The Crash of 2016

by Thom Hartmann

  As we would later learn, it wasn’t actual “prosperity” but instead just another economic bubble created by low taxes and financial deregulation.

  But at the time, Americans had no idea, and they flocked to the Sunshine State to get a piece of real estate in a housing market that everyone thought would continue to rise indefinitely—the same assumption that inflated the housing bubble of the George W. Bush years. As Allen writes, “the abounding confidence engendered by Coolidge Prosperity… persuaded the four-thousand-dollar-a-year salesman that in some magical way he too might tomorrow be able to buy a fine house and all the good things of earth.”

  So, in five years, from 1920 to 1925, the population of Miami grew fivefold. If you were operating under the assumption that real estate prices would continue to soar, then it didn’t matter how much of your life savings you staked out on a piece of land in Coral Gables, Florida, because that land would grow in value and you would make tons of money off of it. And people did make boatloads of money—for a short few years.

  South Florida lots that sold for $800 at the beginning of the bubble were resold just a few years later, in 1924, for $150,000. Land bought for just $25 in 1896 was selling like hotcakes for $150,000 by 1925.102 Nobody was actually planning on moving into these new, insanely priced houses and condominiums, though. Ninety percent of the buyers had only one plan for their newly acquired and mortgaged property—to resell at a profit. As Allen writes, “few people worried much about the further payments which were to come.”

  But then Mother Nature had her say. As could have been predicted (and was by some locals), a hurricane blew through Florida in 1926, killed or injured over two thousand people, and punctured the housing bubble. South Florida imploded.

  A 1928 article in The Nation magazine written by Henry S. Villard relayed what postboom Florida looked like: “Dead subdivisions line the highway, their pompous names half-obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement side-walks, where grass and palmetto take the place of homes that were [soon] to be… Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death.”103

  People who got caught up in the frenzy lost everything. Banks and real estate offices that littered the once-vigorous streets of Miami began, one after the other, to go under. In 1925, at the height of the bubble, bank holdings in Miami totaled over $1 billion—and that was back when a dollar was worth nearly thirteen of today’s dollars.104 By 1929, bank holdings had plummeted almost 90 percent to just under $150 million. It turned out real estate prices couldn’t go up forever (a lesson from the 1850s and the 1770s that had been forgotten).

  When the Florida housing bubble burst in 1926, the hot money created by Treasury Secretary Andrew Mellon’s tax cuts simply shifted to Wall Street. As Allen wrote, “[The] national speculative fever which had turned their eyes and their cash to the Florida Gold Coast in 1925 was not chilled; it was merely checked. Florida house-lots were a bad bet? Very well, then, said a public still enthralled by the radiant possibilities of Coolidge Prosperity: what else was there to bet on?”

  The answer was obvious, as Allen wrote, “Before long a new wave of popular speculation was accumulating momentum. Not in real estate this time; in something quite different. The focus of speculative infection shifted from Flagler Street, Miami, to Broad and Wall Streets, New York. The Big Bull Market was getting under way.”

  Predictably, that “Big Bull Market” imploded a few years later, despite Hoover’s assurance that if government just stayed out of the way, everything would magically rebalance itself and prosperity would return. Instead, it was the third act of the three-act play we’ve seen over and over again, from the onset of capital markets to today: boom, bust, Great Depression.

  And, almost exactly eighty years after that Great Crash of 1929, it all happened again.

  Even Worse than Before

  Economist Steve Keen, author of Debunking Economics, defined the “madness” in our banking system as inherent. He told me, “It’s the structure of finance itself. There’s inherent instability in a capitalist system.”105

  He explained that capitalism demands a banking system and that that banking system is wired to misbehave, since there’s always an “inherent temptation” to create and sell as much debt as possible—whether it’s in the form of oil derivatives, mortgages, or student loans.

  “They will always want to lend more money… the banking sector profits by creating debt,” Keen said.

  If the banking sector simply lent money to businesses to fund productive investments and homeowners who could actually afford a home, then, Keen estimates, bank profits would be only 5 to 10 percent of total profits in America.

  But with manufacturing decimated from so-called free trade, and no rules on Wall Street, Royalist banksters lunged for a bigger piece of the profit pie. They force-fed the nation more and more debt.

  The peak level of debt financing was less than 10 percent of GDP in the 1920s, before the last Great Crash. But between 2000 and 2008, it was 20 percent of GDP—it was a far bigger bubble.

  During this time, Wall Street profits as a share of total profits in America were upward of 50 percent. As Keen told me, “That’s not a sign of a healthy economy. That’s a sick economy.”

  Another debt bubble, even bigger than the one in the 1920s, was being inflated. Keen told me the bubble had started in 1982.

  I asked him why, and he said, “You had such a terrifying experience after the Great Depression and the Second World War. You completely tamed that bad behavior in the financial sector and people’s willingness to take on debt.”

