The world didn’t learn enough from the 2007-2008 financial crisis
Last weekend, Fed chair Janet Yellen and fellow central bank bigwigs returned to the scene of crime of economic crises past: the Jackson Lake Lodge in the western US state of Wyoming.
Located in the heart of the Grand Teton National Park, it’s a devastatingly beautiful spot that hosts the US Federal Reserve’s equivalent of Davos each August. It’s all too often the case, though, that this annual retreat is a moment to air ugly truths about the global economy. Two such episodes are worth recalling as frothy stock markets from New York to Mumbai raise red flags: Jeffrey Sachs in 1997 and Raghuram Rajan eight years later.
In August 1997, Sachs, then with Harvard University, pricked the bubble of celebratory speeches about how global elites had saved Asia. US treasury and International Monetary Fund (IMF) officials on hand held that their Thai rescue package would halt a domino effect of collapsing economies. Nonsense, said Sachs, who argued the West’s demand for harsh belt tightening and reforms in Thailand would make things worse—the economic equivalent of yelling “Fire! Fire!” in a crowded theatre. Sachs proved correct as the Indonesian and South Korean economies fell.
Eight years later, it was Rajan’s turn to upend the self-congratulatory vibe in Jackson Hole. While then Fed chair Alan “Maestro” Greenspan and his peers waxed on about the magic of markets, Rajan, then the IMF’s first non-western chief economist, predicted it would all come crashing down as a subprime-loan bubble and credit-default swaps no one understood topple the biggest economies. Eyes rolled. Giggles filled the ballroom. Former US treasury secretary Lawrence Summers dismissed Rajan as “slightly lead-eyed” and “misguided.” Rajan was proven right in 2007.
So how much did we really learn from meltdowns in 1997 and the one that emerged a decade later? Not nearly enough, and that puts Asia at risk over the next six to 12 months.
In her Jackson Hole comments, Yellen channelled Sachs and Rajan to slap the optimistic spin around record stock prices and financial leverage returning in a big way. No, Yellen didn’t warn directly about “irrational exuberance,” as Greenspan did two decades ago. But she made an impassioned case for governments sticking with tighter regulations imposed after the 2007-2008 crisis as US President Donald Trump works to reverse them. Forcing banks to hold more capital, Yellen argued, “substantially boosted resilience” without hurting growth.
Tell that to Trump’s team, which clearly learned zero from either 1997 or 2007. “I have so many people, friends of mine, that had nice businesses—they can’t borrow money,” Trump claimed in February. “They just can’t get any money because the banks just won’t let them borrow it because of the rules and regulations.”
Not surprisingly, Trump raided the Goldman Sachs executive suite to staff his administration of enablers willing to kill post-crisis Dodd-Frank reforms, water down Basel III norms and restore pre-2007 financial freedoms to make Wall Street great again. Coming as Trump revives the robber baron ethos, Yellen’s speech may have been career suicide. Trump, who’s wavered on granting her a second term, is almost sure to respond to her not-so-veiled criticism by tapping someone else for Fed chair (someone from Goldman Sachs, no doubt).
Asia is directly in harm’s way if the bull run in US stocks reverses course or there’s a sudden run on the dollar. Both risks are rising in reverse correlation with Trump’s sliding support rates and dwindling legislative prospects. Cornered and paranoid amid Russia investigations and more scandals than journalists can count, Trump’s presidency is effectively over. Even if he stays in office for another 176 weeks, he’s too busy attacking via Twitter every ally needed to get anything big done on tax reform, an infrastructure boom or diplomatic solutions abroad.
Trump will go down swinging, though, and he can do serious damage with executive orders. Desperate to appear strong and deflect attention, will he slap 45% tariffs on Chinese goods? Might he attack North Korea with 59 Tomahawk missiles, the way he did Syria? And then there are the ways in which he can help Wall Street build a bigger, better subprime crisis. China, too. It’s making many of the same mistakes Thailand, Indonesia and Korea did in the mid-1990s. Along with Beijing simultaneously juggling bubbles in debt, stocks and property, globally ambitious conglomerates like HNA Group Co. Ltd remind us that opacity and hubris still reign. In the last three years, HNA has shelled out at least $45 billion around the globe. Questions about who owns it and where its money comes from—China’s vast shadow-banking system—is prompting scrutiny from US and European regulators.
Not to be outdone, Trump wants to return to the ugly days that Rajan warned about. The only answer for Asia is to batten down the hatches and get national balance sheets in order. That’s because next time, the issue won’t be whether capitalism is too big to fail, but whether it’s too big to save.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek