John Colson: Is another debt-fueled recession on the way?
Hit & Run
Before we begin, I should note for the record that I am not an economist (and am forever grateful to the universe for that fact).
In fact, I am one of those people for whom economists likely feel utter disdain. I engage in one-man boycotts against corporations I oppose, I do not follow mainstream consumer trends and I distrust banks.
I have a long history of failing to keep my checkbook balanced, and at one point my financial management philosophy involved keeping a bank checking account only so long as it seemed my income was outweighing my outgo. When that delicate balancing act seemed in peril through neglect, I would simply switch banks, leaving enough in the left-behind account to cover outstanding checks (I hoped).
Thankfully, I have moved past such foolishness in my financial life, though I still fail to pay very much attention to banking details.
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But I do pay attention to national and international news about the world economy, which today seems about as shaky as one of my abandoned checking accounts, thanks to nervousness on the part of investors everywhere over the shenanigans of the Republican Party in general and its standard-bearer in particular.
Yes, I am referring to President Donald Trump, who has been slinging some fairly outraged and outrageous slights and insults at Jerome Powell, the head of the U.S. Federal Reserve, which acts as our nation’s central bank.
Trump, who clearly does not understand monetary policy, has been berating Powell for not keeping interest rates low enough to suit Trump’s political agenda.
Never mind that a lot of economists have argued the Fed should be permitted to do its job free of presidential interference, and some have gone even further, maintaining that arbitrarily keeping interest rates low is increasing the likelihood of another recession along the lines of the Great Recession of 2008-09.
“The Debt Crisis Is Coming,” declared a headline in a recent New York Times article by former investment banker William D. Cohan, followed by a lengthy screed outlining how bad things are right now.
For instance, Cohan pointed out that last year, Powell indicated in a speech that he would give in to the Trumpian pressure to keep taxes low, in the mistaken belief that doing so would keep boosting the American economy and help Trump win re-election next year.
And on July 31, Powell did just that, lowering short-term interest rates for what Cohan wrote was “the first time in more than a decade.” And that, Cohan added, “was a mistake. Mr. Powell and his colleagues at the Fed need to stand up to Mr. Trump and do what’s right for the economy.”
What Cohan and others say is needed is for the Fed to begin nudging interest rates upward in order to rein in a mad dash by big investors who appear to be heading down the same rotten path that led to the Great Recession.
Already, Cohan wrote, too much money is being sunk daily into something called “collateralized loan obligations” under which risky, low-rated loans are bundled together for sale in the international market.
Does that term seem familiar to you? It should, because it is the financial cousin to the notorious “collateralized debt obligation,” which played a big part in the sinking of the world’s economy just over a decade ago.
Cohan and others have argued that the current situation is putting big financial players at risk of the exact kind of financial meltdown as the one that savaged the world’s economy in 2008 and precipitated a recession that many said was the worst since the Great Depression of the 1930s.
To avoid this, according to this branch of the economists’ tree, the Fed needs to raise interest rates, but slowly to avoid delivering a destabilizing shock to the already trembling U.S. stock market.
“For calm to return to the capital markets, we must pop the debt bubble, the sooner the better,” Cohan wrote ominously.
“If they don’t,” he maintained, “the only question that remains is, when will it all blow up? When it does — and that day will be soon — we will be staring down yet another financial panic.”
As I noted at the outset, I am not an economist, but I was aware back in the years prior to the Great Recession — roughly from 2005 to 2007 — that some experts were making similar warnings about the housing bubble of that time.
Their warnings were ignored, the party on Wall Street and in financial markets around the world just kept ratcheting upward, and we all know how that ended.
Of course, raising interest rates to avert yet another fiscal disaster would not help keep Trump and his part in power for another four years, and that is all he and his supporters are worried about.
They are not at all worried about the possibility of yet another Great Recession, as long as it hits after the 2020 election and allows them another four years to further destroy the U.S. government and its standing around the world.
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