Thursday, February 21, 2019

2008 Financial Crisis - Thoughts on Current Political Environment

This will be the last of three articles related to Lessons Learned from the 2008 Financial Crisis. The first featured an article by former NY Fed employee Mike Silva and is the basis for all further discussion here. The second included some additional information from an article by Ambrose Evans_Pritchard on why the next crisis may be worse than the 2008 crisis was.

This article will be some commentary that attempts to put the first two articles into some context based on the current political climate that exists both in the US and around the world.

The first point to make is that we intentionally try to avoid promoting any kind of political agenda here. The goal of this blog is to be a free resource of information that presents a variety of credible views on issues related to possible monetary system change. In a perfect world, we would not discuss anything at all involving politics. Unfortunately, as we know, our world is far from perfect and the political environment can greatly impact what actually happens in regards to systemic changes (which can directly impact our daily lives).

The next point to make is that we do not know when another major crisis may come along or if it will be worse than the 2008 financial crisis; so we make no attempt here to predict the future in that regard. What we do instead is simply note the systemic risks that a variety of credible experts from a variety of viewpoints have talked about. We cannot know if and when one or more of these risks will overwhelm the existing system to the point that some kind of major change will have to take place. But we cannot ignore that possibility either. 

With the disclaimers out of the way, here are some concerns related to the current political environment we find ourselves in that should be noted if we are to try and provide an objective analysis.

1) The world and the US is more sharply divided politically than at any time I can recall in my lifetime. There is no indication at this time that this situation will greatly improve. In fact, it is just as likely that it will continue to get worse.

2)  Using the US as an example, we now have a country with tens of millions of people who simply believe that the present system is stacked against them one way or another. In my view, the 2008 crisis simply confirmed to these people that the system is designed to preserve the power of the status quo. They also feel that large powerful interests will be served before there is consideration for the plight of the average person. Whether that perception is accurate or not, it is clearly widespread and very powerful. Anyone thinking it can just be ignored and will just go away is making a mistake in my view.

3) The group of people in #2 above tended to split into two large political sub groups. One group saw Donald Trump as a disruptive outside force that would challenge the existing power structure and seemed to care about their problems more than the typical politician. The other group saw the system as rigged in favor of the wealthy (the so called 1%) and viewed Donald Trump as just an example of an unfair system that has skewed wealth towards a small per cent of the population. This group is somewhat receptive to a more socialistic solution of using the power of government to even things out and to force wealth to be redistributed. I believe this accounts for the popularity of Bernie Sanders and Congresswoman Ocasio-Cortez (as examples), especially among younger people. 

An interesting observation to me is that combined these two sub groups appear to now form a significant majority of the population who are unhappy with the present system and are wanting it disrupted and changed. They just completely disagree on how to do that and are now fighting it out in the political arena daily to see who will steer the future. Trump supporters will stay with him no matter what because they believe he is fighting for them when no one else will and Trump detractors will oppose him with every ounce of energy they have for a variety of reasons.

4) What used to be the so called majority in the middle continues to dwindle as more and more people choose sides and the battle for political power ramps up more and more. I think it is unlikely that this former majority even exists any more now. 

If the above observations are accurate, this presents a very serious problem if and when we do get a new major financial crisis worse than 2008 as some are predicting. We have shown this is accepted as possible by a variety of credible sources. Mr. Silva is just the latest to point out that the next crisis may be much harder to deal with. 

If something does take down the present system, it appears that a very intense political fight is the most likely outcome to determine what comes next. President Trump and his supporters will almost certainly blame the crisis on bad monetary policy decisions from the central banks. Opponents of President Trump will almost certainly say his policies failed and will blame him for the crisis. Beyond that, it is likely a segment of this group will go further and say that capitalism has failed and only a government takeover will fix the situation.

This would mean that some kind of orderly transition from the existing system to a new one is less likely and the potential for significant social disorder has to be taken seriously. When radical change from the status quo becomes a more realistic possibility, emotions on both sides will likely just ramp up even more as both sides believe the stakes are very high.

It is impossible for me to predict how all this will turn out. I can only report what I think various factions would probably propose based on following this for many years now. 

I have no idea who the majority of the public would trust in a situation where the system has broken down and people are really suffering. Both sides would use every tactic possible to blame the other side for the crisis. Multiple factions would probably be fighting to put forward various solutions and proposals for system reform coming from across the political spectrum. Here are just some we would likely see based on what I see and read:

1) Abolish the Fed/Central Banks - this view will say the central banks caused the mess with easy monetary policies and by inflating assets insuring they would eventually crash spectacularly. There will be a very large segment of the population that likely takes this view. 

