The Aftermath of 2008

I remember being one of many people discussing our fear of imminent civil unrest in the immediate aftermath of the financial crisis. Every economist understands that the economy is intimately tied to human behavior (something most people understand as well, albeit intuitively) and given the severity of the crisis many of us feared civil unrest as people's wallets got squeezed by a massive recession which I was convinced would resemble Japan's Lost Decade (now Lost Three Decades). But that civil unrest never came despite a recession that beat most of the optimistic predictions from academics and central bankers. The media even discussed the surprising decrease in crime that ensued.

Years passed and so we believed that somehow we had solved this problem of economically-instigated civil unrest just as the neo-liberal economists believed (right up until 2008) they had figured out how to avoid recessions. Then, about 7 years later something funny happened: civil unrest. And what is our reaction? Is it, "Well, I guess it was too good to be true. I guess it was unreasonable to assume that the moment economists accepted that we were in recession people would immediately start rioting." Or do we pretend that this has nothing to do with the fact that 8 years ago unimaginable wealth was vaporized when a massive portion of the economy (all the capital which was supposedly contained within the various mortgage-backed derivatives, a form of private money) was revealed to be nothing more than a mirage?

The Timeline

What I failed to realize is that the chain of events that result in civil unrest obviously take years to unfold. A recession means that a population is no longer sufficiently productive, not that all the individuals consciously perceive this fact. Take, for example, subprime mortgages. Many people (seemingly most) believe that subprime mortgages CAUSED the recession. This is obviously far too simplistic. The problem with mortgage backed securities was that they were built on the assumption that recessions would not happen. I know, pretty stupid. And yet, that is exactly the case.

They assumed that mortgage defaults were disconnected from one another, meaning that one person defaulting on their mortgage was an independent variable from another person defaulting on their mortgage, which is generally the case. Except when the first person is defaulting on their mortgage because we are in recession. In other words, if Person A is defaulting on their mortgage because the economy is in recession, then it is now far more likely that Person B will default on their mortgage. However, if the American economy had continued to be sufficiently productive, a recession would not have happened, the majority of people would have been able to afford their (admittedly high) adjustable rate mortgages, a random percentage would have defaulted but the majority would not have.

The Mysterious Case of the Disappearing Money

Put another way, mortgage backed securities are just like gold-backed money. As long as gold has value, gold-backed money has value. Mortgage-backed money (a/k/a securities) is valuable as long as mortgages have value. In 2008 too many mortgages lost too much value, and so hundreds of billions of dollars in wealth that was wrapped up in mortgage-backed money (securities, derivatives, insurance instruments) vanished from the American Economy. But it didn't vanish from your wallet. The stock market would crash and then we would wake up the next day, walk outside and be surprised that the sky had not fallen, failing to realize that the world we were looking at had been constructed back when we thought we were richer. All the layoffs had not yet occurred. All of the government programs had not yet been cut. All of the necessary readjustments that would have to take place in order to realign the population's demand for products and services with its ability to actually produce those goods and services had not yet occurred.

Central Bankers Save the Day

The only way a Central Bank can respond to a monetary crisis (a crisis like 2008 where billions of dollars vanish from the economy) is to replace those dollars with new dollars, which is exactly what the Federal Reserve did. I used to be far more critical of the Federal Reserve's actions, though I am certainly no apologist for Central Bankers. That it was all they could do is not the same as saying that doing it accomplishes anything meaningful or even that it is not harmful. Yes, the argument could be made that refusing to print new money would have been momentarily uncomfortable (for a few years) but it would force the population to more quickly and accurately respond to their new reality. That is not what was done.

Instead, central bankers moved us from the pre-2008 world where we believed we had wealth we did not in fact have, to a world where that wealth hole was filled with newly minted currency, predominantly so that balance sheet problems could be solved. Have $100 million in worthless mortgage backed securities? We'll take them and give you $100 million brand new United States Dollars! That bank doesn't have to go bankrupt, it doesn't have to layoff any employees, lower wages, and most importantly: can keep issuing new loans which is itself printing new money. But, of course, only the balance sheet problem is solved. The "books" look fine, but we don't live in the books. We live in the real world where wealth is created not from a printing press but from productive enterprise, and while the bank may still be able to make loans, that doesn't mean there is anyone to make loans to.

The Missing Counterfactual

I suppose if one believes that we have solved all of the economic issues that caused the 2008 crisis then they would be reasonable in assuming that the cause of the ongoing civil unrest is unrelated to the economic issues. However, if one agrees that those issues are still present, then isn't this an important fact to bear in mind? But this is exactly what we are not doing when we get wrapped up in issues like Black Lives Matter v. All Lives Matter, American Workers v. Illegal Immigrants, Muslims v. ... well you get the idea.

Unfortunately, I have no prescription for this dilemma. I am as vulnerable to this thought process as anyone, that's precisely why I am writing this! What I am not saying is that Black Lives Matter has no legitimate arguments and the same goes for All Lives Matter or White Lives Matter. American Workers were screwed by NAFTA and the Federal Government's Drug War and agricultural policies have done their best to force Mexicans to beg, borrow and steal their way into America. Terrorism is obviously scary AF. While most people's arguments have obvious flaws, so too do they have kernels of truth. My point is not that we are blaming the wrong people, but that we are pretending that if the economy were healthy the events we are seeing unfold would still be happening when that is very likely not the case.