Is a New Global Financial Crisis Imminent?
Economists Mark Weisbrot and Gerald Epstein face off to discuss whether 10 years after the Lehman Brothers collapse and the Great Recession of 2008 we are about to see another major financial crisis
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
Here at The Real News, we have been covering the ten-year anniversary of the great financial crisis of 2008. We are, of course, trying to pursue a series of analyses on the lessons learned from that momentous event. We are now turning today to look forward, looking at analysis of whether we can expect a repeat of that crisis in the foreseeable future. Now, some institutes, such as The Democracy Collaborative founded by Gar Alperovitz, recently issued a detailed analysis predicting that there will be another global financial crisis and that it will probably be even worse than the one that took place in 2008. In fact, they have a strategy lined up as far as what we should do when that crisis hit. It’s worth taking a look at, and we’ve done some interviews here on The Real News on that topic as well. So, do look that up.
Now, on the other hand of all of this, we have others, such as Dean Baker of the Center for Economic Policy and Research, who just published a paper titled, The United States is Not on the Brink of a Financial Crisis. And he and his colleague, Mark Weisbrot, were among the few economists who actually predicted the last crisis. So, joining me today to discuss these perspectives on the likelihood of another crisis are Professor Gerald Epstein and Mark Weisbrot. Jerry is co-director of the Political Economy Research Institute and professor of economics at UMass Amherst. Good to have you with us, Jerry.
GERALD EPSTEIN: Thanks, Sharmini. Hi Mark.
SHARMINI PERIES: And Mark is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of Failed: What the “Experts” Got Wrong about the Global Economy. Thank you both for joining us.
MARK WEISBROT: Thanks, Sharmini.
SHARMINI PERIES: I’m going to start off with letting each of you stake out your positions on this. So, let me start with you, Jerry, first. Is the U.S. and the global economy on the brink of a new financial crisis?
GERALD EPSTEIN: Well the brink’s a strong word. I think it’s hard for anybody to predict a brink. But I think there are worrying trends, both in the United States and in the global economy in terms of financial problems. Let me point out that economic historians have shown that there are financial crises somewhere in the world every seven or eight years throughout the history of capitalism. So, it’s unlikely that we’re not going to have other financial crises. I think the real question, of course, is whether we’re on the brink of a financial crisis of this severity and of the type we just saw in 2008. And those kinds of financial crises, historically, are actually quite rare.
So, it would be quite surprising if we were on the brink of a financial crisis like that. Now, what I think is that there are serious financial problems that are building up and that the policies undertaken after the last crisis were not sufficient to solve these problems. And in fact, many of them were just swept under the rug and not looked at at all. So, what are some of the of the disturbing trends? First of all, debt levels in the United States and in many parts of the world; business debt, household debt, et cetera, are at the highest levels we’ve ever seen as a share of GDP or national income. So, debt, which is a vulnerable factor in financial crises, is certainly way up there.
Second of all, a lot of the financial practices that contributed to the financial crisis are still going on; the writing of derivatives and collateralized debt obligations, the borrowing and lending by the shadow banking system. All of these things are going on and those have not stopped. So, I think there a lot of worrying trends, and perhaps the most worrying is that the financial regulators, particularly in the United States, under the sway of Trumpian economics and the Republican Party and the Wall Street-friendly Democrats, are dismantling a lot of the regulations that were put in place. And so, there’s not much of a cop on the block anymore. So, I think all of these things make it more likely that we’re going to have a serious financial crisis but saying we’re on the brink is probably too strong.
SHARMINI PERIES: All right. Mark, what’s your take on what Jerry just said, and as well as do you think we are on the brink of a new financial crisis?
MARK WEISBROT: Well, if the framework we’re looking at is the whole world, then we do already have financial crises in places like Argentina and Turkey. You have a big falloff in the emerging market stock index. And you have these crises resulting partly from the Federal Reserve raising interest rates here. This is similar to what you had when the Fed doubled the interest rates between 1994 and ’97. You had crises in Argentina, Brazil and Mexico, in Asia, including Indonesia, Malaysia, the Philippines, South Korea. You had Russia as well in ’98. And so, all of this spread through the behavior of market participants who just looked around and picked the country they thought was going to be next and pulled out of there, caused the crisis by the sudden stop of capital flows.
So, something like could happen as the Fed continues to raise interest rates, especially for the more vulnerable countries, those that have a lot of debt. But again, some countries will be innocent bystanders and be sucked into it. And I think this is a real problem and it’s also a problem for the United States. The Federal Reserve has caused all of the recessions we’ve had in the United States, except for the last two, by raising interest rates. And if they continue to raise interest rates, as they’ve done five times since 2015 unnecessarily, they will eventually slow this economy and maybe push it into recession.
But if we’re talking about now, we’re comparing to the tenth anniversary of the last- the media calls it a financial crisis- but we compare it to the Great Recession, which I think is a better way to describe it, we’re not seeing any bubbles, for example, that could cause that. The housing bubble was very evident at the time. You had a huge runup of construction, and when that collapsed we lost four percentage points of U.S. GDP. And people were spending often at the increase in wealth, they were borrowing against their means. And they were spending, and the savings rate collapsed two and a half percent. I think it was a record low in 2005. And that was very evident as well.
