Debt: Don’t Think It Can’t Happen Again
Peter Grant | Aug 28, 2014 03:40PM ET
Former Fed chairman Ben Bernanke is now saying that “September and October of 2008 was the worst financial crisis in global history, including the Great Depression.” This is a pretty significant paradigm shift, as most economists consider the financial crisis that began in 2007 as the worst financial crisis since the Great Depression.
Bernanke, prior to becoming the Fed chair, was a professor of economics and considered to be an expert on the Great Depression. His redefining of the severity of the financial crisis must be accorded due-credence. His words reveal just how close to the brink of economic catastrophe we came a few short-years ago.
Bernanke went on to point out that of the 13 “most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.” Had that happened, mayhem would have surely ensued, and not just in the United States, but around the globe.
So here we are seven-years later and we’re even more loaded to the gills with debt and the ‘too-big-to-fail’ financial institutions are now ‘too-bigger-to-fail’. Rather than pulling us back from the brink, policymakers like Bernanke left us on the brink and forced us up a very tall step-ladder.
In a recent interview , The Telegraph’s Ambrose Evans-Pritchard warned that we still have “all these structural issues. None of it’s resolved. And here we are back in the same position again, but worse, because the debt levels are higher.”
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As I’ve pointed out in recent commentary; cyclically speaking, we’re already overdue for the ‘next downturn’: Since the Great Depression, the U.S. has suffered thirteen recessions. The periods of economic growth between recessions have been as long as 120-months, and as short as 12-months. The average is just over 59-months.
The time elapsed since the Great Recession “officially” ended in June 2009 presently stands at 62-months. We’re due.
Despite some encouraging economic data from time-to-time — reminiscent of the “green-shoots” spring of 2009 and the “recovery-summer” of 2010 — Evans-Pritchard warns that “fundamentally the world is still stuck in this low-growth trap.” The CBO’s halving of its 2014 U.S. growth forecast, from 3.1% to 1.5%, is the most recent evidence of this.
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The CBO says their renewed pessimism reflects “the surprising economic weakness in the first half of the year.” Apparently they see the 4.2% pace of growth in Q2 as somewhat of an anomaly. It doesn’t bode well for the second-half of the year.
After coming out of recession in Q2 of 2013, Europe may already be on the cusp of their next downturn. In Q2, Japan’s GDP plummeted to a -6.8% annualized pace. That’s a long way to come back in Q3 to avoid recession.
The real burning question is how will global policymakers react to the next crisis. The ECB is already under intense pressure to engage in BoJ/BoE/Fed-style quantitative easing, the legality of such measures be damned. Japan has already said it will escalate it’s asset purchases if need be.
Meanwhile, here’s the Fed, nearly done with tapering and trying to convince us that growth risks and labor market slack have been dealt with. The next step would be a rate hike, and there has been much speculation about when that might happen. Consensus seems to be running toward H1 2015. Yet even the Fed has adamantly proclaimed that their policy-path is data dependent.
A lot can happen between now and next summer. If the CBO’s growth expectations prove to be more accurate than the Fed’s, a rate hike would be difficult to justify with GDP below 2%. Also, if Europe and/or Japan go back into recession, there would likely be negative repercussions for the U.S. economy. This too may forestall ‘lift-off’ for an indeterminate period of time. Not to mention any number of possible geopolitical and black-swam events that might negatively impact global growth, or perhaps trigger the next crisis.
If anything, all the zero-rates, and trillions of dollars worth of liquidity operations and fiscal stimulus may have left us more vulnerable than we were before the last crisis. We’ve been pushed up that ladder on the precipice; a ladder than becomes increasingly unstable with every step up.
Don’t be lured into the belief that global policymakers have it all under control. Another financial crisis is indeed possible, and perhaps even probable given that core systemic issues that led to the last crisis have been ignored. That next crisis may well prove to be ‘the worst financial crisis in global history, including the Great Crisis of 2007-2008.’
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