When we forget the history, to paraphrase Sir Edmund Burke, we are doomed to repeat it. And it takes about 80 years for that to happen. Roughly 90 years ago we saw the election of Warren Harding on a platform, his slogan was, “More business in government, less government in business.” He dropped the tax rate, deregulated banks, deregulated pretty much everything. It was this huge bubble in the ’20s that crashed in 1929.Perhaps so. In Mr Hartmann's view, the shadow banking sector is where the trouble will restart.
If you go back 80 years before that you see the big battles over regulation and deregulation of the 1840s and 1850s that led to the crash of 1857 that arguably led to the Civil War. And if you go back 80 years before that, you see there were somewhat similar economic debates.
Roughly every 80 years we kind of forget about economic bubbles, make the same mistakes, and those mistakes lead to economic disaster, which typically leads to a war. And I’m saying we’re 80 years out from the last one and we’re making the same mistakes.
I would say that the crash of 2008 wasn’t the housing bubble and the mortgage bubble, but it was the housing bubble and the mortgage bubble, which crashed the derivatives bubble, which is really what caused the crash of 2008. You had banks that had multitrillion-dollar liabilities, which we’d never seen before. In the late ’90s we had a derivatives market that was less than $80 billion, to, in 2008, having an unregulated derivatives market was over $800 trillion, according to the bank of international settlements. The entire GDP of the planet is $65 trillion and the entire GDP of our entire country is $15 trillion per year.I've been doing some reading on the shadow banking sector, and there may be less to it than meets the eye. Note -- and Mr Hartmann is not the sole commentator to get confused over stocks and flows -- that for all the quantitative easing the Federal Reserve and other central banks have done, they lack the power to replace the assets that were destroyed in the crash. That may be why the inflation some observers have feared has not yet materialized: those derivatives markets had credit expansion multipliers far in excess of anything the traditional banking system can produce. That gets too technical for the Feast of Stephen.
This is all funny money, and it dropped down to $400 trillion after the crash, but it’s back up to $700 trillion or $800 trillion now. Nobody knows for sure because it’s unregulated. So I’d say that the crash really begins back in ’99/2000 when Phil Gramm pushed through the Commodity Futures Modernization Act that allowed all that to happen. Of course he did that because [former Enron CEO] Ken Lay wanted it done.
There was an attempt to change [the law] with Dodd-Frank, but more than half of Dodd-Frank has not even been implemented. And I don’t think Dodd-Frank, even if it was fully implemented, would be strong enough to rein this stuff in. We need to go back to simple stuff like Glass-Steagall. Am I making sense?