× Expand Mark Lennihan/AP Photo A man wearing a protective mask walks by the New York Stock Exchange, March 17, 2020.

As the economy heads toward a full-on 1929-scale collapse, there are three parts to the impending abyss. First, the virus itself is disrupting supply chains and global commerce. Second, the necessary public-health responses to the pandemic, as people shelter in place, is wreaking havoc on everything from air travel to hotels, restaurants, sporting events, and ordinary retail—with cascading effects as workers are laid off.

But the third aspect of the downward vortex has gotten too little attention, and it is one of the most serious elements—namely, the financial engineering that arose from disgrace after 2010. It was excessive leverage in the financial economy—too much debt based on speculative bets—that crashed the economy in 2008. Today’s speculative leverage is even worse.

As a result of loopholes in the 2010 Dodd-Frank Act, and new ones created by Wall Street working in tandem with Trump officials after 2016, Wall Street was primed for a crash more serious than the crash of 2008, even before the pandemic struck. Now, the economic implosion of the real economy will act in tandem with overexposed banks and shadow banks to intensify the collapse in both the financial economy and the real economy, dragging each other down.

Program Trades. Wonder why the Dow goes up 2,000 points one day and down 3,000 points the next? The reason is program trades—stock trading by computer algorithm. To oversimplify, when the market is going up the computer says “Buy!” so the buyers pile on, as happened when Trump seemed to be taking charge in last Friday’s Rose Garden press conference.

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Then, over the weekend, the press and the markets realized that Trump’s drive-in test kits and Google’s do-it-yourself sign-up system were fakes. So on Monday, actual investors dumped stocks and algorithms piled on.

Corporate Debt. Beyond the volatility created by program trades, an underlying factor is the explosion of corporate debt. In the very-low-interest-rate environment after 2008, and again after Trump’s pressure on the Fed to further cut rates, corporations took advantage of what was effectively free money to load up their balance sheets with cheap debt.

It’s a clever tactic when the economy and stock markets are booming. But when the bust comes, the debt needs to be serviced and sometimes paid back. That’s a recipe for corporate bankruptcy.

On the eve of the 2008 collapse, corporate debt totaled $3.3 trillion. At the end of 2019, it was $6.15 trillion, according to the Federal Reserve.

Much of that corporate debt was used to buy back stock. When the stock market is in its boom-bubble phase, that tactic pumps up the price of the stock and enriches executives. But when the market crashes, the corporation is suddenly saddled with a lot more debt relative to a lot less equity. Weaker corporate balance sheets impair their ability to invest in real-economy activity (which is collapsing anyway).

Meanwhile, the financial sector profited by enabling all of this corporate debt, which it turned into bonds. But someone bought those bonds. And as the risk of default grows, the bonds lose value. So investors are out real money. They are also downgraded by credit-rating agencies.

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The economic implosion of the real economy will act in tandem with overexposed banks and shadow banks to intensify the collapse in both the financial economy and the real economy.

Some of those investors, such as pension funds, firms that hold your retirement account, and life insurance companies, have fiduciary responsibilities. So they are forced to sell into a collapsing bond market, pushing bond prices down even further. As there is a scramble to convert assets with dwindling value into cash, the bond market and the stock market collapse in tandem, something that isn’t supposed to happen.

Private Equity Debt. As private equity takeovers of more and more companies have proliferated, all of these acquisitions are financed by debt. Often, cynical PE firms run healthy companies into the ground, taking out their own profits in advance. A lot of these maneuvers have been in retail.

That strategy can work when companies are producing positive cash flow. But when stores are shuttered, even the PE guys can lose money. Yet their tactic is to sell off debt as soon as they incur it, sticking someone else with the risk. The economy as a whole, however, ends up with much more debt.

The public debt gets most of the publicity. But the far more dire problem in a collapse is the implosion of private debt. The PE vultures, however, make out on the downside as well as the upside. As real companies go bust, they can buy the remains even cheaper in anticipation of the recovery.