  But then people forgot. As Keen said, “If you look at when people started to really take on debt again, it was when the first baby boomer turned eighteen. We lost that memory, and then that same irresponsible behavior that gave us the Roaring Twenties came back.”

  While my father’s generation remembered the Great Depression, I was born in 1951 and have no personal recollection of it. As my “boomer” generation took the reins of business in the seventies and eighties, there was no “remembered” sense of the dangers of reckless banking practices or even of reckless personal debt.

  And so, in October 2006, history repeated itself when the second Great American Housing Bubble started to burst. It was worse than 1929.

  Savvy investors saw the fuse burning. They knew that the housing-fueled Bush Bubble inflated by the Royalists’ assault on financial regulations and Alan Greenspan’s dangerously misdirected stewardship of the market, much like the dot-com-fueled Clinton Bubble, had come to an end and that soon it would move from little-noticed Fed figures into their own backyards—into the guts of Wall Street. The business press subtly informed investors, and giant hedge funds in New York and London began to position themselves for the coming market collapse.

  The Financial Times, for example, in a September 27, 2006, article titled “Hedge Funds Hone In on Housing,”106 cited that “growing numbers of hedge funds have placed bets on a slump in the US housing sector in recent weeks.” The article noted that the funds were rapidly buying insurance against a housing crash in order to “be on the winning side of a housing downturn.”

  But those insurance bets only made the problem worse. They just shifted ground zero of the now-larger derivative bomb from megabank corporations like Goldman Sachs to mega-insurance corporations like AIG. Both were “Too Big to Fail,” both were drenched in systemic risk, and both were capable of ending the United States as we know it.

  We know what happened next—a serious financial panic.

  Fittingly, three years after that panic, a June 2011 article in the Financial Times titled “Alfred Hitchcock’s ‘The Bankers’ ” noted, “The characteristics that make for good traders and investment bankers are pretty much the same as those that define psychopaths.”107

  The article goes on to ask about the increasingly
vital-to-our-economy psychotic bankers. “Surely only someone with a serious personality disorder could have thought it was a good idea to sell a highly risky financial instrument like a CDO-squared to a naive investor who clearly did not understand the risk?”108

  As a result of these psychopaths, the markets tanked, banks across the country failed (the big ones got bailed out), and millions lost their homes and jobs.

  But with the crash of 2007–08, the Royalists were just warming up. Their harvesting of the United States wouldn’t be complete until a few years later.

  PART 3

  “Oppression, Rebellion, Reformation”

  Chapter 7

  A Revolution Denied

  You never let a serious crisis go to waste. And what I mean by that is it’s an opportunity to do things you think you could not do before.

  —Rahm Emanuel, chief of staff to

  President Barack Obama, 2008

  The beginning of the end of the Crash of 2016 begins on a cold January night in 2009—where this book begins—with the inauguration of Barack Obama.

  In fact, the crash was plotted in a dining room a block off of Pennsylvania Avenue about halfway between the White House and the US Capitol. The Caucus Room, as it’s known, is across the street from the J. Edgar Hoover Building, headquarters of the FBI, right around the corner from Ford’s Theatre, where a president was killed during a time of national crisis, and two blocks north of the National Mall, which was “occupied” by the Bonus Army, during another time of national crisis, in 1931. It’s in the back end of the apartment building where Louise and I resided during the first year we lived in Washington, DC.

  It was there, on the night of Inauguration Day in 2009, beneath soft track lighting and surrounded by polished cherrywood paneling, that a plot was hatched to make sure the Economic Royalists took advantage of the economic crisis, which they had caused. The stakes couldn’t be higher for them.

  America was on the verge of a second New Deal. Or, a second Gilded Age. She was in the middle of a revolution.

  In fact, Thomas Jefferson had predicted this revolution, and he also predicted what might happen to this nation if those Royalists in the Caucus Room won the revolution.

  Jefferson’s Cycle of Revolutions

  Running alongside the eighty-year cycle of Great Crashes, there’s another cycle, one of revolutions.

  Because he had lived through a true revolution here, and had watched another one sputter and fail in France, Thomas Jefferson knew that periodic revolutions were necessary for America—or any democratic society—to flourish and grow.

  Jefferson even suggested that “every generation” should have its own smaller form of revolution, reconfiguring the nation and its government to adapt to changing needs and changing times.

  The concept of generations has played a role in many governing documents. The Iroquois Confederation’s “Great Law,” which was a major inspiration for the American Constitution, famously called for all governmental decisions to be made in the context of their impact on “the Seventh Generation” down the line into the future.

  While the definition of the time period represented by a “generation” has been the subject of much speculation over the years, Thomas Jefferson recognized two clear definitions, and repeatedly said that both the Constitution and future legislators should respect each of them.

  The first was the personal, familial definition of “generation”—which Jefferson put at nineteen years and today is generally considered to be around twenty years. In that context, with the first American Revolution officially beginning in 1776, today’s young people are about the twelfth generation since our nation’s birth.

