Trump and Clintons plans to prevent or respond to another financial crisis are an integral part of national security. But they probably havent even considered that
This election season is enough to drive a normal voter by which I mean anyone in search of substantive debate on real issues to the brink of insanity. And the losers are us.
With the very real possibility that we are heading towards another financial crisis, all we are discussing is whether Hillary Clinton had a body double after the her fainting episode. Or the latest outrage from Donald Trump, or his kids. Its idiocy ad nauseam.
With the two main candidates finally set to meet face-to-face for the first televised debate tomorrow, youd be forgiven for hoping that might be finally about to change. I wish I shared that confidence.
I do believe that both Clinton and Trump will engage in a free-for-all in an effort to show just how tough theyll be when it comes to homeland security. Thats probably inevitable, given that the debate will take place only about 10 days after a bomb exploded in a dumpster on West 23rd Street in Manhattan, injuring 29 people.
Clearly, its important for the two candidates to spell out their views on national security issues. Hopefully this can be accomplished with a minimum of melodrama and a maximum of substantive dialogue.
What worries me is that theres one aspect of national security that no one has mentioned, that no one will mention, and that neither of the two major candidates is even thinking about.
What am I talking about? The risk that we could be heading for another financial crisis one that might make the events of 2008 look like a walk in the park. And that kind of event the prospect that the banking system will collapse, leaving us without access to our savings, and with no way to pay our bills or collect our paychecks is just as much of a threat as the more conventional perils that spring to mind when I use the phrase national security.
Lets be clear: statistically its much more likely that the next president will have to deal with a massive financial crisis than it is that she or he will have to contend with a terrorist attack of the magnitude of 9/11. It not a certainty, but it is a possibility given our never-ending cycles of boom and bust. And neither has even mentioned how theyd prevent, or respond to, to such an event.
The problem with trying to evaluate the probability of a financial crisis is that all the risk-management tools we use inevitably rely on what happened in the past. Inevitably, the next crisis comes from something we hadnt imagined could or would become a problem, or hadnt been watching. After the collapse of Long-Term Capital Management in 1998, regulators knew they needed to worry about contagion, or the way that the financial links between banks and other financial counter-parties, could spread problems, like a virus, throughout the system. But they were looking at hedge funds, not mortgage lending.
Someone needs to ask Trump and Clinton who their top candidates for treasury secretary are and what kind of instructions they would give that individual in terms of monitoring the financial markets and guarding against catastrophic outcomes.
Well-informed candidates could deliver revelatory responses. Someone representing a traditional Republican view, for instance, might echo the view that private equity tycoon Stephen Schwarzman of Blackstone Group put forth in a Wall Street Journal opinion piece last year, and argue that new rules passed following the 2008 crisis might create another liquidity crunch, cutting off access to capital just when its needed most.
Someone from the other side of the aisle would focus on the fact that the shadow banking system has exploded in size since the 2008 crisis. The private funds that form part of this universe now handle about 60% of all trading in the US Treasury securities market found in virtually every major investment portfolio using high-speed trading based on algorithmic models.
This does assume that we end up with an informed candidate, of course, and not just someone who blusters that because he is rich, we should trust him with the nations finances. (Forget about that unpleasant matter of the multiple corporate bankruptcies ) Or someone who does seem to be well-informed, but who may still be getting a lot of her information on the subject from one powerful constituency. (Yeah, Id still like to see those speeches, even if I can pretty much guess whats in them.)
An informed moderator would asked an informed candidate during tomorrows debate what kinds of risks have been created in the name of trying to jumpstart the economy by keeping interest-rates at rock-bottom levels?
At best, the result has been a surge in the issuance of junk bonds speculative investments offering above-average bond yields because investors have become desperate enough to take those risks. In some areas particularly energy they have discovered the perils of that approach, sometimes losing billions in days when crude oil prices slumped. But what will happen when interest rates make all of these bonds look like bad investments?
At worst? Well, thats a trickier matter altogether. The Federal Reserve now has an astonishing $4.5tn on its balance sheet, compared to only about $1tn at the onset of the financial crisis. The difference? Thats all the assets it bought from the banks to stabilize the banks and keep interest rates low. Now, how does it reduce that bloated balance sheet without freaking markets out? No one really knows, because no one has ever done it before. Thats another factor that could end up causing or worsening a crisis, because it means the Feds hands would be tied behind its back in the midst of another crisis. So how would the next president cope in such an eventuality?
Both presidents have said they want to reinstate Glass-Steagall financial regulations and break up the big banks. Setting aside the merits of that policy, how would the deal with the instability that would accompany its implementation?
While were on the subject Since most banks today would fail a real stress test, do the candidates know what one incorporating realistic scenarios would look like? In other words, can they do more than utter the words, Id get tough on big banks and make sure they wouldnt take foolish risks with your money again?
All of this matters even in the best of all possible worlds. And when it comes to financial markets, we arent living in the best of all possible worlds. Stocks and bonds alike are priced for perfection, and when thats the case, the slightest hiccup like comments made by Federal Reserve officials early this month can ignite a big selloff. And there are many, many things that could send markets into a tailspin, and generate a massive loss of confidence.
Including, its worth noting, whether or not the countrys next commander-in-chief seems to have a grasp of how financial markets work, and how to manage that part of his or her national security responsibility.
Im hoping financial security will make it into Mondays debate. But given this election cycle Im not holding my breath.