Back in 1998 a long-standing axiom in moderation was broken with the repeal of the Glass-Steagall Act.  This act had kept banks in check by limiting them to doing what they were intended to do—to meet the financial needs of the community in which they were situated.  This arrangement had worked quite well for the preceding 65 years.  But once bankers were free to engorge themselves wantonly, they were to meet up with disaster.  We know it as the Great Recession of 2007.  But hold that thought.

Running a parallel course with banks was an emerging economic giant.  We know this giant as China.  She was experiencing growing pains.  Beginning in about 1980 she began to expand.  For the next 27 years she stretched her tentacles to the far reaches of the planet, while breaking all the rules of fair play in commerce.  She polluted, built shoddy products, rigged her currency in foreign exchange, oppressed her people, and built up a huge trade imbalance with the world in general, but with the U.S. in particular.  Now hold that thought.

A third leg in this geometric formation was the development of the Euro zone, the Euro, and more trade imbalances with the U.S. and with its poorer nations along the Southern shores of Europe. 

The final leg of this global formation was underway with the emergence of a new conservatism here at home.  It hated the Evil Empire that was in its last throes in Russia.  It bought into the idea expressed on a napkin over lunch with Dick Cheney in attendance known as the Laffer Curve.  This tissue based notion held that lower and lower tax rates meant more and more tax revenues.  Now hold that thought.

A perfect storm requires more than a mixture of volatile forces.  It also requires a common driving force.  Our brewing storm needed a set of actors pursuing a fundamental need—we know it as greed.  The actors were bankers (central, commercial, and investment); a corrupt society of cheaters (the Chinese bigwigs); innocent players, and a bubble.  

By 1998 Bill Clinton got caught with his pants down, and he gave up control of Congress to the conservatives.  They forced through the repeal of Glass-Steagall and put in its place a new monster:  The Graham-Leach-Bliley Act.  This act allowed banks to get into mischief as wealth managers, insurance salesmen, mortgage lenders, as well as the decider about who, how much, when, where, and why loans were to be made.  They were relieved of letting capital find its path of least resistance by Fannie Mae and Freddie Mac, both government sponsored enterprises, who were ready and willing to accept mortgages allowed by Congress in a push to make home owners of us all.

Meanwhile China was piling up huge current account balances in foreign trade thanks to their currency pegged to the US dollar.  They purchased our Treasury Bills with billions of excess trade dollars.  Their continuing purchases pushed interest rates down, thus inviting more and more subprime borrowers into subprime loans, with risk shifted away from banks and onto Freddie and Fannie. 

Following Graham-Leach-Bliley great conglomerate banks formed (Citi Corp, Lehman Bros, AIG, Wells Fargo, etc.) who rapidly grew to become “too big to fail” in this new era of risk-free lending backed by taxpayer bailouts if or when they got overextended.

The Perfect Storm.  A housing bubble also got underway, and prices began to soar.  Although Freddie and Fannie bought up mortgages, they had no capital on which to hedge their bets.  So they got busy packaging up pools of mortgages and sold them as collateralized mortgage obligations (CMOs) to investment banks seeking safer and higher returns.  They, in turn, repackaged them into credit default swaps; pressured Standard and Poors to label them AAA rated securities, and sold them to the world, but mainly to Europe who was also seeking safer, higher returns from America. 

This storm and its various components rested on what many called the weakest link--a mathematical algorithm that purportedly transformed high risk mortgages into high grade credit swaps that nobody understood, but nevertheless was the way to elevate millions of subprime junk mortgages into pure AAA rated gold.    

The Bubble Pops.  Between 2000 and 2007 oil prices doubled, inflation climbed 25 percent, and its effects were transmitted throughout world economies.  The world’s economic engines sputtered.  It had been some six years since the last recession. Weak companies faltered and  unemployment climbed.  Low income earners were hit first.  Many new home owners began to default on their mortgages as their interest rates rose.  Soon an avalanche of defaults hit, and the bubble that was—burst.  Rapidly the artificial fortress of forces imploded, and the worldwide house of cards with all its linkages came a-tumbling down.  Virtually all lending stopped as banks scampered to find new ways to balance their books that had far too little capital backing them.

The carnage lasted until mid 2009.  Housing bubbles across at least 25 industrialized nations burst.  US wealth fell by $14 trillion, and world wealth fell by perhaps another $30 trillion.

Obama was elected as the carnage hit the abyss.  The conservative elements of Congress quickly blamed him for the entire mess—just because they could. He was able to pass just enough legislation until 2010 to begin a recovery.  For the next six years conservatives in Congress were able to block nearly all his Fiscal Policy efforts at recovery.  The Fed, operating independently from Congress, was able to inject about $4.5 trillion into the banking system that eventually restored the economy, but only after commercial banks used enough of that new money to re-inflate stocks, bonds, real estate, and commodity prices. Since Obama first took office:

§          The economy has added more than 9 million jobs, and the jobless rate has dropped below the historical median..

§          The number of long-term unemployed Americans has dropped by 614,000 but it is still 761,000 higher than at the start of the Great Recession.

§           Corporate profits are up 166 percent; real weekly wages are up 3.4 percent.

§          There are 17 million fewer people who lack health insurance.

§          Wind and solar power have nearly tripled, and now account for more than 5 percent of U.S. electricity.

§         The federal debt has more than doubled — rising 116 percent — and big annual deficits have continued.

At this writing in 2016, US wealth has recovered the lost $14 trillion, and added another $21 trillion.  The wealthiest Americans are richer than ever, while the middle class and the poor have not improved their lots much at all.

Lessons Learned.  Blame has been laid variously on Fannie Mae and Freddie Mac; on too little oversight of our banking system; on profligate lending practices; on “too big to fail” banks arising from repealing Glass-Steagall; on default credit swaps that nobody understood; and on “moral hazard,” the ability to conceal risk and shift it onto someone else as an underlying demon.  The price mechanism of oil is rarely mentioned, but at a minimum it triggered the avalanche by exacting a heavy price on all economies.  World-wide demand paid from current account balances, especially from China and Europe, played a big role in the price run up of oil. 

Can it Happen Again?  Yes.  The currently depressed price of oil cannot last forever.  Soaring prices could return with a vengeance once the OPEC and U.S. shale war is settled.  Oil prices affect most other prices, even in the age of diminished reliance on oil as our primary energy source.  But the main gap to this observer lies in no oversight of the link between commercial and investment banking.  This link is an outgrowth of Graham-Leach-Bliley Act.  Since 2009 most of the recovery money authorized by the Federal Reserve has not been directed into the circular spending flow so that new GDP, and new jobs, and new tax revenues can be generated; rather, it has gone into the personal investment accounts of very wealthy individuals.  At least 90 percent of the $35 trillion in new wealth since 2009 has gone to them, but at the expense of a new era of prosperity that could have been created, but was not.  It is still business as usual.

Oh, did I mention?  A new bubble has formed at the top of the wealth curve.  It can only be popped by people like you and me who are not sharing in the new wealth when we say “enough” and decide to take action.