  The second was the generational epochs—blocks of time during which generations overlap and a major transfer of power is made from one to another, along with a period of time long enough for a major change in our understanding of government and a recalibration of our worldview.

  Jefferson and his contemporaries spoke and wrote often about the obligations of each generation to its heirs, and about the political crime of any generation placing shackles (financial or legal) on future generations.

  Jefferson wrote to his protégé, James Madison, the year the Constitution was ratified and our modern nation birthed: “The question, whether one generation of men has a right to bind another… is a question of such consequences as not only to merit decision, but place also among the fundamental principles of every government.”109 No single generation, he wrote, has the right to saddle the next with problems or debts, and it should be obvious “that no such obligation can be transmitted” from generation to generation.

  Laying out his thinking on the issue, Jefferson continued: “I set out on this ground, which I suppose to be self evident, that the earth belongs in usufruct [common ownership] to the living; that the dead have neither powers nor rights over it. The portion occupied by any individual ceases to be his when himself ceases to be, and reverts to the society.”

  Jefferson’s logic that no person or generation should be able to bind the next one was one of his core beliefs throughout his life, and shared by most of his contemporaries. He added, “For if he could, he might during his own life, eat up the usufruct [commons] of the lands for several generations to come; then the lands would belong to the dead, and not to the living, which is the reverse of our principle.”

  But what was most revolutionary about Jefferson’s thinking on this was the idea of generational revolutions—that the nation itself must fundamentally change roughly once every biological or epochal generation, and that even that wouldn’t prevent larger periodic political transformations of the nation. These were, he believed, not just ideals but a basic force of nature. He wrote:

  On similar ground it may be proved, that no society can make a perpetual constitution, or even a perpetual law. The earth belongs always to the living generation: they may manage it, then, and what proceeds from it, as they please, during their usufruct [shared ownership]. They are masters, too, of their own persons, and consequently may govern them as they please. But persons and property make the sum of the objects of government. The constitution and the laws of their predecessors are extinguished then, in their natural course, with those whose will gave them being.

  Jefferson believed that even the laws enshrined in our Constitution came with a time limit, and that once the generation that wrote those laws passed on out of power, those laws must be rewritten by the new generation, or at least every second generation.

  “Every constitution, then, and every law, naturally expires at the end of thirty-four years,” Jefferson wrote. “If it be enforced longer, it is an act of force, and not of right. It may be said, that the succeeding generation exercising, in fact, the power of repeal, this leaves them as free as if the constitution or law had been expressly limited to thirty-four years only.”

  A revolution every twenty to thirty-four years? Could Jefferson have actually been proposing—or predicting—that?

  In fact, yes.

  Jefferson stressed the need for every generation to essentially produce a revolution that would turn the wheel of America forward into the new epoch. He arrived at this conclusion by understanding the weaknesses inherent in the Constitution when it was first drafted, and the need that each new generation must continue to perfect it, or at least adapt it to respond to changing times.

  Jefferson noted the absurdity of a rigid Constitution—or at least an interpretation of that Constitution—that does not change as the nation grows and times change, saying, “We might as well require a man to wear still the coat which fitted him when a boy, as civilized society to remain ever under the regimen of their barbarous ancestors.… Let us follow no such examples, nor weakly believe that one generation is not as capable as another of taking care of itself.”

  Looking back, Jefferson’s theory of revolution holds up.

  A History of Revolution

  The young men of the Revolution of 1776 had become the old establish
ment of 1800. But the young people of the nation were dissatisfied with how things were going under the presidency of John Adams (elected in 1796), as Adams had steadily been moving the government in a more and more authoritarian and monarchical direction.

  The result was that young people who voted in the election of 1800 fostered what historians refer to as “The Second American Revolution of 1800,” the first peaceful transfer of power from one party (Adams’s Federalists) to another (Jefferson’s Democratic Republicans, today called the Democratic Party) of a major nation in history. Jefferson called it a “revolution as significant” as the one of 1776.

  This cycle then repeated over and over again, with each new generation bringing with it a new “revolution.”

  The young people of 1800 came to power in the 1820s, and the election of Andrew Jackson in 1828 was again revolutionary, in that he campaigned on a platform of overturning the existing order. In 1832, he vetoed a renewal of the charter of the Second Bank of the United States, took on the “selfish” “rich and powerful,” and humbled the banksters. He was the people’s hero, and it was a revolution against the establishment that had rigidified thirty years after the revolution of 1800.

  Roughly thirty years later, the children of Jackson’s revolution fought the Civil War under Abraham Lincoln.

  The next generation came of age and power in the 1880s, while America was once again facing a grassroots revolution, this one against the Industrial Age’s rise of the Robber Barons (railroads, steel, oil, finance) in a period we often refer to as “the Gilded Age.”