Bubbles, Banksters, and Billionaires:
Or, Understanding Market Risk for Dummies
Part of a series on Extreme Economic Inequality.
There are a couple of days that I will always remember.
Friday, January 18, 2008.
Already anxious because the group I was traveling with had taken the bus to Rwanda leaving me alone at the airport to catch a flight (to save my back and neck from the stress of a long bumpy bus ride). I was hanging out in the television lounge at the airport in Kampala, Uganda, watching the BBC news report that the U.S. Stock market had tumbled at the end of another tough week. Bush was President. Stocks had also plunged on Thursday in part due to comments from Federal Reserve Chairman Ben Bernanke. The comments by Bernanke, who testified before the House Budget Committee, came as a cascade of more bad news about the housing, financial and manufacturing sectors stoked calls for decisive action.
The Ugandan businessman who was also in the TV lounge turned to me and said, “When the U.S. market hiccups, the rest of the world goes hungry.”
This conversation was my first taste of how the rest of the world views the U.S. markets. The Ugandan businessman was prophetic. The instability in the U.S. Stock market and real estate markets caused billionaire investors to move their wealth into commodities driving up the price of wheat, corn, soybeans, rice, and oil. The sharp increase in rice prices led to panic buying by importers, who feared even higher prices in the future, and contributed to hunger, food shortages, and food riots in developing countries across the globe.
Monday, October 19, 1987.
Stunned and terrified, I sat in my living room watching the news about Black Monday. I hadn’t slept much over the weekend because on Friday the Dow had already dropped over ten percent. At the time I was an independent investment adviser and Certified Financial Planner. I worked on a fee and commission basis. I taught my clients about the variety of risks involved in investing and about using asset allocation strategies and dollar cost averaging to protect their savings from market volatility. For over a year I had cautioned clients to avoid new lump sum investments in the stock market (including mutual funds invested in the stock market) because my analysis indicated that the market was overpriced and due for a significant correction.
Even though I knew a correction was coming, I was stunned by the near collapse of our global economy. The lesson I learned that day was, we can never count on our investment portfolio (or retirement accounts) to provide security. It was a spiritual turning point in my life.
From 1989 to 1991, I served as the Deputy Commissioner of Securities for the State of Montana. In addition to getting a thorough education in white-collar securities fraud, I learned that we could not trust the economists who work inside the “system.” Either they minimize the risk of decline because of groupthink, or they have sold out and are willing to deceive the public for personal gain.
Between 1989 and 2008 there were other significant market events. Each time the conversation within the financial sector (including mainstream media coverage of the financial sector) was upbeat and positive. Right up to the point the market dropped, most of the financial advisors were still recommending people invest.
I’ll let you in on a little secret I learned during those years as a regulator for the Securities industry; the financiers and their economists openly lie to the public during market events. My tip is to look for contrarian economists and opinions from outsiders.
The 2008 economic crisis had a massive impact on my career. Like many other mid-career professionals, I found myself out of work not because of my performance but because I ended up being one of the unlucky victims of the economic crisis. Even though I saw the debt, housing, and stock market bubbles increasing for years, there was very little that I could do to protect myself. When I tried to warn my supervisors and other people that a major economic event was coming, they dismissed my warnings. Later I cringed when the supervisor who was firing me said, “No one could have seen this coming.” Which he followed with, “Just be patient the economy will recover within a few months and maybe then we can give you your job back.” Of course, that never happened.
This past week (on 2/6/18) my husband sent me the following text message,”Just saw the headline about that drop in the Dow Jones industrial average. People seem surprised. You have been talking about this for months!”
Unfortunately, I am not the least surprised at last week’s volatility in the stock markets. I knew the corrections were coming, that the financial bubbles would burst. I have predicted every significant economic downturn since 1987. I just cannot predict precisely when the collapse or correction will happen. Because I am not willing to engage in profit-seeking off the misery of others (which is essential for hedge fund traders), I have not used my knowledge for personal financial gain.
I have contemplated various defensive financial strategies, and the only one that has been appealing to me has been to sell my home and purchase acreage with the vision of living off the grid and growing our food. But I don’t and won’t own guns, and I am not willing to defend my land with violence, so even that doesn’t make sense for me.
The one thing I can do about the financial bubbles is to communicate and educate as many people as possible. What I care most about is how these bubbles impact the 99 percent. The “banksters” and “financial fraudsters” get away with their crimes in large part because they intentionally make their strategies too complicated for the average investor or voter to understand. In the run-up to the 2008 crisis, they invented fraudulent investment schemes (securitization) that were able to dupe even their own economists.
In addition, they lie to us. Over the past week, there was an epidemic of lies and deception, and almost none of the financial gurus interviewed by mainstream media were telling the truth about the asset bubbles that threaten our global economic security.
Get Robyn Morrison’s stories in your inbox
Join Medium for free to get updates from this writer.
An asset bubble is when the price of an asset, such as housing, stocks or gold, becomes over-inflated, when their values are not supported by any real sustainable value. There are three primary causes of asset bubbles.
1. Low interest rates increase borrowing and expand the amount of money in circulation.
2. When the money supply expands, the excess money tends to push prices higher resulting in inflation.
3. Social psychological factors such as; (1) the herd mentality, (2) fraud and risk transfer — when the investor knows someone else will bear most of the cost of the risk (the 2008 bailouts have created more of this type of risk), (3)
the greater fool theory (also called a Ponzi scheme), and (4) irrational extrapolation or projecting future returns based on recent trends and ignoring the cyclical nature of markets.