2) Nationalize the System - this view will blame the "failure of capitalism" on greed and unfair wealth distribution and will demand the government step in to fix everything. The more progressive leaders of this view are actually promoting the idea that ultimately the Fed should be used to just print whatever money is needed to convert to a more socialist society (see modern monetary theory). Another large segment of the public will take this view. 

3) Just Reform the Existing System - This view may perhaps suggest replacing the US dollar with the SDR as the global reserve currency and allow the IMF become the global lender of last resort if the Fed is unable to fulfill that role. Or perhaps less dramatic reforms will be proposed that attempt to just tweak the existing system run by national central banks. Proponents of this approach will feel they are advocating reasonable adjustments to the present system and not radical reforms.

Please note that in the current political environment, it is entirely possible that option #3 will have the least number of supporters. The basis for this statement is that it appears that the majority of the public now is in the "we don't trust the current system and think it is rigged against us" camp even if that majority may be sub divided into two opposing political camps that don't trust each other. Even though President Trump is currently in power, his supporters do not trust the existing system and view it as "the Swamp". They will be skeptical of anything proposed by the existing establishment without a blessing from President Trump.

If the above analysis is on target, those in charge of things now have a lot of serious work to do to avoid a gigantic mess if things do ever go south in the present financial and monetary system. I can only offer these suggestions based on years of following this now and seeing the diversity and intensity of competing viewpoints out there.

1) Much more effort is needed to try and educate the public on these issues and get them to study the problems and various possible solutions than is being made right now. That is what this blog has attempted to do, but it needs a lot more support reaching the public than this blog can provide. Unfortunately, the incentive for whoever is in political power to do this does not exist. I do understand that when we are not in crisis conditions, it is very hard to motivate most people to take the issues seriously and try to learn more about them. But I honestly believe that the effort needs to be made anyway.

2) Much more transparency and willingness to be truthful about the potential risks to the present system is needed. What happens now is that whoever is in political power works night and day to create the impression that all is well and there are no serious issues or problems while whoever is out of power works night and day to convince the public that the world will end soon unless their side is put back into power. I believe this happens because it is the easy road to take. Working to educate the public objectively without regard to political advantage is much harder to do. It also requires some level of trust and cooperation between political leaders that simply does not exist at this time.

This situation is not conducive to open discussion and a free exchange of ideas on how to make things better for the most people because that is never the goal for all the sides at the same time. Gaining political advantage is more important to each side, especially when they are out of power. Both sides convince themselves that only if they get power can things be made right and so any tactic required to gain power becomes justified.

I can offer no solution to this problem, but it is important to understand the reality of it and incorporate it into your personal decision making process

3) The time to do #1 and #2 above is before another crisis arrives. Once a crisis hits, it will be too late for sure. All that will be left then will be a high stakes raw power struggle that may or may not do anything to improve the situation for most people. The odds are against things improving under those conditions in my view because the public may be totally confused and easily misled as the power struggle unfolds.

The goal here is to try and observe the facts as best we can, analyze them as objectively as we can, and provide that as a free resource of information to anyone interested that can be helped by the information. If the above analysis is reasonably correct, everyone needs to be prepared for any possible outcome ranging from no crisis for many more years to another major one worse than 2008 at any time. If we do get the latter, it will be very important to understand these issues and learn as much as possible. That is what we try to encourage here. 
Added note: After writing the blog article we got more evidence that the above analysis has some merit. Former Fed Chief Janet Yellen goes on the record to state that she does not think President Trump has a basic understanding of Fed policies and mandates. The quote below in particular caught my attention:

"President Trump's comments about Chair Powell and about the Fed do concern me, because if that becomes concerted, I think it does have the impact, especially if conditions in the U.S. for any reason were to deteriorate, it could undermine confidence in the Fed," she said. "And I think that that would be a bad thing."
(editors note: underline added for emphasis here)

This comment fits perfectly with the analysis above in my view. If we get another major financial crisis, almost anyone paying attention can predict what is going to happen. President Trump will point a finger of blame at the Fed and we now appear to have former Fed officials trying to offset that by saying in the next crisis the Fed shouldn't be blamed because Congress took away its emergency authority (based on Mike Silva's comments) and that the President does not have an in depth understanding of economics and Fed policies. Janet Yellen goes on to express concern that President Trump is undermining confidence in the Fed. 

All of this is supportive of the idea that if we get another major crisis, the effort to assign the blame will be of epic proportions. It does not seem likely that anything productive is going to emerge in an atmosphere like this which is why we strongly encourage readers to learn as much as possible about these issues and how various scenarios might impact their daily lives eventually

For now, it understandably is off the radar for most people. But just look at all the effort going on before we even have a crisis to deflect blame in one direction or the other. 

I will repeat a statement from above. Those in charge of things now have a lot of serious work to do to avoid a gigantic mess if things do ever go south in the present financial and monetary system in this political environment.

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