Securitization of Debt. The securitization—conversion into bonds—of all manner of debt is a huge factor in the market bubble and the ensuing bust. In the collapse of 2008, the insiders’ game had two parts. The first was to convert mortgages into so-called asset-backed securities, which were further sliced and diced into collateralized debt obligations. Many of these mortgages, such as subprime mortgages, were literally designed to default.

The wise guys on Wall Street further ramped up the risk of a crash by using credit default swaps to make bets against some of the very securities they had created. One of the biggest companies that wrote swaps as insurance against defaults, AIG, went broke because it had almost no reserves to cover losses when these debts went bad. The collapse of AIG in 2008 helped push the economy into broader collapse.

Amazingly, Wall Street has repeated this maneuver. All manner of loans—consumer loans, auto loans, mortgage loans, student loans—have been converted into securities. These are now called collateralized loan obligations, as distinct from collateralized debt obligations, but they are the same thing. And while they look to investors like bonds, many of them lack the same payback guarantees as true bonds.

Meanwhile, many of the largest banks have played the same kinds of speculative games with credit default swaps that helped supercharge the 2008 collapse, and here the story grows truly sinister. It is one thing to use a swap as insurance against an investment going bad; another to make a side bet that the investment will go bad covered by no real capital. That’s known as a “naked” swap. It is pure gambling.

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Evading Dodd-Frank by Moving Prohibited Bank Gambling Offshore. One of the most important parts of the Dodd-Frank Act required full transparency and capital adequacy in the use of credit default swaps, whose speculative abuse was so central to the 2008 collapse. But lawyers for the big banks found an obscure footnote in the regulations, which was used as a loophole to allow the banks to move the booking of swaps to subsidiaries offshore, where they would be arguably exempt from the Dodd-Frank rules, and free to engage in hidden and “naked” bets uncovered by adequate capital—so that others could get stuck with losses—the same kind of hidden leveraging that crashed the economy in 2008.

The public debt gets most of the publicity. But the far more dire problem in a collapse is the implosion of private debt.

So obscure and evasive was this maneuver that it took the regulatory agency for swaps, the Commodity Futures Trading Commission, three years to find out that the banks were even using this ploy. The CFTC was in the process of closing that loophole in 2016, when Trump got elected, and his appointees shut the effort down.

This and kindred evasions and risks are explained in this definitive piece by University of Maryland professor Michael Greenberger. As terrible as loan defaults are, Greenberger told me, “these multiple side bets are worse.”

The Fed Is Out of Tricks. The Fed has cut interest rates effectively to zero. But that won’t solve the problem. If you are out of a job or your company is heavily indebted and running in the red, the bank won’t give you a loan. In a depression, economics terms interest rate cuts “pushing on a string”—a maneuver that doesn’t work.

The Fed has restarted another device from the 2008 playbook: massive bond purchases to keep the bottom from falling out of the bond market. That can help, but only to a point.

The Fed and other regulators are paying for the sins of the 2010-2020 period—letting a bubble economy get even bigger and more dangerous than last time.

And of course the rest of us suffer.

To add insult to injury, Timothy Geithner, who did such a dismal job as Treasury Secretary bailing out rather than cleaning out the biggest banks, authored a report in 2018 for the prestigious Group of 30, urging that governments acquire even stronger tools to help the largest banks weather the next crisis.

This, of course, is backwards. The result is that Too Big to Fail banks gain even more confidence to take excessive risks, knowing that they have a get-out-of-jail-free card from governments. And worse, because of the government guarantee they have lower capital costs than their competitors and can get even bigger. Paul Volcker, onetime chairman of the Group of 30, was livid when he read Geithner’s report.

Between 1929 and 2008, it took the regulators and advocates of market speculation a full 79 years to forget the lessons of the last crash. This time, they forgot the lessons in just a few short years, before the real economy was even in recovery. And of course, they didn’t just “forget.” They were rewarded handsomely for their myopia.

Once again, the financial economy has helped destroy the real economy. When the recovery comes—if it comes—economic health will return only after government resumes both a tough regulatory role and a massive public-investment role.