Right now we are experiencing several asset bubbles with a mixture of these causes. One of the underlying reasons for the bubbles that have been building up since the 2008–2009 bailout of bankers and financiers has been the experimental monetary policy of the Federal Reserve coined “Quantitative Easing.”
The purpose of the Federal Reserve (Fed) is to implement monetary policy to maintain a safer, more flexible, and more stable monetary and financial system. The Fed has a few tools, but regulating the supply or quantity of “money” circulating in our economy is the most critical and visible tool.
Quantitative Easing (QE) is an experimental monetary policy developed by the Federal Reserve to respond to the 2008 crisis. Quantitative Easing describes a strategy whereby the Federal Reserve creates money and loans it out to financial institutions at near zero interest rates. The interest rate is “eased” to increase the “quantity” of money that is in circulation.
The rationale behind Quantitative Easing is that increasing the supply of money through extremely desirable loans to banks will encourage the banks to loan the funds out to customers resulting in more money circulating on Main Street (local economies and businesses).
Estimates are that the Federal Reserve created $12.3 trillion of “money” between 2008 and 2016 through QE. The Central Banks of other nations also used QE as a response to the global economic crisis. The central bankers all hoped that QE would stimulate their economy and result in shared prosperity; that the money would eventually end up in more jobs, higher wages, and a broad recovery from the economic crisis.
From the Federal Reserve’s perspective, the most frightening aspect of the September 2008 market crisis was the money market impact (market liquidity). The US financial markets lost approximately one-third (35%) of their value. Imagine the effect throughout the global economy when one out of three “dollars” suddenly disappears.
We can look back to the 1929 Stock Market crash and examine how the Federal Reserve’s monetary policy contributed to the Great Depression. Hindsight attributes the severity and duration of the Great Depression to the Federal Reserve’s mismanagement of monetary policy. In 1929 the Fed did not move to expand the money supply dramatically.
The consequences of failed monetary policy during the Great Depression were that real economic activity declined by about one-third between 1929 and 1933; unemployment climbed to 25 percent of the labor force; prices in the aggregate dropped by more than 25 percent; the money supply contracted by over 30 percent, and close to 10,000 banks suspended operations.
We may never know the total cost of the 2008 crisis, but our Government admits that $19.2 trillion of “household wealth” disappeared. When an asset bubble breaks (or explodes), suddenly the irrationally overpriced asset deflates and money disappears from our economy. Estimates of the cost of the Government bailout (to corporations and financial institutions primarily) was $23 trillion.
Having learned a lesson from the experience of the Great Depression, in the fall of 2008 one of the first actions taken by the Federal Reserve was to lower the rate they charge banks (to borrow money) to 0.25 percent (they eventually dropped the rate to 0 percent). Since interest rates were already at historical lows before the market crash, they needed a much more powerful tool to replace the $23 trillion (or more) lost to the money supply. Faced with the potential complete collapse of global markets, the Federal Reserve (and other Central Banks) concocted a strategy to “ease” the “quantity” of money, hence the term “Quantitative Easing” was coined. (Yes, in a sense the Fed can create money out of nothing).
“The prolonged program of quantitative easing [by the Federal Reserve] has sent asset prices soaring.” Jean-Michel Paul (as reported in Bloomberg, January 11, 2018, “Why We Have to Talk About a Bubble.” )
The QE experiment was highly successful for financial institutions and large multinational corporations, but the policy did not result in shared prosperity. In fact, it was a significant contributor to the acceleration of economic inequality. Most of the trillions of dollars created by Quantitative Easing ended up in the hands of the very people who tanked our economy in 2008. It did not produce the anticipated expansion of loans to consumers and small businesses. Bankers, hedge funds, the financial sector, and large corporations borrowed (from the Federal Reserve or from the banks that borrowed from the Federal Reserve) at extremely low interest or zero interest rates.
Because of QE, over twelve trillion dollars flowed into investment assets including bonds, stocks, real estate, and commodities (gold, food, oil, etc.). Companies such as Apple (and many others) borrowed money from the large banks at close to 0 percent and engaged in buying back their stock, inflating the price of their stock through their QE subsidized purchases of their stock. It is impossible to discern how much of the increase in the stock market since 2008 has been because of these stock buybacks.
The rising stock, bond, and real estate markets are not signs of the strength of our economy, they are merely indicators of the size of the financial bubbles created by the Federal Reserve’s Quantitative Easing experiment. Since 2008, most of the gain in wealth and income has gone to the top 1 percent. The average Joe or Jane does not feel better off financially.
In addition to Quantitative Easing, tax policies have benefitted the financial sector and major corporations. Tax cuts for the wealthy mean more of their investment income is retained and hoarded. The December 2017 Tax Bill exacerbated our complex financial challenges, putting even more capital into the hands of the very players that tanked our economy in 2008.
The very day the market correction began (Friday, February 2) was Janet Yellen’s last day as Chair of the Federal Reserve. The new Chair Jay Powell was Yellen’s ally on monetary policy (QE), but he has called for more deregulation of banks. This mostly subtle change in leadership should not have caused any market panic. These are the synchronicities that make it nearly impossible to predict the timing of market corrections.
A more interesting note for those of us in the middle class or working class is that last week (February 5–9, 2018) many economists in the financial sector blamed the market drop on stronger wage reports. The billionaires and “banksters” may have panicked in part because they do not want shared prosperity and higher wages.
Such a pitiful state of affairs.
This article is part of a series of article on Extreme Economic Inequality. The market is where the extremely wealthy “hoard” much of their wealth. Visit Robyn Morrison’s Medium site to read more about Extreme Economic Inequality.
