Then central banks did what central banks do – they compounded their earlier policy errors by repeating their old ones. They doubled down on the failed policies they were employing to stimulate economic growth in an over-indebted post-crisis world. On October 31, 2014, Bank of Japan Governor Haruhiko Kuroda announced unprecedented new stimulus measures in another desperate attempt to break Japan’s decades-long economic spiral. In January 2015, European Central Bank (ECB) President Mario Draghi followed suit with Europe’s first-ever quantitative easing initiative. Only Janet Yellen’s Federal Reserve was moving in the opposite direction by ending its own quantitative easing program, but this was primarily through sins of omission that strengthened the dollar and exerted additional downward pressure on commodity prices, U.S. corporate profits, and the global economy.
By mid-2015, serious cracks began to appear in global markets. Greece defaulted and had to be bailed out again by the European Union while solidifying its status as a failed state and global security threat as an entry point for refugees from a shattered Middle East. Emerging markets were melting down with particular weakness in Brazil and Russia. China’s stock market was crashing and the country shocked global markets by beginning a concerted effort to devalue the yuan. Puerto Rico declared itself insolvent (something anyone with a functioning cerebellum already knew was the case). Leveraged oil and gas companies in the U.S. were filing for bankruptcy left and right. And then the U.S. stock market, which had struggled to rise all year, suffered sharp losses and extreme volatility in August and September, shaking the confidence of investors. The post-crisis debt party had run long past midnight – and nothing good ever happens after midnight.
With interest rates around the world stuck at zero, there was little prospect that the $200 trillion of debt suffocating the global economy could ever be repaid by conventional means. The world is incapable of generating enough income to pay the interest and principal on that much debt. Instead, it was obvious that this debt could only be repaid through a combination of currency debasement, inflation, and defaults. Stated plainly, this means that the value of fiat money is going to be obliterated. Of course, politicians, central bankers, and policymakers have been destroying the value of money for years. But now they are going to have to accelerate their efforts. Out-of-control debt is metastasizing, crippling global growth and sucking the lifeblood out of the global economy. Central bankers badly miscalculated when they decided to try to solve a debt crisis by printing trillions of dollars of additional debt.
The 2008 financial crisis and, before that, the 9-11 attacks drastically reshaped the world. Each of these seminal tragedies unleashed massive policy responses that radically altered American life for the worse. As a result of the 9-11 attacks, the United States invaded Iraq and Afghanistan and launched anti-terror operations in Pakistan, Yemen, and Somalia; passed the Patriot Act that expanded surveillance of its citizens; and established a massive new bureaucracy in the Department of Homeland Security to protect the nation. As a result of the expansion of the radical Islamic terrorism around the globe that triggered the 9-11 attacks, Americans can no longer travel freely or feel secure in public places due to the growing threat of random violence. American police forces are militarized and the freedoms enjoyed by our parents and grandparents are limited by our own fears and our government’s failure to effectively fight our enemies at home and abroad.
Financial regulation was supposed to improve after the financial crisis, but instead it deteriorated into an orgy of mindless rulemaking. In a perverse interpretation of his campaign promise of “Hope and Change,” Barack Obama left post-crisis financial regulation in the hands of the same cast of inept economic policymakers that led America into crisis in the first place.
He named Lawrence Summers as his chief economic adviser, a man whose inflated opinion of himself dwarfs his meager accomplishments such as rejecting CFTC Chair Brooksley Born’s pleas to regulate derivatives in the late 1990s despite himself knowing virtually nothing about derivatives. He named Timothy Geithner, who ran the Federal Reserve Bank of New York before the crisis while Wall Street leveraged itself into insolvency right under his nose, as his Treasury Secretary.
And, in perhaps his most disappointing move, the president brought in Mary Schapiro, an undistinguished career regulator who had mastered the art of failing upward, to run the already ineffective Securities and Exchange Commission (SEC). Among Ms. Schapiro’s notable failures was allowing Bernard Madoff to run the largest Ponzi scheme in history right under her nose as she served as a senior regulator and ultimately the Chair and CEO of the National Association of Securities Dealers in the mid-to-late 1990s, the height of Mr. Madoff’s fraud.
Rather than new blood and new thinking, Mr. Obama relied on the same people responsible for the policy errors that contributed to the crisis to fix those errors. Those who had warned of the problems before they happened were nowhere to be found.
In the aftermath of the financial crisis, Congress passed The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Naturally, this bill turned into a regulatory and lobbying orgy that ended up sapping liquidity and vitality from the financial system while leaving derivatives inadequately regulated and the individuals who committed crimes that contributed to the financial crisis unpunished. Dodd-Frank was 14,000 pages in length and included 398 rule-making requirements, rendering it almost impossible to administer by the SEC and other agencies charged with administering it. Like the badly flawed Affordable Care Act, which House Majority Leader Nancy Pelosi famously (and disgracefully) said had to be passed into law in order for the members of Congress to know what it actually said, Dodd-Frank was another piece of absurdly complex legislation that was voted on by people who didn’t read it or understand its contents or its unintended consequences.
The gargantuan Dodd-Frank bill was the government’s main regulatory response to the financial crisis. The law required banks to reduce leverage and risk-taking activities using taxpayer money (reforms that I proposed in the first edition of this book). While some of these goals were accomplished, the forms in which they were implemented rendered the financial system less liquid, more rigid, and more susceptible to another financial crisis.
Legislators and regulators failed to recognize that inflexibly bolstering bank capital would severely reduce market liquidity, yet that is precisely what occurred. By 2014, liquidity in fixed income markets had dried up as banks restructured their businesses to meet the demands of the new law. Corporate bond inventories held by dealers dropped by 70 percent while Treasury market liquidity evaporated. This happened as debt markets increased dramatically in size; by 2015, the U.S. corporate debt market had doubled in size to $4.5 trillion since before the crisis, yet it had become much more difficult to trade bonds than a decade earlier. The evaporation of market liquidity will inevitably make the next crisis more severe than the last.
The government’s role in the economy and its intrusions into the daily lives of its citizens are immeasurably greater today than on September 10, 2001. The costs in terms of lost privacy and freedom are incalculable. We live in a world run by regulators who are operating in the dark while exercising increasingly untrammeled power. We are lorded over by a growing regulatory state to whom courts – particularly the Roberts Supreme Court – have granted enormous and undue deference. The Tyranny of the Alphabet – the FBI, IRS, SEC, FINRA, NLRB, EPA, OSHA – governs our lives. The rise of the regulatory state coupled with the epic increase in debt are smothering the economic vitality of the United States and dooming this country and the rest of the world to generations of sluggish growth.
The expansion of the regulatory state is appalling in breadth. Over the last decade, 768,920 pages of federal regulations have been added to the Federal Register, an average of almost 77,000 pages a year.3 A nearly incomprehensible 36,877 new regulations were added during that period.4 It is a miracle that the American economy can function at all under the weight of all of these rules, many of which can give rise to substantial