The Global Financial Crisis Never Went Away

The Global Financial Crisis (GFC) of 2008/2009 truly broke the US (and global) financial system and ever since then the US government (and other Western governments) has practised a mix of extremely lax banking oversight, massive amounts of monetary stimulus, the socialization of private debts, and government deficit spending to keep the financial system afloat. The counting, especially in the US, of financial extractive rents as economic value creation instead of economic costs (together with some misrepresentation of the inflation rate) has obscured the reality of slow, or no, economic growth ever since. At the same time, the corporate leaders of the financial system have been continuously protected from the consequences of their actions; something that started with the sovereign debt crisis of the early 1980s. The decades of “getting away with it” have bred a culture of extreme risk taking in the financial sector that has leaked heavily into the corporate sector.

During and after the 2008 crisis the financial system was bailed out in many nations by the transfer of bank liabilities to the state (private debt socialization), through bank bailouts, and debt restructuring (e.g. the Greek bailout that was really a European bank bailout as their Greek debt portfolios were taken over by the European Central Bank [ECB]). In addition, interest rates were set at zero or even in some cases went below zero, as the central banks flooded the economy with liquidity (Quantitative Easing [QE]). The massive corruption and lawlessness of the run up to the GFC was also ignored, with governments even going out of their way to get banks out of legal land mines (e.g. the reality that many US housing loans were not enforceable as the legal paper work had not been done properly). Even with all of this, the situation was only kept from turning into another Great Depression by a massive credit expansion in China.

The documentary Inside Job is a good summary of the wild west nature of the US financial system in the run up to the GFC.

The Untouchables by PBS is also a good one:

When the US and other economies looked like they were stalling in 2011 and the European Debt Crisis raised its head interest rates were rapidly cut again and the European banks bailed out at the expense of the state (i.e. the general population). In Europe, government austerity was instituted to make the people pay for the failings of the financiers. At no time was a breaking up of the big banks, or a prosecution of wrongdoers along the lines of the 1930s US Pecora Commission, considered. Instead it was back to business for the financial extractors, now feasting even more on the body of the state. An excellent detailing of the European Debt Criss by Yanis Varoufakis:

The decade of European austerity only led to slower economic growth and increasing indebtedness, as increases in government outsourcing and one sided public-private partnerships (one sided in favour of the private part) provided for a corporate feasting on the increasingly anorexic public carcass. The rich were bailed out and given juicy profit opportunities while everyone else paid through underfunded public services. As Mark Blyth puts it a one-sided put option that benefits the top 20% of society at the cost of the 80%. The rich also got low interest rates that led to increases in their stocks and bonds.

After nearly a decade of a new “1920s” of massive credit expansion and the creation of a new “Guilded Age” of wealth and income inequality, the Fed attempted to slowly wean the US economy off QE and started a very tentative Quantitative Tightening (QT) combined with rises in short term interest rates. The result was the memory-holed 2019 repo crisis, where the Fed had to step back in to save the US financial system from collapse.

This was only a short-term fix though, especially as corporations had spent their rainy-day funds (and more in some cases) on massive stock buy-backs which boosted the stock option values for the corporate executives who voted for the buy backs. Whether the COVID crisis was a human creation or not, the unfolding pandemic was most definitely utilized by the societal elites to launch yet another financial system and corporate bail out. An important feature of this bailout was the lengths that the governments went to to block any public tracking of where the funds went to; US$ trillions of government funds.

Another massive QE was initiated, short term interest rates were brought close to zero, and trillions of dollars were doled out to banks and corporations with little or no democratic oversight. Then in late 2021, the Fed moved once again to try to remove the excess through QT and higher interest rates - but this was only slowly removing the post-COVID QE not the post-GFC QE. In the first half of 2022 the US economy entered recession and the stock market fell significantly. But just as the Fed medicine seemed to be having a real effect in charged the government with a large fiscal stimulus in the second half of the year, leading to an economic and stock market recovery that stretched into early 2023. The extra expenditures included the support for Ukraine, much of which ended up in the pockets of the US Military Industrial Complex (MIC) suppliers, and the very much misnamed Inflation Reduction Act (IRA) that provided for large subsidies to the corporate sector and consumers purchasing electric vehicles. The sanctions on Russia also aided the US economy, by providing increased demand for US fossil fuel exports and pushing European firms to transfer energy-intensive industries to the low energy cost US. The Fed should have responded with higher interest rates, but instead “bottled it” and backed off. Even with the Fed backing off, and the government fiscal stimulus, a regional banking crisis emerged in March of 2023.