And together, those two shocks, the collapse in the consumption that you got of the wealth effect of losing eight trillion dollars in housing wealth and the four percentage points of the GDP, that’s what caused the Great Recession. It wasn’t the result of the financial crisis, of any financial crisis. And I think that’s very important. That’s widely misunderstood throughout in the media, and as a result, I think people have a lot of misunderstandings about what to do going forward and where we are right now in terms of facing the threat of a Great Recession. And that’s not to dismiss what Jerry said about regulatory concerns and the fact that we didn’t fix a lot of what we needed to fix in terms of financial regulation. We don’t have any bubbles like the one that we had in 2006, 2007, or even like the stock market bubble that we had in 2000.
SHARMINI PERIES: All right. Now, it appears that both of you agrees that it is the nature of our economies, or capitalism, that there are crises in some part of the world somewhere at any given moment. Now, Leo Panitch has also written about this, he wrote a book called In and Out of Crisis. And as I mentioned off the top, Gar Alperovitz also predicts such crises is pending. Now to talk about it might happen or it is happening somewhere in the world like Argentina or what we experienced even in Turkey these past few months is one thing. But it’s another thing to be waiting in the United States and on the brink of that these kinds of crises may trigger another financial crisis in the U.S. Is there any possibility of that happening, Jerry?
GERALD EPSTEIN: Yeah, sure. I mean, let me respond to some things that Mark said. I certainly agree with a lot of what he said. But to step back a bit, we look historically at the causes of financial crises, there’s been a lot of research done on this by economic historians like Charles Kindleberger who wrote the great book, Manias, Panics, and Crashes, Hyman Minsky. More recently, a lot of empirical work done by economic historians like Alan Taylor, Moritz Schularick and others. And what’s pretty clear is that financial crises, and very serious ones, come in all varieties. Not all financial crises are started by bubbles. Bubbles, asset bubbles like we saw with the housing market and other stock market bubbles, or South Sea bubbles, tulip bubbles, these are all things that can start a financial crisis and have started financial crises.
But you can have pretty serious financial crises without bubbles, historically. And so, I think it’s not sufficient to say, as I think Mark suggested and maybe Dean has suggested, that, “Well, there’s no bubbles out there right now, so we can’t have a major financial crisis. That doesn’t necessarily follow if you look at the historical record. Financial crises are caused fundamentally by debt structures, or one of the main causes of financial crises is businesses and people and governments taking on a lot of debt and expectations feature income and revenues that don’t materialize for some reason or another. And it gets worse if the financial system buys and sells and insures these types of debt throughout the financial system.
And if one institution fails and if they’re complexly integrated with each other, then that can bring down more financial institutions and other institutions. And then, you have a big problem. And the problem now is that, perhaps Mark is right that we don’t have any obvious bubbles right now, that the global financial market has become incredibly interconnected with all kinds of derivatives, the same sorts we saw before and even more complex, the whole shadow banking system that isn’t regulated and we don’t know much about. This is generating lots of interconnectedness, lots of complexity. And so, there’s a lot of danger lurking in there and the absence of a bubble does not guarantee us the absence of a major financial crisis. So, I would be a little more worried than it sounds to me like Mark and perhaps Dean are.
SHARMINI PERIES: All right, Mark. Let me give you an opportunity to respond to Jerry.
MARK WEISBROT: Well, I’m not going to say it’s never going to happen some years from now if some large unsustainable debt burden were to grow, for example, in the business sector, then that would be a different story. But we don’t really have that now. And so, I think that there does have to be something. You can see if it’s a crisis that’s going to cause something like the Great Recession or the prior recession or any of the deep recessions prior to 2000, we would see it. The most likely cause of the next recession, if we’re looking ahead and just doing a baseline projection for right now, barring some real trade war, for example, is it is much more likely to be the Federal Reserve raising interest rates until it slows the economy enough to cause a recession. That’s what we’re looking at as the greatest threat right now.
There’s no financial imbalance of the sort, including the business sector borrowing. A lot of that was just borrowing because interest rates were very low, so corporations locked in debt at very low interest rates. It wasn’t borrowing because they were in trouble of any sort. So, these are not the material of crises. That doesn’t mean they won’t be three or four years from now, even further. But if we’re looking at it right now, you don’t have anything that we can point to as something that will cause a crisis in the foreseeable future other than, again, the threat of the Federal Reserve.
SHARMINI PERIES: Jerry?
GERALD EPSTEIN: Well, I hope you’re right. I think that would be a good thing. And it is true, I agree with you Mark, that the Federal Reserve excessively increasing interest rates is both unnecessary and dangerous from this regard. But let’s not forget- and you know this as well or better than I do, that in 1982, with the so-called Third World debt crisis, there weren’t any obvious signs of problems here in the United States. But unbeknownst to many of us, the thirteen major commercial banks in the U.S. were lending much more than their capital to a set of eight or nine developing countries. And when problems developed there, in Mexico and Argentina and so forth, that almost brought down the U.S. financial system.
