Financial FAQs
“Irrational Exuberance. Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories. Robert J. Shiller
Nobel Laureate Robert Shiller is best known for his book, Irrational Exuberance, that he wrote in 2000 predicting the Dot-com recession. But it applies as well to the Great Recession of 2007-09, the worst world-wide recession since the Great Depression, which was precipitated by the busted housing bubble that in turn was based on the irrational belief housing prices would never fall.
And former Fed Chair Alan Greenspan’s Fed cooperated by pushing its Fed Funds rate to 1% in 2004 per the FRED graph, after which inflation took off. CPI (consumer) inflation ultimately reached 5 percent and Greenspan’s Fed then had to sharply raise its Fed Funds rates to combat it, busting the housing bubble.
The Great Recession that lost more than eight million jobs was ultimately based on President GW Bush pursuing the time-honored Republican agenda of multiple tax cuts and borrowed money while advocating ultra-low interest rates that created the first $1 trillion federal budget deficit.
Sound familiar? Trump is pushing for lower interest rates once again when Chairman Powell’s term at the Fed ends in the spring and his own Fed Chairman takes over with a majority of more inflation-friendly Trump-appointed Governors.
The Great Recession was caused by pure greed, in other words. Republican tax cuts mainly benefited their wealthiest supporters and the higher federal debt incurred was paid for by taxpayers. The Trump administration is running up another $4 trillion to the federal debt from its Big Beautiful Tax Bill renewing the tax cuts enacted during his first term that had already added $5 trillion to the debt.
There were also other lessons from the 2007-09 Great Recession. Bush had championed cutting regulations that ‘freed’ more market speculation and appointed regulators who were in reality foxes in the hen house. They refused to enforce existing regulations, allowing banks to buy and sell junk bonds that were falsely rated as investment grade, causing several investment banks to fail (e.g., Bear Stearns, Lehman Bros).
How close are we to another recession of any kind? The November unemployment report comes out on December 16, as I’ve said, (skipping October’s report) after the Fed’s FOMC meet that decides whether another rate cut is appropriate, so we have only the ‘unofficial’ ADP private payrolls report on employment that showed -32,000 private payrolls were lost in November.
We do have the just out October JOLTS report on monthly hirings and layoffs that said job openings jumped to 7.7 million in October from a 7.2 million reading in August that had been close to a pandemic low.
“Yet the number of people hired in October was basically the same as the number who found jobs in August: 5.1 million. That was the second-lowest number since the pandemic and the lowest since 2015 if the COVID-19 era is omitted,” said MarketWatch’s Jeffry Bartash.
That’s hardly a reason for optimism on future job growth. The fear of higher inflation from the tariffs is causing higher long-term bond and mortgage rates, stopping the housing market from growing at all.
A recession is basically a vote by consumers that they will spend less (because fewer can afford the higher prices, in this case). It’s possible that Republican priorities will fool some of their poorer, MAGA supporters some of the time, but not all Americans.
Yet Donald Trump will continue to pursue more rate cuts when his Fed Governor takes control, telling everyone it won’t cause higher inflation.
This could be the Great Recession scenario all over again, with a deflated AI asset bubble instead of the busted housing bubble. Consumers will know first, even though Trump likes to fire those government statisticians that don’t agree with him and hire incompetents in their place.
There are even more lessons to learn, such as history has a habit of repeating itself when “markets are driven by pure stupidity.”
Harlan Green © 2025
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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