Once again the Fed stepped in to rescue the situation, together with a government that bailed out all the depositors of the SVB bank instead of only the ones with deposits US$250,000 or less (a limit increased from US$100,000 during the GFC). This made whole many tech companies and rich investors who had not managed their counter party risk adequately, but had managed their political connections much better. SVB and other regional bank asset purchases by bigger banks were also subsidized by the Fed. It came out that SVB had taken a massive one-way bet with the bank’s capital that interest rates would start to fall in late 2022 and 2023; a losing one.

The Fed then stood pat with interest rates, and the ongoing fiscal stimulus, the “AI” bubble and constant BS from the bank sector analysts about pending interest rate cuts lead to a major stock market rally - centred on a very small number of large capitalization stocks. In the background, the Fed put in place a scheme to lend to banks the face value of bonds that were worth significantly less than face value. This facility is set to expire on March 11th, a pending event which has already caused issues as yet another regional bank; New York Community Bank with a balance sheet of over US$100 billion has had to realize major losses on its loan portfolios. At the same time the US financial sector as whole is sitting on massive losses in its government bond portfolios due to rising interest rates (held in “held to maturity” accounts that don’t have to be marked to market) and seeing ongoing deposit losses to money market funds that can offer higher interest rates. As deposits flow out, a bank has to start selling part of its bond portfolio to fund the deposit outflow and then realize the loss on those bonds.

It is best to understand that we are still in the GFC, it is just that the government and the Fed have thrown massive amounts of liquidity and subsidies at the financial and corporate sector, whilst facilitating intensifying levels of rentier extraction to keep things afloat. Each time a new crisis erupts even more extreme support measures are required, as the financial body continues to decay under the weight of its maladies; with increasing numbers of “corporate zombies” and massive one-way bets and ongoing control fraud within the financial and corporate sectors. Repeatedly, as with SVB, financial fires bubble up and are contained by central banks, governments and regulatory actions. “Nothing to see here” is the message provided through the media to the population to keep the ongoing crisis under wraps. As with the bailout merger of the massive Credit Suisse bank of Switzerland in 2023:

Or the loss of US$20 billion in two days by the highly leveraged Archegos Capital Management in 2021:

Deutsche Bank and Citibank are other zombie banks that have been kept alive within financial intensive care units put together by governments, central banks and regulators. To add to this is the increasing competitiveness of China as it climbs the technology curve and the wariness of the dollar (and Euro) by other nations after the naked theft (“freezing”) of Russian state financial assets. For the US this has been exacerbated by the obviously partisan usage of US extra-territorial law that claims oversight on any US$ transaction anywhere in the world (e.g. the Meng Wanzhou case). And now the US government is spending even more money subsidizing the Israeli genocide in Gaza, much of which flows back to the US MIC.

The US is looking more and more like the Soviet Union at the end of the 1980s, externally a huge economic, financial and military power but internally a weakening and deeply corrupt edifice in danger of collapse. Much of the remaining US financial strength is based upon the ability of its corporations to monopolize certain global markets and extract monopoly profits from those markets. One case is that of Google and Apple with their stranglehold over smart phone platforms and the related “app stores”. This was protected by concerted corporate and US state actions when Huawei threatened to break that stranglehold; spuriously stated as being a national security issue. Huawei managed to survive this attack and has now brought out a new range of competitive smart phones utilizing China-only technology, and already Apple sales in China are being impacted. US technology sanctions are hurting Western companies more than China, as the latter responds by developing its own domestic capabilities, now being “on cusp of next-generation [5nm] chip production despite US curbs”; resulting in reduced demand for Western technological goods

Another area is that of the global food supply, where a handful of Western corporations (ADM, Bunge, COFCO, Cargill and Louis Dreyfuss Company) exercise an iron grip that delivers them outsized profits at the expense of growers and consumers. They have tripled their profits in the past three years, exacerbating the food inflation crisis. US financial extractors are also salivating over the corpse of the Ukrainian nation, whether it be the wonderfully rich soil or “reconstruction” funds. A party that Russia will spoil if it takes the most productive parts of the country. With such a takeover, when combined with the major expansion of Russian agricultural production in past decade, Russia could also become very problematic for the Western agricultural oligopoly.