So, the problems do not have to emanate from here to kick back and create a crisis here, because our financial institutions are at the center of the global financial system. Major interconnected problems that start elsewhere can boomerang back and affect our financial institutions. Now, the question then is what you’ve been writing about, and Dean and others, well if that happens, what should we do about it? Should we bail out the banks again and bail out the bankers? And that’s where the interesting question is. And I think that’s where the work by the Democracy Collaborative that you referred to is very interesting, because they’re saying no, we should nationalize the banks at that point and then move on from there. So, I agree with their perspective on that.
SHARMINI PERIES: So, Mark, how do you respond to Jerry’s argument that of course deregulation, combined with increasing, unpayable debt burdens make a crisis practically inevitable in spite of not having a bubble?
MARK WEISBROT: Well, it depends what you mean by inevitable. At some point, yeah, there is definitely a tendency, there’s a boom-bust, there’s a business cycle. And there are financial cycles as well, as Jerry referred to at the beginning, referring to Minsky and Kindleberger and others. You have cycles, of course. But the question is where we are right now, and there isn’t any unsustainable business that that would cause it. And in terms of the crisis coming from other countries and tanking the U.S. economy, I don’t see that. Jerry is absolutely right about the threat to major banks in the 1980s from the lending that they had. But I don’t see anything like that today.
In fact, I remember in the midst of the Asian financial crisis, Alan Greenspan made a statement. He said, “How long had the United States economy be an oasis in a sea of financial crises?” Something like that, saying that this would you know eventually hit the U.S. And it never did. In fact, the answer question was, the U.S. could continue to grow quite well until our own stock market bubble burst 2000. So, I think the structure of the world is different now than it was in the 80s, and even in the late 90s, of course, that was a series crisis to many countries; the Asian crisis, I mentioned Latin America and Russia. And the U.S. economy plowed through all the way and was not affected.
SHARMINI PERIES: All right, Jerry, we will have to leave it there soon, but let me give you the last word.
GERALD EPSTEIN: I think the major problem is that we don’t really have enough information to know whether Mark’s right or whether I’m right. I’d like to believe what Mark is saying, and Mark has done a lot of research on a lot of these topics. But a major problem with the lack of follow-up after the financial crisis is that the regulators and the banks and the financial markets are still shielding information from hedge funds, from private equity firms, from global security markets, the so-called shadow markets. We don’t know what dangers really are building up out there. And so, we need to demand to get this information so that we can make a more informed assessment.
SHARMINI PERIES: That triggers something. Jerry, the fact that even though we had Dodd Frank, half of the regulations that needed to be put in place from Dodd Frank was never done. And further, the Trump administration has come in and further deregulated the environment. Do you think these steps would trigger something that we should worry about?
GERALD EPSTEIN: Well, some of them could. I’m particularly thinking of something Michael Greenberger, who’s an expert on derivatives and has been writing about it at the INET website, among other places, talking about a very arcane loophole that has been exploited by the major writers of credit default swaps and other derivatives, so that they are now able to escape all regulation from Dodd Frank. And as we know, these credit default swaps and so forth are things that spread the collapse of the housing bubble through the financial system. So, now they’re able to build up all kinds of derivatives positions globally.
And I know that Michael Greenberger, who’s an expert on this, is quite worried that this is leading to the buildup of a lot of interconnected, complex risks in the global financial markets, just another example of how the ability to evade the rules of Dodd Frank and the absence of other rules in Dodd Frank, making it easy for them to hide risks around the global financial markets.
SHARMINI PERIES: All right, then. Mark, I have to get to respond to that before we can go.
MARK WEISBROT: Oh, well I- again, I don’t write off the idea that there will be future financial crises, and some of them could come from places we don’t see that clearly right now. But that sure wasn’t true in the last two major crises we had. Both of those were painfully visible for years before the bubbles burst. And again, I’m not saying all financial crises result from bubbles, but you could see it from the impact of the bubble. So, for example, you could see that the housing bubble was driving consumption in the U.S. and you could see all the signs that it really was a bubble, even though most of the media, almost all the media missed it entirely.
You could see that rents, for example, weren’t rising and vacancy rates were rising. You could see all of these things, they were big and obvious, and you could see the same thing in the stock market bubble that burst 2000. So, it is, again, it is possible that there are things we don’t see right now because of poor regulatory structures that will eventually become a visible problem, not just a visible problem, but a visible threat to the economy, a serious threat. All I’m saying is that those serious threats are not visible now.
SHARMINI PERIES: All right. That was Mark Weisbrot from the Center for Economic and Policy Research in Washington, D.C. And we were also joined by Professor Jerry Epstein from the Political Economy Research Institute at UMass Amherst. I thank you both for joining us today.
GERALD EPSTEIN: Thank you.
MARK WEISBROT: Thank you, Sharmini.
SHARMINI PERIES: And thank you for joining us here on The Real News Network.