believes that we have solved all of the economic issues that caused the 2008 crisis then they would be reasonable in assuming that the cause of the ongoing civil unrest is unrelated to the economic issues. However, if one agrees that those issues are still present, then isn't this an important fact to bear in mind? But this is exactly what we are not doing when we get wrapped up in issues like Black Lives Matter v. All Lives Matter, American Workers v. Illegal Immigrants, Muslims v. ... well you get the idea.
Unfortunately, I have no prescription for this dilemma. I am as vulnerable to this thought process as anyone, that's precisely why I am writing this! What I am not saying is that Black Lives Matter has no legitimate arguments and the same goes for All Lives Matter or White Lives Matter. American Workers were screwed by NAFTA and the Federal Government's Drug War and agricultural policies have done their best to force Mexicans to beg, borrow and steal their way into America. Terrorism is obviously scary AF. While most people's arguments have obvious flaws, so too do they have kernels of truth. My point is not that we are blaming the wrong people, but that we are pretending that if the economy were healthy the events we are seeing unfold would still be happening when that is very likely not the case.
I believe the true root of the problem is coming from lack of incentive to do the right thing. Meaning when "successful people" are continually lying, stealing and cheating there way to the top with little consequence, it's a self re-forcing more bad behavior. The 4 big banks created a monster crisis whereas, in the old days those banks that made terrible decisions would have huge consequences to pay. Excessive regulation has caused substantial barriers to entry limiting competition, freedom of choice and only helps rich get much richer!
I agree in the overall scheme of things. People lower down on the ladder of authority take their behavioral cues from the people above them. If workers see that their boss is doing unethical things and getting away with it, then for many, that justifies their own lapse in moral behavior. If the workers see that their boss sets high standards for his behavior and will not tolerate lapses in ethical judgement from his staff, then the moral standards of his staff will generally rise to his standards. When the President and Congress demonstrate by their behavior that they are above the law and can get away with things you or I are imprisoned for, it's not too much of a stretch to understand that pretty soon, the administrators in govt will begin reflecting their standards, then their staff will reflect the degraded standards, then the weaker of society will reflect those standards. Finally, the remainder of society accepts that new norm of behavior. If we want to get back to a society that values freedom and the rights of the individual, we as a whole need to have a change of heart. you can't have liberty in a society that thinks it is OK to steal from your neighbor via govt and force you to do things you wouldn't do given a choice.
Exactly! Actions have consequences. The government just swept the problem under the rug and pretended that their lovers (the banks it's in bed with) didn't just do a really terrible and illegal thing to everyone else in the country. It's unnatural.
Politics is necessary to balance the positive side of the government, also known as prosperity. The USA can print magic money, so what?.. only those who live outside the USA will suffer as a result. Top of the world mah, topa da world
Add in this crazy US election- 2016 into 2017 is going to be an interesting time to live through
The old Chinese curse..."May you live in interesting times".
This is the real reason the US elections are crazy IMO
Always a great post.... Have to say, while it is equally great I kind of found myself wishing this was a video discussion of yours. You do really well at breaking things down with when speaking and using the whiteboard. Always enjoyed and just sharing early though at 1/2way through article mark.
the only problem with linking widespread civil unrest to economic issues is that these issues have been around literally forever in the US. This crisis with mortgage backed securities -- something like this happens every 25 years or so. Has been since before there was a federal reserve.
The last time, the SNL crisis, was literally the exact same thing. they told a certain kind of lender they could do whatever they want, the lender did. It broke the universe and the government had to step in. It doesnt seem like a big deal to you because you weren't around for but shit like gas lines, stagflation, etc were just as bad if not worse than the 2008 crisis. The depression was obv worse. And, had JP morgan not personally pledged his own money to save the day, the knickerbocker crisis might have turned the US into a 3rd world nation.
going back in time:
2008 mortgage deregulation/universe breaks/bailout.
late 70s early 80s: SNL deregulation/universe breaks/bailout
XXXX: (it didnt happen here cause the post WWII economy was insane
30s -- stock market securities overvalued (due to trading deregulation) then crash/universe breaks/ then eventually bailout in the form of new deal
1907 -- banking and stock deregulation causes the knickerbocker crisis. Universe breaks. JP morgan financed bailout.
1875-- XXXX (nothing here... it was a big boom time after the way)
1850ss, "free banking era" deregulation allows wildcat banks to overissue notes. universe breaks when wildcat banks start going under. Leads to the 1863 adoption of national banks and "greenbacks" (this is when the US started printing paper currency)
Its always the same ... unless there's a war on, finance gets derggulated, it breaks the universe, then gets reregulated. People are stupid.
Younger people won't even remember the 2008 housing bubble in 25 years (the same way most people dont know about the SNL crisis in the 80s.)
It wasn't my intent in this post to imply that anything you say here is not the case. My main point is that MBSs were not the thing, they were one small part of a chain of events which go back in time to the beginning of humanity. The decision to focus on 2008 is wholly arbitrary, as is choosing to start anywhere. The point of the article is only that economic realities have societal effects.
Well yeah, there has always been an economic cycle, and there has always been civil unrest in response to economic turmoil.
