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Will the Obama Bubble Burst in Time to Get Sanders Elected?

Obama could have changed the US economic system again, but the Great Recession resulted in changes on a much smaller scale.

December 7, 2015

Obama could have changed the US economic system again, but the Great Recession resulted in changes on a much smaller scale.

We wouldn’t have had a President Barack Obama had it not been for the massive subprime mortgage crisis. Striking at the tail end of George W. Bush’s presidency in 2008, it was ushered in by the collapse of the investment bank Lehman Brothers two months before the election.

We might have had John McCain and Sarah Palin in the White House without that. It was, in a large measure, the popular anger at the Republicans’ mismanagement of the economy that tipped the scales in Obama’s favor.

The Great Recession now seems to be a thing of the past. There has been continuous economic growth in the United States since the third quarter of 2009, the jobless rate declined almost to its pre-crisis levels and we are even seeing an uptick in wages.

However, the 2008-09 crisis was resolved not by finding new engines of growth for the US economy but, on the contrary, leaving the system very much unchanged and by infusing massive amounts of liquidity into the financial system.

Not only did the US Federal reserve grow its balance sheet from less than $1 trillion September 2008 to nearly $4.4 trillion currently, but the world’s central banks collectively injected some $12 trillion in new liquidity into global financial markets.

Only a small portion of this new liquidity went into wages for the poor and the middle-class. The bulk of it still had to go somewhere.

Asset bubbles

In fact, we now have a number of massive asset bubbles – for example, in real estate in New York City, San Francisco and Washington, DC, in the contemporary art market, in Hollywood, television show production and everywhere else those who are closest to the Fed’s financial trough can park their cash.

And, of course, the most severe bubble has been inflating in the stock and bond markets. As in 1990s, the technology sector has been in the forefront of the bubble creation.

Startups with an unproven business record are attracting a huge flow of investment and even companies that have produced profits such as Amazon, Netflix and Tesla are trading in astronomical multiples.

This is a very familiar pattern and we have seen it three times before. Every two-term president since Ronald Reagan has presided over a major rally on Wall Street but left office with the stock market in shambles.

Americans unlucky enough to be retiring in 1988, 2000 and 2008 saw their savings decimated by the bursting of the stock market bubble, while students graduating in the same years struggled to find meaningful employment.

There is no guarantee that this will not happen in 2016.

The popping of the stock market bubble, which began to deflate in October 2007, presaged the 2008 subprime mortgage crisis.

But even as Wall Street went into reverse, the bubble in commodity prices, especially in oil, continued to inflate into the following year, as oil prices rose to nearly $150 per barrel in the early months of 2008.

Now we are seeing the opposite: the oil price bubble burst in mid-2014, but stocks continue to rally.

When oil prices tumbled, we heard lots of optimistic forecasts that cheaper gasoline would put more money into consumers’ pockets and trigger a consumption boom. None has materialized so far, and it is no surprise.

On the contrary, sharply lower oil prices mean that the destruction of the liquidity issued by the world’s central banks has already begun.

With oil prices down from $100 per barrel to $40 per barrel, oil producers are losing over $5 billion per day, or nearly $2 trillion annually.

All about the economy

As James Carville pointed out during the 1992 presidential campaign, “It’s the economy, stupid.” The health of the economy largely determines voter preferences and economic crises, in turn, offer great opportunities to politicians to fix what is wrong with the economic system.

The Bush bubble burst, conveniently enough, to get Obama elected. The trillion-dollar question in 2016 is: Will the Obama bubble survive through next November? Or rather, will it pop in time to get Bernie Sanders nominated by the Democrats?

The Great Depression changed America. The dire economic situation in 1933 allowed FDR to pass New Deal legislation, which guaranteed a respectable old age to several generations of Americans.

It protected the unemployed, helped millions of American kids get college degrees and created the great American middle class. It laid the foundation for America’s postwar economic and political domination in the world.

Obama had a unique opportunity to change the US economic system again, but the Great Recession resulted in changes on a much smaller scale.

It got us Obamacare, which substantially reduced the number of Americans without health insurance. It’s not a small achievement — bringing the United States closer to the standards of other developed economies — but the boom/bust economic system remained in place.

Shadow of the Great Recession

However, the good news is that the Great Recession is not over yet — not truly. John Maynard Keynes once compared pumping liquidity into a deflating economy to pushing on a string. Once the central banks’ quantitative easing hocus-pocus is exhausted, it will return with a vengeance.

In fact, it is already happening. Countries in the European Union are suffering from deflation despite negative interest rates – meaning that borrowers actually charge lenders for the privilege of spending their money.

Japan has just entered yet another recession, as its GDP contracted for the second consecutive quarter in the July-September period. China’s breakneck growth is sputtering.

The United States, which has remained the lone global locomotive is also starting to feel the impact of the global slump. Both consumption and industrial production figures have started to be disappointing of late.

US exports — a major factor in driving corporate profits and the stock market — are being hit by slower demand abroad and a stronger dollar. The shadow of the Great Recession is starting to hover over the US economy as well.

Will it be back in time to allow an elderly Jewish Socialist with a New York accent, representing the hippie state of Vermont to change America for a second time?


Will the Obama bubble pop in time to get Bernie Sanders nominated by the Democrats?

The 2008-09 sub-prime crisis was resolved by infusing massive liquidity into the financial system.

Sharply lower oil prices means destruction of liquidity issued by the world’s central banks has begun.

Obama had the unique opportunity to change the US economic system again but he did not.