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The Coming Economic Crash — And How to Make it Worse

Written by Jason Stutman
Posted July 27, 2019

Earlier this week, presidential hopeful Elizabeth Warren posted an article on Medium entitled “The Coming Economic Crash — And How to Stop It.”

In the article, Warren makes a number of bold claims and bearish predictions about the U.S. economy and then proposes her own solutions on how to prevent the next market crash (spoiler: she’d only make it worse).

From a strategic standpoint, I have to admit that I can’t help but admire the post as a clever maneuver from Warren’s camp. The Democratic candidate is wisely attempting to chip away at Trump’s biggest advantage heading into the 2020 presidential race: the fact that, on paper, the U.S. economy is looking better today than it has in decades.

Unemployment is at its lowest rate since 1969, GDP growth has yet to dip below 2% in any single quarter, hourly earnings have been ticking up, and the stock market is booming with major indices at record highs. 

Love him or hate him, it’s undeniable that Trump’s presidency has correlated with significant economic gains. And based on historical voting trends, that’s going to make him particularly difficult to beat in 2020.

Not surprisingly, Gallup finds that Trump’s “top strength” in polling currently surrounds economic measures. Despite an overall approval rating around 43%, the majority of Americans approve of Trump’s handling of the economy (56%) and unemployment (54%).

Trump, of course, is riding that train, claiming earlier this month that the U.S. economy is the “best it has ever been.”

Warren’s prediction of a coming economic crash, though, aims to plant a seed of doubt in U.S. voters about Trump’s economic success as president. Is the economy really doing as great as Trump wants us to believe, or is it all a house of cards ready to come crashing down? 

Politically speaking, I have to say it’s a brilliant move by Warren, but it’s also important for us to ask whether or not any of her claims actually hold water. 

Perhaps more importantly, we need to ask whether or not Warren’s proposed economic solutions would make the situation better or worse for the average American.

The Coming Economic Crash — And How to Make it Worse

As much as I admire Warren’s Medium post from a politically strategic standpoint, I can’t help but shudder at the economic realities of it. 

The piece, which purports to know the preventative measures for “the next economic crash,” is largely tone deaf to how the economy works and what caused the 2008 collapse in the first place.

The article begins with an attempt to establish Warren as an accurate economic forecaster, primarily with the claim that she predicted America’s most recent recession. 

I warned about an economic crash years before the 2008 crisis, but the people in power wouldn’t listen.

PolitiFact ran a fact check on the claim, ultimately rating it true, but as is often the case with so-called “fact checkers,” the rating is misleading at best.

While Warren was indeed lamenting subprime mortgages as predatory as early as 2003, there is zero evidence (at least that I’ve seen or that’s been presented by PolitiFact) of Warren actually predicting a broader economic crash as a result of such lending. Warren may deserve a modicum of credit, but voicing concerns about a single economic issue is not the same as predicting a macroeconomic crash.

Further, while Warren goes on to cast banks and private lenders as the sole villains of this story, she conveniently disregards the role of government policy in the 2008 housing crisis. Specifically, Warren ignores government efforts throughout the Clinton and, to a lesser degree, Bush administrations to degrade mortgage standards in order to increase home ownership.

The Big, Bad Banks That Never Were

To provide a bit of necessary history, in 1992, Congress adopted legislation that required federal housing agencies, namely Fannie May and Freddie Mac, to meet “Affordable Housing Goals.”

In short, this legislation required between 30% and 55% of mortgages to be made to the bottom half of income earners, which ultimately flooded the market with subprime mortgages. Banks decreased their lending standards in order to meet or compete with these government-mandated quotas, and those reduced standards spread like wildfire throughout the entire lending market.

All told, half of mortgages by 2008 were subprime, three quarters of which were on the books of government entities. Certainly, private lenders had a degree of influence in the crisis, but to disregard the role of government policy is sheer historical revisionism.

The irony, then, in a politician like Warren claiming that she foresaw the 2008 economic crash is that she supports the very same kinds of policies that caused it in the first place.

The Next Crisis: Making Matters Worse

The most glaring parallel here is Warren’s plan for student debt. Earlier this week, the presidential hopeful introduced a bill to cancel roughly $640 billion in student debt, which, of course, would be paid for with taxpayer dollars.

Worse, such a bill would only address existing student debt and would ultimately exacerbate the underlying cause of the crisis in the first place (exploding cost of tuition, room, and board).

You see, the same way Affordable Housing Goals artificially inflated demand by increasing the pool of subprime borrowers, subsidizing tuition only does the same for higher education by increasing the pool of what we might call “subprime students.”

Consider, for one, that the majority of borrowers who default on their student loans are not college graduates; they’re actually college dropouts. 

In fact, less than 15% of students who graduate with a bachelor’s degree or higher default on their student loans by age 33. Non-graduates, on the other hand, default above 40%.

If we break those numbers down by other categories, the picture of the student loan crisis becomes even clearer, and that’s the fact that we’re overvaluing many aspects of higher education as a society (the same way we were overvaluing housing in 2008).

Would you be surprised if I told you student loan default rates are highest among students who pursue an Arts/Humanities degree at a non-selective college? 

Would you be surprised if I told you that default rates are lowest among students who pursue a business, STEM, or vocational degree at a selective college?

Well, both those statements are unequivocally true, which is why any form of student loan forgiveness incentivizes the very behaviors making student loans explode in the first place: 1) students pursuing college degrees halfheartedly, and 2) students pursuing college degrees that carry little value in the real world.

In essence, Warren wants working electricians and engineers to bail out art and philosophy dropouts. The message this sends to incoming students is that there are no consequences to flunking out and no consequences to picking a gender studies degree. 

You don’t need to be an economist to figure out that such legislation could only lead to a further increase in the cost of higher ed. You do need to be a politician, though, to claim that it’s how we prevent the next economic crisis.

Until next time,

  JS Sig

Jason Stutman

follow basic @JasonStutman on Twitter

Jason Stutman is Wealth Daily's senior technology analyst and editor of investment advisory newsletters Technology and Opportunity and Topline Trader. His strategy for building winning portfolios is simple: Buy the disruptor, sell the disrupted.

Covering the broad sector of technology and occasionally dabbling in the political sphere, Jason has written hundreds of articles spanning topics from consumer electronics and development stage biotechnology to political forecasting and social commentary.

Outside the office Jason is a lover of science fiction and the outdoors. He writes through the lens of a futurist, free market advocate, and fiscal conservative. Jason currently hails from Baltimore, Maryland, with roots in the great state of New York.

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