I guess my point is that looking for a "solution" to that is sort of a fools game. Even if there was no fed and we were back to the specie standard, that would still be the case. Its just the nature of a captialist economy. To quote the noted economic scholar Biggie Smalls "mo money, mo problems"
I actually think Martin Armstrong hit the nail on the head when he said that the 2008 recession was precipitated by a transition from relationship banking to contractual banking. What he means by that is that when a bank used to loan you money, they kept the mortgage contract themselves, and so had huge incentive to vet you properly. In the decade preceding 2008, that model went out the window. They now had an incentive to sign up as many people as possible for the loans because they no longer had to keep the contract. They could package it up into derivatives and pawn it off on some poor schmuck that you've obscured the risk from. No need to vet anyone, because you could sell the contract as soon as you made it, and collect all of the value while only holding the risk for a very brief time. The lifting of Glass-Steagall made this possible.
In a world without other financial regulations, a lack of Glass-Steagall wouldn't be an issue, because people would be incented to properly assess risks and structure investments accordingly, but under the current system, lifting Glass-Steagall and allowing banks to gamble with people's deposits while propping them up with government money is a huge part of the problem. And this problem has gotten bigger in the interim.
fantastic comment IMO
Thanks for the thoughtful comment! It is not Martin Armstrong's claim that the shift to transactional banking (contractual is not the term he uses) caused anything. His claim is that the shift to transactional banking is one important facet of an infinitely complex and interconnected global economic system that has evolved over time and which he describes in his Economic Confidence Model. For example, it is not his claim that if the shift from relational banking to transactional banking had been avoided everything would be fine. The shift was one small part of a larger whole and in fact, was just a symptom of larger trends. Obviously the system is far more complex than that. I am a big fan of Armstrong's.
Yes, thanks, transactional is the word I was looking for. Good point on it being just a piece of the puzzle. It's a very big piece of it though.
When the regulations limiting banking/investing were removed by the Bill Clinton Administration, anyone could be and was approved for home loans they had no hope of actually qualifying for or repaying. This caused the massive bubble in the housing sector. The same bubbles (but bigger) now exists in several areas of the USA, INC. economy... housing, derivatives, stocks. When the next bubble bursts, the Federal Reserve has no more ammo this time around. FYI: when nations get into economic trouble there is no way out of, world wars happen soon there after.
Things remain calm as long as Central Banks continue to overpower the market with their invisible hand. At some point though, the market will overtake them... and at that point civil unrest will likely follow.
In Central Banks we trust... until we don't.
Yes, because our money was so much safer before the federal reserve.
Good point.
They seem to have trouble where to draw the line though. It becomes a slippery slope rather quickly.
Things don't feel so calm to me :/
The killing of police officers has me concerned as well... that seems destined to escalate
If you look historically, police deaths are way down. And it's not really even close.
Not too hard to understand. Especially when too many cops in certain parts of the country are content to shoot first or otherwise violate the rights of citizens when they perceive that their authority is threatened and their bosses and the local judiciary back them up. At some point, some people will see the injustice and decide to take matters into their own hands.
Exactly...
Nothing good can come of it on both sides, and it likely will get worse before it gets better...
The next year is going to be both very interesting, terrifying, and painful
all narratives require a point of entry and #History is forced to begin within a pre-existing context. The best eye opener I ever read is #Eward G. Griffin's
'The Creature from Jekyll Island', not only the economic insight and lucidity but also his chapter on 'Iron Mountain' and the Climate Scam, (yt see Monkton).
Thx for your art of transmitting useful insight.
Glad you liked it and excellent point. Jekyll Island is good. If you haven't already you might find value in Martin Armstrong's work.
Huh.. Trying to understand how the markets are at record highs right now yet the economy appears to be in the toilet. Is the market not adjusted for all of the supposed currency that was printed? If they did print billions of dollars in money, that would allow the markets to get back to the levels we were at before the crash. This would make it seem like the economy is recovered but in reality all they did was adjust the chart by printing money. Is there a way to see how much money is actually "printed"?
Good question. It's actually pretty common for markets to go up when the economy is bad. People don't want to invest in productive enterprise that is likely to go bankrupt so they park their capital in "safe" investments like stocks, bonds, commodities, etc.
Federal reserve is printing money to pay off debts. That money is losing value. Many countries that get the short of end of stick by not being part of OPEC are implementing there own oil markets so they are no longer slave to the petro dollar. US is tying to force their service based economy into growth by provoking war to increase it's share of the goods production that will come from war time economy. As we produce less and less goods and more services, our security in our currency fades. As countries figure out ways to circumvent having to pay for oil in USD, that hurts our economy and security in the currency fades. It's a scary situation.
The Mysterious Case of the Disappearing Money.........never disappeared , they took it along with the industries that used to give us jobs. The banks to big to fail just took our money, made more to replace it and now we go back soon to 2008 apart from this time there will be no more new money or anything else for that matter. As generally governments when in this situation just pick an enemy and go to war to get the machine going again ! Yes so here we go again, as Germany now warns it citizen's to stock up with food and water for ten days ! the worst crime as i see it in times like this is apathy and our silence, this is the thing which the secret world government counts on to make sure they get what they want when they need it !!
Before Obama was elected I was doing GOOD. Six figure income.
Today, I've been bankrupted and now live on a fixed income (social security).
Yes...I blame it on Obama, but the Rinos deserve a big part of the blame.
tbh i would guess thats post hoc ergo propter hoc.
Keep working, stop paying.
If u fail to look at the money and who creates it, your missing the point.... Worldwide fiat money creation strips citizens of their wealth without them even knowing it..... The average individual holds on to something that he believes has value (money) and over the years the wealthy hold on to assets that generate ongoing value/revenue while the paper money held in bank accounts loses that same aggregate value. value is never lost, it just finds a new home...
The royal bloodlines have had the design to collapse the human species for thousands of years.