One Year After Lehman: Another Crash Coming?

Given the failure to enact serious reforms, it wouldn't take much to push the economy off the cliff again: a severe pandemic flu, a terrorist attack or a major weather event could set off a major economic relapse.
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"What I think will change, what I think was an aberration, was a situation where corporate profits in the financial sector were such a heavy part of our overall profitability over the last decade.... That means that more talent, more resources will be going to other sectors of the economy. I actually think that's healthy. We don't want every single college grad with mathematical aptitude to become a derivatives trader. We want some of them to go into engineering, and we want some of them to be going into computer design."

Obama's statement seems so passé. Now the stock market is rising. Our 401ks no longer are on life-support. The financial sector is showing resilience. And the Great Recession is ending. Then why should we fear another crash?

Maybe the most sophisticated economic models all point upward, but our sense of history should be flashing warning lights. There are a few enduring lessons we can't avoid: any nation that fails to find enough work for its people, and that doesn't rein it its obscene distribution of income, is courting catastrophe. Consider these problem areas:

1. As Larry Summers recently said, unemployment will remain, "unacceptably high." Truer words were never spoken. He's telling us that the recovery will be so anemic that current massive job shortfall is likely to continue for years. According to the most recent government numbers, there are about 29 million Americans out of work or forced into part-time work. If that continues, as Summers predicts, consumer demand will be low and misery for millions will be high. That's bad economics.

2. We have done almost nothing about financial institutions that are too big to fail. Supposedly we're supervising them more carefully. But all the evidence suggest that they are off and running into a new round of fantasy finance. Goldman Sachs already is selling repackaged synthetic securities, precisely the kind that crashed the system last time around, (and Moody's again is rating them AAA.) Large banks are making a move into "Death Bonds," finding new ways to skim profits by buying up and securitizing life insurance policies of the elderly and ill. We could stop this madness either by nationalizing the largest institutions entirely, or breaking them down so that they truly were small enough to fail. Trust-busting Teddy Roosevelt would have understood what to do. But in today's Washington such a discussion is off limits.

3. There still are no controls on the specialty derivatives that caused the last crash and likely to contribute to the next one. In fact, I've been told by reliable sources that derivative traders are pooling a bit of their upcoming bonus money to fund a billion dollar lobbying effort to make sure no serious reforms take place.

4. Despite President Obama's insightful words last May, nothing has been done to shrink Wall Street's size, let alone its political power. The Pay Czar was supposed to crack the whip on outrageous compensation packages. Instead, Mr. Czar immediately said that it's okay for Andrew J. Hall, an oil speculator, to receive $100 million in trading fees from CitiGroup, a bank which we basically own. What a Wall Street recruiting poster for new math whizzes!

5. Most importantly, we've failed to address the major cause of the entire mess: the underlying distribution of income and wealth. The fantasy finance casino and its bubbles grew from the fact that the super-rich accumulated too much capital after years and years of tax "reforms" that gushed money to the top. When they ran out of real world investments, their capital rushed to Wall Street's speculative securities. And they are doing it again. You can't limit catastrophic speculation without returning excess capital to society. And there is plenty of excess: The latest tax data shows we have the worst income distribution since 1929. Not only are we failing to learn from history, we are begging to repeat it.

The failure of Washington to clamp down on Wall Street is also creating a very negative political feedback loop between government and the public. Most Americans are furious about Wall Street's outsized pay and profits. They are also furious about the inability of the administration and Congress to act. There's a growing sense that the rich and powerful are in control of financial policy and of the political process. This fuels anti-government anger which undermines the things we need government to do: raise taxes on the super-rich; put in place a windfall profits taxes on Wall Street; cap outrageous financial compensation packages; and enact public programs and national industrial policies that create real jobs for the unemployed.

Given the failure to enact serious reforms, it wouldn't take much to push the economy off the cliff again: a severe pandemic flu, a terrorist attack, a major weather event or an unexpected failure of a company that is too big too fail could set off a major economic relapse.

I sure hope I'm wrong. I hope we're not again betting our future in the fantasy finance casino. I hope the miracle of the markets will lead to a massive boom in jobs and incomes for everyone. I hope everyone's 401ks will prosper. And I hope President Obama will succeed.

But as Wall Street recycles the money we have given it to lobby against any and all reforms, it's obvious that hope is not enough. We also need a very strong dose of audacity.

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