After the massive US spending on the Iraq and Afghanistan wars, together with the many other military engagements of the past two decades plus, together with the massive government deficit spending of the GFC, COVID and now Ukraine/Israel and the IRA, the US government debt to GDP ratio was 123% of GDP at the end of fiscal 2023. And is of course continuing to expand with the effects of continued deficits and the increasing interest bill as low-yielding Treasury bonds mature and the amounts have to be refinanced at now higher interest rates. The fiscal year 2023 deficit was 6.3% of GDP (up from 5.4% in fiscal 2022) and the deficit is forecast to be 5.3% of GDP with only more increases in the deficit envisaged for future years by the Congressional Budget Office. With future GDP growth forecasts of lower than 2%, continuing inflation above the Fed’s target would be required to reduce the debt as a share of GDP. The problem is that such higher inflation would lead to higher interest rates which would retard economic growth. If the Fed decided not to raise interest rates, and to use QE to keep longer-term rates down, then the US dollar exchange rate could very sharply depreciate - exacerbating inflation! All with a financial system constantly teetering on the edge without its regular fixes of liquidity and subsidies. This is the conundrum which the US government now finds itself in. And lets remember that this is without a major recession which would blow the deficit to GDP number well above 10%.

So the US, and the Western financial system in general, will continue to stagger on until “something” gives. Since the early 1970’s US de-pegging and depreciation of the dollar, the US has shown itself adept at keeping a final accounting at bay, but at the cost of continuously inflating bubbles and supporting greater and greater levels of risk-taking and extraction by the US financial and corporate sectors. Such an accounting would now involve huge asset value losses and a downsizing of the US military budget; basically an IMF Structural Adjustment program for the US. But the military budget is a major support for US corporate extraction on a global scale, and therefore would lead to significant reductions in extractive flows into the US. The other option is a multi-year bout of inflation that would shrink US debts in relation to GDP, but this would lead to dollar devaluation and perhaps a removal of the dollar’s reserve status. In the latter case, the US government would have to accept an external constraint upon government expenditures and Fed actions; just like any other country. Such limits are anathema to the US capitalist elite and therefore a continued attempt at “muddling through” will be attempted. Given the continuing arrogant and aggressive actions toward the global community, such a strategy may find little support from any nations but the US vassals in the West.

The other option is high import tariffs to support domestic production and perhaps even some form of capital controls, but this would be utterly toxic to the globalized corporate monoliths which dominate the US corporate sector. In addition, in many cases there is no domestic industry as the US CEOs have spent the last four decades moving such capabilities abroad (“labour arbitrage”) and under-investing in domestic capacity (the “efficient use of funds” known as share buybacks). The result would be a large inflationary spike in the US and economic dislocation as the “China price” becomes unavailable to US consumers; the US relies much more on Chinese manufacturing than visa versa. As a large chunk of the US population have only been able to keep their heads above water due to expanding debt levels and the China price, a significant chunk of the US population may become deeply impoverished. China has moved up the supply chain, so many exports from other nations now include Chinese components; any tariff could not just be against China as the Chinese could simply re-route through third countries.

As this article notes

“In effect, there seems to be triangular trade, which really doesn’t look like a lot of de-risking. It’s just the same trade happens more indirectly and less transparently. And I don’t think this is sustainable,” he said.

“What we already see is that it drives up prices quite a bit.”

And also,

“The simple reality is that much of the leading technology in the world resides in China,” he noted. “If the US wants to move forward as quickly as possible, then it’ll need to do so in partnership with China.”

And as this article notes:

China is now the world’s sole manufacturing giant. As its recent success in electric vehicles demonstrates, its wide and deep industrial base can help it gain a competitive edge in virtually all sectors. The exceptions are the most advanced sectors, where the G7 countries still dominate.

Politicians who indulge in loose talk about decoupling from China need a clear-eyed look at the facts. As we have shown (Baldwin et al. 2023), all the major manufacturers in the world source at least 2% of all their industrial inputs from China. Decoupling would be difficult, to say the least.

