Peak Trump! Why the Undrainable Swamp Wins Again

Peak Trump! Why the Undrainable Swamp Wins Again by David Stockman – Lew Rockwell

The history books will record, ironically, that the Donald peaked in September 2018.

Obviously, that was the 10th anniversary of the Lehman financial meltdown. But the original event and its current commemoration actually book-end why Trump came out of nowhere, sojourned briefly in the Oval Office, and then fell victim to an even greater crisis that will end in ignominy for the Donald and in staggering political and economic setbacks for the nation.

The original Lehman event was actually a symptom of the national economic breakdown which brought Trump to power against all odds. That is, decades of fiscal profligacy and egregious money-pumping by the Fed have deeply impaired and capriciously bifurcated the national economy and polity.

On the one hand, soaring household debts, relentless inflation of domestic costs, prices and wages and an addiction to destructive financial engineering in the corporate C-suites have de-industrialized much of the vast expanse of Flyover America. These wrong-headed Washington policies have caused the off-shoring of massive amounts of America’s productive base and generated enormous and chronic current account deficits, which have turned the US into the greatest debtor nation in history, owing the rest of the world more than $9 trillion.

At the same time, Washington’s foray into statist destruction of sound money and fiscal rectitude has capriciously conferred financialized prosperity on selective pockets of American society scatted along the coasts and in the hinterlands. These economic precincts have prospered mightily – albeit unsustainably – from both the vast bloating of the financial sector and the relentless inflation of financial assets, as well as from the tax-and-debt fueled state enterprises of war, medical care and education.

In this context, the crisis of September 2008 represented the first down-leg of financialization coming undone. At that point, the so-called financial crisis was essentially concentrated in the canyons of Wall Street owing to the blow-up of the securitization meth labs, which, in turn, set off a contagion of falling prices for these and other dodgy assets held in investment bank inventories.

The latter had been accumulated during the subprime mortgage, real estate and credit booms that the Fed had ignited after the dotcom crash. When soaring defaults on the underlying mortgages caused a sell-off of the securitized derivatives, the liquidation accelerated rapidly owing to the Fed’s folly of mechanically pegging and transparently telegraphing its money market interest rate targets.

That is to say, this kind of absolute money market certainty had encouraged Wall Street to recklessly fund these risky, sticky, longer-term mortgage, real estate and junk bond assets with hideously mismatched liabilities. These consisted heavily of hot, short-term money market instruments (unsecured commercial paper and repo) that suddenly dried up in the summer of 2008, forcing dealers to dump even more toxic junk into the market.

Still, the fallout of the Wall Street crisis had initially penetrated Flyover America only by virtue of the mortgage refi machine and the predation of the mortgage broker boiler rooms that peddled low-rate ARMS (adjustable rate mortgages) to economically marginal households. The latter, of course, could not remotely hope to afford these subprime mortgages after the ultra-low “teaser” rates reset and escalated sharply higher.

In fact, by the eve of the crisis, refi-based mortgage equity withdrawal (MEW) had reached a $900 billion annual rate, thereby goosing household consumption spending by up to 9% of disposable personal income (DPI), while the subprime boom was generating record levels of home prices, new construction and existing unit turnover.

Both came to a screeching halt when Wall Street melted-down, triggering what would have otherwise been a mild-downturn in the housing sector. But what transformed the so-called Great Recession into a rout on main street was the C-suite response to plunging stock prices in the fall and winter of 2008-2009.

To wit, by then the Fed’s cancerous regime of Bubble Finance had turned the C-suites of corporate America into options obsessed stock trading rooms and financial engineering joints. Almost instantly, a recession that was not even visible in the summer of 2008 to the Goldilocks worshipping economists of both Wall and Washington alike turned virulently south as depicted below.

But the crash of business inventories and employment shown in the chart happened not for the classic reason that interest rates were soaring and household and business credit got crunched, but because the C-suites were desperately attempting to propitiate the new trading gods of Wall Street.

The sacrifices they offered consisted of sweeping so-called “restructuring” plans that amounted to shit-canning payrolls, inventories, facilities and balance sheet assets with nearly reckless and frenzied abandon.

During the brief 11-month period after August 2008, more than 6 million workers were tossed overboard and $150 billion of inventories or 10% of outstandings were hastily liquidated.

Even a superficial post-mortem of the data shows that the Great Recession was a drastic overreaction based on the underlying economics; demand did not fall by anything close what was implied by the C-suite initiated strum und drang.

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The daily news and opinion site was founded in 1999 by anarcho-capitalists Lew Rockwell and Burt Blumert to help carry on the anti-war, anti-state, pro-market work of Murray N. Rothbard. We published articles written by hundreds of authors six days a week.