George N. Romey published on 03/20/2017 on the Writer Beat website (http://www.writerbeat.com/articles/15878-A-History-of-Crashes-and-the-Next-One-Coming) article under the title A History of Crashes and the Next One Coming. In this article Romey states that "from the end of World War II to the late 1970s, Wall Street and the stock market was a quiet place. Companies were Partners of Wall Street and the risks were low, "and that this began to change dramatically in the 1980s when the risk exploded, greed was high and this led to" irrational exuberance" and huge "crash" of the stock market in October 1987. Romey states that this crisis did not spread to the general economy, which was doing well at the time. However, the lessons were not learned and soon the financial sector again took great risks.
According to Romey, before the 1980s, hedge funds were small in numbers and unknown. In the 1990s, hedge funds with investment banks were gaining more leverage and greater risk. It should be noted that the Hedge Fund is an alternative, very risky, low-restrictive and highly speculative form of investment in which investors provide large sums of money to a company specializing in economics so that it can invest as it sees fit and then share the profits and losses according to the agreement between the parties. The manager of the investment fund or someone with natural talent is free to invest the money as it deems best.
Romey says that by the year 2000 interest rates had fallen to 1% and the government pressured banks to make mortgage loans for low-income consumers who contributed to the subprime crisis. Another factor was securitization, which allowed banks to make loans with no return. In 2008 the whole system imploded. Romey says the Bush administration and later Obama, along with the Federal Reserve, quickly worked to rescue the Fraudulent personages through direct bail outgoings, bond purchases that banks valued, cheap loans, and loan guarantees.
In the article, Romey states that investment banks were allowed to convert into commercial banks by providing them with a number of redemption benefits. Wall Street in six months showed little or no sign that anything serious had happened. As of 2008, the economy was booming, corporate profits including Wall Street were at record levels, unemployment was relatively low and oil prices were rising due to strong demand (and speculation).
Romey talks about what he calls the Great Depression 2.0, which may happen when the stock market falls, as well as real estate, asset prices and all parallel bets that continue to take place. Suddenly trillions not billions of dollars will be needed. Romey asks: Where will it come from this moment? Will the Federal Reserve be allowed to digitize a couple hundred trillion? If not, the IMF will provide counterfeit money in the form of "Special Drawing Rights, or World Currency?" Romey says: Suppose the IMF does not move fast enough to stop what will certainly be a new economic crisis in New York. Says that we have to prepare for the Great Depression coming soon, and as usual, Washington and New York will be the last to know.
Mackinsey Consulting confirms Romey's prognosis in the report published in February 2015 under the title Debt and, not much, deleveraging (McKinsey Global Institute. Debt and, not much, deleveraging. Available on the <http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging> website. February 2015]. McKinsey Global Institute (MGI) shows that world debt of households, governments, companies and the financial sector increased from US$ 87 trillion in the fourth quarter of 2000 to US$ 142 trillion in the fourth quarter of 2007 and to US$ 199 trillion in the second quarter of 2014. As a proportion of GDP, the total debt went from 246% in 2000 to 269% in 2007 and reached 286% in 2014.
For McKinsey Global Institute - MGI, this means that the world economy is being sustained by a credit bubble that has been growing exponentially, reaching almost 200 trillion dollars in the middle of 2014, or about 3 times the value of world GDP. Much of this debt is controlled by the financial system and fuels the process of financialisation of the world economy. But the sectors of creation of real wealth of the economy are not employing at the adequate rate the workers in relation to the total population. The concentration of wealth in the financial sector increases social inequality and aggravates the prospects of economic growth, since much of the wealth is based on credit, with no real basis in production.
Promises of future payments, for example, pensions and social security, rely on resources that do not really exist, while the wealth that exists is increasingly concentrated in the hands of a small and very rich portion of world society. The globalization process has boosted world debt and most countries are losing control over national debts. Some economists consider that this indebtedness is needed to get the world economy out of recession (or low growth since the 2008/09 crisis). The fact is that increasing world debt has been an obstacle to the return of high economic growth rates from the pre-crisis times of Lehman Brothers. There are clear signs that we are experiencing a credit bubble that has caused too much investment in some areas with uncontrolled financialization in the service of the rich.
Sociologist Wolfgang Streeck, a professor at the Max Planck Institute, believes that the democratic capitalist system of the postwar period is coming to an end. For him, the marriage of capitalism to democracy is practically closed, and there is a tendency of low growth, suffocation of the public sphere, advance of the financial oligarchy, corruption and international anarchy (Streeck, Wolfgang. How will capitalismo end? London, New York: Verso, 2016). The low interest rate charged by the central banks of developed countries and the policies of monetary easing to provide the market with liquidity, such as “quantitative easing”, should cause financial bubbles. This process also generates great speculation in the stock markets, which can lead to a major crash, as in 1929, 1987 and 2008. There are many signs of a coming financial crisis and a new collapse of the international economy that may have beginning in the United States.
We have not yet overcome the effects of the financial earthquake experienced in 2007-2008, but politicians and bankers themselves are already setting the stage for the next crisis. Mathematical studies show the dense interconnected web of global financial actors, in which the failure of one of them can trigger the collapse of all. They put us on the razor's edge, and we have good reason to be pessimistic because governments and international financial institutions show no intention to regulate banks, exposing us to the danger of having to endure a repeat of the crisis. Not only banks and bankers are too big to fail, but also to be challenged. That is why they allow themselves to do whatever they feel like doing.
The adoption of security devices in the financial sector has been systematically sabotaged. There was no necessary separation between commercial banks and investment banks (which would prevent depositors' money from continuing to be used to speculate). For more than sixty years, the Glass-Steagull law passed during the New Deal of the Roosevelt government separated them, protecting the American financial system. It was repealed in 1998 under President Bill Clinton - with a big push from Treasury Secretary Robert Rubin, former CEO of Goldman Sachs.
Daily volumes of transactions with derivatives and currencies grew 25% or 30% compared to pre-crisis levels, and add up to trillions each day. Total annual operations with derivatives add up to about 100 times the Gross World Product. The emergence of automated transactions, driven by algorithms, drives this growth. It took less than a decade to produce the devastating breakdown of Lehman Brother and of the global financial market. Politicians do not attend to reasons, but to the banking lobby. As a result, banks' (capital) reserve requirements are still too low. No new tax on financial transactions was approved.
* Fernando Alcoforado, member of the Bahia Academy of Education, engineer and doctor of Territorial Planning and Regional Development from the University of Barcelona, a university professor and consultant in strategic planning, business planning, regional planning and planning of energy systems.