Eight years after the worst financial crisis since the Great Depression, the economy is doing much better in many important ways. We have now seen almost 80 straight months of job growth, unemployment is down below 5 percent and some numbers suggest that wages are ticking upwards, however slowly. But make no mistake: The next crash is coming. It’s not a question of “if.” It’s a question of “when.”
And that’s because the underlying cause of the 2008 crisis is still with us today — the economy is too financialized.
According to government statistics, the financial services sector of our economy — i.e. Wall Street, the big banks and all their various tentacles — only employ about 4 percent of our workforce, but now accounts for something like a quarter of all corporate profits.
In 2015, no other individual industry came even close to matching finance’s dominance over the economy. This is just not sustainable.
Although there is a role for banks to play in the economy — they facilitate commerce, after all, when just doing “normal banking” — 30-plus years of Reaganomics have made banks increasingly vulnerable and prone to crisis. Giving banks this kind of powerful role to play in the economy is just asking for trouble. Wall Street is literally a ticking time bomb, and when it explodes it will take the rest of the economy down with it.
This is not hyperbole — it’s fact, and we’re seeing more and more evidence every day that the moment when the Wall Street time bomb will explode is rapidly approaching. As Greg Ip points out in the Wall Street Journal, housing prices and stock prices are now hovering around decades-long highs.
The last time they were this high? You guessed it: 2007, right before crash.
Meanwhile, net wealth is now equal to about 500 percent of the United States’ national income. As Ip also points out, “Net wealth has reached that level only twice before: from 1999 to 2000 during the Nasdaq bubble, and 2004 to 2008 during the housing boom.”
In other words, history appears to be repeating itself in the worst possible way.
So what’s the endgame here? Now that we know that the next big financial crisis is probably on its way, what do we do about it?
Well, one thing we shouldn’t do is “let a good crisis go to waste,” as Rahm Emanuel once warned President Obama against doing. The crash of 2008 was one of the biggest missed opportunities in US history.
But, instead of overhauling our financialized wreck of an economic system, we tweaked around the edges, leaving the economy in much the same position as was before the crash, plus or minus a few regulations here and there.
The economic royalists who brought us Reaganism are still in charge. Dodd-Frank, the crowning achievement of the post-2008 reform push, is a perfect example of this.
Although it set up the Consumer Financial Protection Bureau and put in place new rules for big banks, it didn’t break those banks up, and now they’re back and bigger than ever before.
Ironically, 2008’s failure could be 2016’s success. Because we didn’t completely overhaul the economy last time around, the crash of 2016 is probably going to be a lot worse than the crash of 2008.
Things will be bad for a bit, but if the crash is as disastrous as it’s likely going to be, that also opens up opportunities for big change. Once people realize the dysfunction that governs our economy, they’ll fight back, just as they did in the 1930s during the New Deal.
History is cyclical — especially US history. At different points in our country’s history the mass of “We the People” have come into conflict with “They the Billionaires and Economic Royalists.”
It happened in 1800 when Thomas Jefferson was elected — it happened in the Progressive Era when the Robber Barons were taken down — and it happened in the New Deal when FDR picked up the pieces after the crash of 1929 put and literally built modern US democracy.
After 2008, we avoided going to war against the royalists, which is why the next crisis is inevitable.
But if the next crisis is inevitable, our response to it is not. This generation’s fight against the royalists is coming — let’s get ready to win.