...the endless repetition of history.  Although history is always there for us, patiently waiting to impart its hard-earned knowledge, we continue to stubbornly disregard it. 

 

It’s fascinating how soon we forget disasters.  From hurricanes to wars to financial crises, it seems we have little interest in examining cause and effect — which is unfortunate because that is one of the best ways to stop bad history from repeating itself. 

 

When the fallout from the 2007-2009 Financial Crisis was finally in our rearview mirror, for example, it seemed like some people believed (yet again) that the good times will roll forever.  Laissez les bons temps router!  Let the good times roll!!

 

Throughout the 2007-2009 crisis, the term moral hazard was widely used in reference to the government "bailouts."  Moral hazard is the concept that people take riskier risks if they are not the ones who directly feel the consequences of their actions.  What has happened since 2007 proves that those concerned about moral hazard had a very valid point.

 

In the years leading to the 2007-2009 global catastrophe, there were a multitude of events — the savings and loans fiasco, the dot-com bubble burst, the Asian currency crisis, the Russian government bond default, massive accounting scandals, and blatant fraud — that presented cautionary tales.  But the lessons were not learned because, miraculously, the fallout from those events had little long-term significance.  Any one of these should have brought our economy to a screeching halt, but somehow we, as a nation, recovered virtually unscathed. Yet someday, if we’re not diligent, the music will stop and there won’t be enough chairs. 

 

We here at 1787 are actually super fun-loving people, so we hate to the ones to be the buzz kill.  But the time has come that we have no choice:  America, we can't continue to get lulled into a false sense of security. 

 

Before Covid-19, our economy looked like it was on fire!  But here is where we generally get ourselves into trouble.  As a nation, we have gotten into the horrible habit of constantly reacting to negative outcomes as opposed to proactively anticipating them.  After all, the U.S. economy looked pretty great before the last financial crisis also, to the point where practically no one saw it coming.  In other words, everything was great — until it wasn't.  Read more here.

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The 2007-2009 Financial Crisis was avoidable.  And so is the next one, but only if we learn from the past.

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The underlying elements of the mortgage crisis — inadequate financial regulation, shockingly awful corporate leadership, uncontrolled risk-taking, excessive borrowing by Wall Street and the American public, federal officials who were unprepared for such a crisis and, therefore, inconsistent in their decisions and practically zero accountability for anyone — must be examined and fixed.  For good.  

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​In reality, little has changed over the past ten years.  Banks are bigger than ever.  Combined, the top 15 largest banks in the United States hold $12.54 trillion in assets.  The ratings agencies are still up to shady shenanigans.

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Insanely reckless trading, foreclosure abuse, the rigging of foreign exchange markets, the enabling of tax evasion and money laundering, and the exploitation of the London Interbank Offered Rate (LIBOR), the key global interest rate, are just a few examples of Wall Street’s continued hubris and lack of repentance.  Derivatives are still all the rage – to the tune of over 15 trillion. 

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This is frustrating because we actually acted responsibly for a while after the 2007-2009 Financial Crisis.  In fact, for several years, our financial system was much safer than it was before.

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On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law.  This legislation was far from perfect — for example, it put too much regulation on smaller community banks, and it was far too cumbersome, which we’ll get to in a minute — but it did make sure the nation’s largest banks were operating with substantially higher levels of capital than they did before and that banks were no longer making risky, speculative bets for their own profit.

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Dodd-Frank also established the Financial Stability Oversight Council, the Volcker Rule, and stress tests for banks; created both the Orderly Liquidation Authority (OLA) and the Consumer Financial Protection Bureau (CFPB); and strengthened the regulation of credit agencies as well as whistleblower protections.

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These were positive steps but, almost immediately, congressional Republicans went to work on chipping away the safety measures that were enacted — big surprise! — and some rules were never finalized in the first place.  Davis Polk, a law firm that closely tracked the progress of Dodd-Frank, reported that, as of July 19, 2016 — a full six years after Obama signed the legislation — only 70.3 percent of the rulemaking requirements had been finalized.

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Naturally, the Republicans had plenty of help dismantling the law from their buddies, the lobbyists.  Yet again our destiny was sold to the highest bidder.  Since 2010, the Finance, Insurance and Real Estate sector has contributed $3,652,531,988 to the political process, and it appears their onslaught worked beautifully. 

 

For example, on the eve of a December 2014 continuing resolution omnibus bill — which was jammed through Congress to stop yet another government shutdown — an unrelated provision was slyly stuck in the down-to-the-wire spending package. 

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Written by the financial services corporation Citigroup, the random provision repealed a central part of Dodd-Frank — banks can once again use insured deposits and other taxpayer subsidies to play in the derivatives market

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Meanwhile, remember that deadly, extremely complex security called the collateralized debt obligation (CDO)?  Today, we have the CLO (collateralized loan obligation), which are loans once again being made to risky borrowers with little oversight.  This time around, instead of risky homeowners the target is risky companies.  The estimated size of the CLO market is $900 billion.

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...the endless repetition of history.