Is America’s political system facing collapse? The terrible symptoms of a breakdown are obvious.
The public is irreparably divided on almost every issue, big or small, important or trivial. Neither party is able or willing to compromise on a solution. And political discourse is uglier and more vicious than ever, relegating truth and facts to meaninglessness.
The most dangerous symptom, unprecedented in American history, is that both political parties view each other as a threat to democracy.
President Joe Biden argues that the threat of this era lies between democracy and dictatorship. Overseas, China, Russia, North Korea, and Iran are the major powers of authoritarian politics. If elected at home, former President Donald Trump would end democracy as we know it and become a “dictator.”
Trump calls Biden the worst president in American history. Trump accused Biden of weaponizing the Justice Department against him. Trump, who initially pledged “retribution” and “revenge” by bringing about a successful administration, has changed his tack. Revenge is against political opposition. And a think tank and a former aide have laid out a blueprint for ‘revolutionizing’ the Constitution.
These simultaneous attacks on democracy are eerily similar to the one that nearly brought down the financial system in 2008. Both parties are assuming a catastrophic outcome. But what happens if your assumptions are wrong?
Past crises occurred because of the assumption that housing prices would rise and mortgage loans would become securitized and become safe financial products that could make huge amounts of money based on monthly payments and cash flow. This resulted in a credit default swap and collateralized debt obligations.
Investopedia defines a credit default swap as “a financial derivative that allows an investor to exchange or offset his or her credit risk with that of another investor.” This is done through “a contract whereby the buyer pays an ongoing premium similar to the insurance policy payment.” In return, the seller agrees to pay the value of the securities plus interest in the event of default.”
Tick, tick, tick.
Collateralized debt is defined as “complexly structured financial instruments backed by pools of credit and other assets and sold to institutional investors.” These are “derivatives.” “Its value is derived from another underlying asset,” meaning “this asset will serve as collateral if the loan defaults.”
In the era of low interest rates in 2006 and 2007, the appeal of owning not only a home but also other properties became very attractive. Brokers, mortgage companies, and banks began offering loans with little oversight.
Mortgages from AAA to subprime have been replaced by credit default swaps and collateralized debt obligations. We eliminated the risk by combining AAA mortgages. The bets were placed on these tools. An additional assumption was that prices would rise. Additionally, other bets were also placed.
The process became financially identical to a nuclear reaction. So-called NINJA loans (no income, job or assets required) have become common. Too many unqualified loans were made to people who could not afford them. Rating agencies such as Standard and Poor’s and Fitch continued to support these tools. I was making money with my fists until the music stopped.
Payment defaults began to increase. This has escalated into a crisis. Unable to repay loans, the banking system was on the verge of collapse, and default swaps and debt collateral became financial weapons of mass destruction as defaults rose sharply.
Fortunately, the Federal Reserve stepped in with a ton of capital. Among the victims, Lehman Brothers Bank and Bear Stearns Bank also went bankrupt. Things could have been worse. But despite the cheating and illegal activities, only one banker went to jail.
In politics, there is no Federal Reserve to step in to save the system. As both parties declare that democracy is at risk, the legitimacy of the system will be eroded, just as the NINJA loans and defaults led to the financial crisis. And the equivalent of credit default swaps and collateralized debt obligations is today’s social media and the willingness of both parties to use any means, fair or unfair, to attack and defeat the other.
What can you do? Political systems have become more resilient and powerful, and the risks may have been exaggerated. Checks and balances can limit what each political party can or will do if its candidate wins.
But suppose, as in the financial crisis, that assumption turns out to be wrong. And what?
Harlan Ullman Ph.D. Senior advisor to the Atlantic Council and principal author of the “Shock and Awe” military doctrine. His 12th book, “The Fifth Horseman and the New MAD: How Massive Attacks of Disruption Became the Looming Existential Danger to a Divided Nation and the World at Large,” is available on Amazon. You can reach him on Twitter @harlankullman.
