Adam Tooze
Every day brings new spotlight-grabbing headlines about the clashes, bashes and triumphs of President Donald Trump. On the bright side, America's gross domestic product grew at a robust 4.1% rate in the second quarter. But all the hubbub — good and bad — distracts from a dangerous complacency that's gripping the country distinguished by the failure to look for serious risks that could be hidden away in the global financial system.
What's needed is vigilance and a rigorous effort to watch for such risks, Adam Tooze, economic historian and Columbia University history professor, argues in an interview with ThinkAdvisor. Nonetheless, the multi-prize-winning author forecasts the U.S. recovery's inevitable end in 18 months to two years, at which time an economic recession will take hold.
Big banks, the mortgage space, emerging markets, the yield curve inversion and more should be monitored closely, stresses Tooze, whose new book is "Crashed: How a Decade of Financial Crises Changed the World" (Viking). Its publication on Aug. 7 marks the 10th anniversary of the start of the global financial meltdown.
Tooze's cautionary stance stems from meticulously analyzing that crisis, which upended the status quo and opened the door to what he calls Trump's rise as "an irresistible political force." This after the Republican Party in the 2008-2009 crisis "failed as the bracket between its mass base and the imperatives of systemic stabilization."
The big shift accompanying Trump's election as president has triggered two deeply disturbing conflicts, the professor points out: Most of Europe and Asia, as well as Canada, have written America off as a reliable ally. Indeed, Trump has "an allergic response to globalization," Tooze insists. And in the U.S., Republicans are torn between the belief that Trump's strategies are prudent and the "goodies" — the financial benefits, delivered or promised — for Americans that are generated by his policies.
Trump's, er, hypersensitivity to globalization hardly jibes with the reality of the world's interconnectedness and the fact that the U.S. is indispensable when it comes to the global financial system, as Tooze emphasizes in the interview. Indeed, during the meltdown, "the Fed acted across borders to provide liquidity to banks in other countries," he writes.
Born in London, bred in England and Germany, Tooze, 51, is a prize-winning author of "The Deluge," about remaking the global order after World War I, and "The Wages of Destruction," on the Nazi economy. Before Columbia, he taught at Yale and the University of Cambridge.
ThinkAdvisor recently interviewed the professor, on the phone from his New York City office. The conversation kicked off with why he wrote "Crashed" "with urgency," as he noted in the book's acknowledgements, ahead of Page 1. "There was an important story about how the financial crisis worked on the global level that needed telling. As the Trump phenomenon came into view," he said, "that dominated the theme."
Here are excerpts from the interview:
THINKADVISOR: Why do you say that the U.S. is in "a moment of renewed complacency"?
ADAM TOOZE: To the extent that one could say there's a dangerous complacency, there's reason to wonder where the hidden risks in global finance are. The balance sheets of the big American banks look relatively healthy. The question is whether various evasion mechanisms — perhaps the swap market and others — are [in play]. There are real issues in the emerging markets. Right now, we should be looking at all sorts of places to shake us out of our complacency.
Is the U.S. not paying enough attention to such issues?
Trump is definitely not paying enough attention. The recovery has got to come to an end. There's every reason to think that a recession is coming America's way in the next 18 months to two years. Will it be a regular recession, or are there more serious risks hidden away somewhere in the system?
What does this forecast mean to investors?
The question is: How long will the run-up continue? And can you afford to sit on the sidelines while the markets are still heading upwards? But at some point, that's going to turn, and the turn might be quite nasty.
What's the current state of the U.S. economy and securities markets?
We're clearly on an incredible sugar high since the tax cuts. The yield curve is inverting, but the Fed is telling us not to worry as long as it's pushed down artificially by a variety of factors, including a huge portfolio of stocks. That's exactly what they said in 2006.
How significant is the yield curve inversion? Some say it typically augurs a recession.
It's not the yield curve that kills you — it's what people do in reaction to it. If investors have to search for yield, they go into more risky assets and start taking risks that may become unmanageable.
Should there be another financial crisis, how do you think President Trump would handle it? In 2008-2009, Republicans and Democrats cooperated to resolve the dire situation.
That's an unanswerable question. But I don't think Trump is going to be confronted with the kind of crisis we had in 2008. That won't repeat.
What shape is the U.S. mortgage market in right now?
It's striking that the housing finance system isn't fixed. In fact, it's increasingly true that mortgages are being financed by nonbanks — small specialist mortgage lenders who don't qualify for bank charges; they avoid them. This is scarily reminiscent of the funding model for American mortgages before 2008. So, even if the big commercial banks are considerably safer than before 2008, it's not obvious that the mortgage system is on a stable long-term foundation.
You write that in around 2007, President Trump had plans to launch a mortgage brokerage. Why didn't he?
I think he was too late for the game and was distracted. But he wanted in. That's a very striking element in the story: How he himself was directly caught up in the crisis. The condo office building he had in Chicago was in deep trouble in the winter of 2009.
What was Trump's view on the bank bailouts?
He said publicly that they were necessary to keep the show on the road. That's not something he would want people to remember right now because it doesn't play well with the [House] Freedom Caucus and other folks like that in the Republican Party.
What do you think will happen with the Dodd-Frank Act, which Trump promised to repeal?
