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Secretary Jack Lew chairs the meeting of the Financial Stability Oversight Council (FSOC) at Treasury on February 28, 2013.
Earth got a taste of its planetary mortality last month, when the largest meteorite to strike in a century plowed into central Russia with the force of 33 Hiroshima atomic bombs. The celestial pyrotechnics showed that stuff happens, and you may be helpless even when you know it’s coming.
Something similar can be said about economic crises. We can expect one roughly every 10 years. The S&L scandal came in the late 1980s, the Asian financial crisis in 1997-98, and of course the Great Recession starting in 2007-08. If such history is any guide, we’re now just five years away from the next financial and/or equities crisis at most. It could come from the eurozone, from China’s property asset bubble, or from America’s own overheated stock market. Even if we dodge those bullets, the global economic track record is pretty good in pinpointing 2018 or so as a year to fear.
“What should terrify policymakers, stockholders and taxpayers is how weak we will be when the next crisis strikes.” – Michael Auslin
What should terrify policymakers, stockholders and taxpayers is how weak we will be when the next crisis strikes. Unlike in earlier downturns, we have yet to emerge into a sustained recovery. The Clinton years saw healthy, extended growth, even during the late stages of the S&L debacle. So did the Bush years after the dot-com bubble. We have had nothing like that recovery since 2008.
Instead, we face two major problems that will leave us more vulnerable than ever before when facing the next crisis. The first is U.S. household weakness. Unemployment remains at historic highs, as does the average length of time out of work. Meanwhile, the U.S. labor force participation rate is at its lowest since the 1980s, dropping more than two full percentage points since 2009, to 63.5 percent. In 2012 alone, nearly 3 million people dropped out of the labor force.
Numerous economists estimate that it will take until 2022 before we regain all of the 8.8 million jobs lost since 2008, and that is assuming we don’t fall off the cliff again. On top of that, wages have been stagnant, if not falling, during the “recovery” while re-hired workers are forced to accept lower pay. American households are poorer and scared for the future. Things are worse in Europe, and not much better in Japan.
Second, Washington has learned the wrong lessons from the Great Recession. U.S. debt has soared nearly 40 percent, to $16 trillion dollars, under Barack Obama. The $1 trillion in stimulus spending did little to restore long-term growth or confidence in the economy. And the country is now functionally bankrupt. The Federal Reserve can print fiat money, and President Obama can raise taxes along with spending, but there’s no meat left on America’s fiscal bones.
On top of that, legislation passed in the panic, such as Dodd-Frank, has only papered over the systemic weaknesses that led to collapse in the first place. Too-big-to-fail has been replaced by “systemically important” financial entities, formalizing the moral hazard that reform was meant to resolve. Meanwhile, U.S. housing is now nearly all underwritten by Fannie Mae and Freddie Mac, leaving the U.S. government massively overexposed to another wave of foreclosures coming from a general economic turndown.
Washington is out of bullets to face the next crisis. There’s no cavalry ready to ride in at the last minute, and the local population has already been stripped of everything it has for the fight.
It seems almost certain that the next time the financial system tumbles, the country will not yet have recovered from the last crisis. There will be little more that can be pumped out through higher taxes, without causing businesses to lay off more workers or making workers unable to afford their mortgages, let alone maintain consumption rates. Washington chose the easy way out last time, and is bereft of ideas and political courage to bring our unfunded liabilities in line with our fiscal reality.
Time is counting down to the next shock. We’ve wasted the brief breathing space before the next battle, and in just a few years, we may find that the entire structure has been too weakened to withstand the assault. Those pyrotechnics will make Russia’s meteorite pale in comparison.
Michael Auslin is a scholar at the American Enterprise Institute. Follow him on Twitter @michaelauslin
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