The above is why we see a Fed chairman seemingly talking out of both sides of his mouth as he attempts to disarm the bubble while not triggering its explosion. Further interest rate rises, or even a lack of cuts, may trigger such an explosion while a reduction in interest may very well trigger significant currency devaluation and inflation. In 2007 there were a number of financial crises that warned of a much larger problem; for example, the collapse of mortgage banks, such as New Century Financial in March 2007

Then, Bank of America took over Countrywide Financial in January 2008, in what was really a government-supported bank rescue:

Then the take over of Bear Stearns by JP Morgan in what was also really a bailout in March 2008 (after the implosion of two of Bear Stearn’s hedge funds the previous year):

The financial commentator Jim Cramer once again acted as the perfect contrary indicator as he stated that Bear Stearns was fine 5 days before the rescue, or was he doing he is job to keep the public in the trade while the insiders got out?

Are we tracking the GFC timeline with the SVB and Credit Suisse collapses in early 2023, and now New York Community Bank in early 2024? Time will tell. There is also the slow burn of the Commercial Real Estate collapse with office demand 50% below pre-COVID levels and more than US$1 trillion of losses to be shared between CRE owners and their lenders (with a heavy concentration in the regional bank sector). With US$1.5 trillion of CRE debt coming due in the next 18 months, there will be a forced market clearing which will most probably drive CRE prices lower and force banks to take extremely large credit write offs.

Added to that is an ongoing implosion of the auto finance area, loans taken out on massively overpriced vehicles in 2021 and 2022 are coming home to roost for the lenders; with a used car market starting to collapse putting many car dealerships and their lenders at risk.

2008 was also an election year, just like 2024. The above details the financial edifice that the Fed is walking on egg shells on top of, with any sudden crisis having to be quickly dealt with using Fed money printing and government funds to stop a much wider crisis from breaking out and becoming self-driving.

Corelli Barnett wrote the excellent books The Collapse of British Power, The Audit of War: The Illusion and Reality of Britain as a Great Nation, The Lost Victory: British Dreams, British Realities, 1945-1950, and The Verdict of Peace: Britain Between Her Yesterday & The Future about the inability of Britain to modernize its industrial base and working practices; making it unable to produce its own machine tools, military vehicles and munitions. Instead, it had to deplete its foreign assets and go into debt to pay for the imports of these from the US. Turning itself into a debtor and the US into its creditor.

The recent inability of the US and Europe to ramp up production of military equipment and munitions in response to the Ukraine War is reminiscent of the British failings. As is the inability of Western industries to compete in the clean energy industries such as solar, wind, batteries and electric vehicles which form the basis of so much future growth and economic strength. Not helped by the increasing resistance of anti clean power groups, at least partially driven by climate change denial and fossil fuel industry propaganda (including fake industry-created citizens groups), that are placing increasing limits on projects. In the US, the transition to electric vehicles seems to be in the process of stalling. Europe now holds a weak position in many of the strategic industries that will drive future growth, while the US position is rapidly deteriorating as Chinese dominance becomes more and more embedded. As this article notes, China is now the sole manufacturing superpower with its production exceeding “that of the nine next largest manufacturers combined”. China produces 29% of global manufacturing value added, while the US only produces 16%, Japan 7% and Germany 4%. When measured by gross manufacturing production, China is 35%, the US 12%, Japan 6% and Germany 4%. And to add to this is the Western mismanagement of the COVID pandemic, including the most recent “let it rip” phase leaving large numbers of the population debilitated to differing degrees; for example up to 1 in 7 New Jersey adults may be impacted by Long COVID.

The West as a whole, and the US specifically, may be faced with its version of the Suez Crisis where it must face up to the inevitable loss of global power or face economic and financial destruction. At that time it was the US that pulled the financial reins (under the threat of Soviet intervention) to show Britain and France that it was the Western superpower and its wishes must be respected. Will the financial reins be pulled by others to pull back US power, with the alliance of China, Russia and Iran replacing the Soviet Union? The US is pushing its financial system to the limit to facilitate the combination of US global power and domestic rentier extraction, in the end global power must be based on a strong domestic base.