At summer’s end, the U.S. economy looks to be sizzling. Unemployment is low. Growth is higher than expected. Consumer confidence is soaring and Wall Street just set a record bull run.

“We are crushing it,” Trump’s economic advisor Larry Kudlow recently boasted.

The euphoria feels a bit like… just before the crash of 2007-8. Does that worry you? It should.

Hold onto your 401(k)s, because the Wall Street casino that nearly tanked the global economy ten years ago is up and running amok again.

But what about the much-touted safeguards in place today? It’s true that in 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed to ensure that taxpayers would never again be on the hook to bailout of big financial institutions.

Alas, according to Michael Greenberger, a law professor at the University of Maryland and one the key voices to raise alarms a decade ago, you can’t trust that promise. In new research for the Institute for New Economic Thinking, he warns that bankers are wriggling right out of Dodd-Frank’s rules.

If something goes wrong it could be even worse than last time. So we need to clearly see the game that’s being played.

A Boom That Went Bust

First, let’s recap what happened last time to knock millions out of their jobs and homes and send peoples’ savings down the tube.

The late nineties real estate boom made people think, wow! Housing prices are going to keep going up. Let’s get a mortgage! Banks got excited and created investment vehicles to sell loans bundled together as Collateralized Debt Obligations (CDOs), which promised higher returns to investors. Credit ratings agencies gave the CDOs high ratings and investors snapped them up.

CDOs became so hot that banks wanted to make more of them, so they started giving mortgage loans to just about anybody, even if they were broke. More than a few became famous as “Ninja” loans — no income, no job (see Thomas Herndon’s recent discussion of that fraud-fueled nightmare).

Banks said no problem: housing prices will keep rising, so people can just refinance their homes to pay off the loans. They sold these dodgy bundled mortgages to investors, and the credit ratings agencies cheered them, too, because banks paid them.

A few people said, wait; maybe the value of these CDOs will collapse if people default on the underlying mortgages. They wanted to insure the CDOs in case that happened—even though they had made none of the underlying loans! Banks and other financial institutions at first thought these people were stupid, but they were happy to sell them insurance for a hefty fee, using a financial product called a “naked” credit default swap.

The naked credit default swap is a problem. Picking out sets of mortgages that you have no financial relationship to and betting that they won’t be paid off is like seeing a sick neighbor who you think is going to die and taking out insurance on their life. For centuries insurance law said no, you can’t insure risk that is not your own.

If you take out insurance on mortgages you don’t own, you sure as heck don’t want the debtor getting out of debt, through bankruptcy for example, do you? No way: then you don’t get your insurance pay out. Incentives get very shady.

But the banks and big financial institutions, including insurance companies like AIG, sold the naked credit default swaps anyway, saying they weren’t really insurance. Which was nonsense.

By federal statute, transactions on all this stuff were unregulated and undisclosed, so nobody had a clue how much they were worth and who had them. Investors kept on betting trillions that people would fail to pay off their mortgages even though they didn’t own them. Some of these actual home mortgages were bet on as many as nine times!

Then everything spun out of control. Too many houses got built that people couldn’t afford and prices started coming down. Folks started to default, so CDO values collapsed, too, and banks like Goldman Sachs bought “insurance” on the very products they sold to investors. That’s kind of like selling cars and betting they will blow up as you drive home.

Greenberger points out that if we had just had regular defaults on mortgages, without all the crazy side bets, we would have had economic problems, sure, but nothing like a Great Recession.

Instead, banks ended up with heaps of bad loans they couldn’t sell. Everybody who had taken out “insurance” on CDOs demanded their money, but nobody could pay.

The rest is history. Lehman Brothers imploded. The Federal Reserve bailed out AIG so that it could pay off at full value the naked credit default swaps of big banks. Taxpayers shelled out trillions—first a $7 billion bailout package, then trillions more in the form of a special Federal Reserve magic called quantitative easing, to keep the banks afloat. The guys who ran the firms that made this disaster got gold-plated bonuses and retirement packages.

History Repeating Itself?

So here we are in 2018. Jerome Powell, the Chairman of the Federal Reserve, says the economy is wonderful and we won’t have too-big-to-fail banks anymore. Everybody can relax and trust the financial system.

Now, Dodd-Frank did do some good things. The riskiest stuff—like naked credit default swaps—was supposed to be overseen, principally by the Commodity Futures Trading Commission (CFTC), and the markets were meant to become more transparent. When you trade credit default swaps, somebody — a clearing facility — has to be between you and the other party to the swap to guarantee that the underlying obligation is paid off. Exchanges were created to make these transactions transparent.

Both clearing facilities and exchanges would hit the alarm bell if a company like AIG started to lose a lot of money on swaps. The government would also be told who is making all the bets. If a firm didn’t have the money to cover the bets, then the clearing facility would close out the transaction before losses started to pile up.

So we’re all good, right? Wrong, says Greenberger.

The banks may have turned away from the business of insuring bundles of mortgages, but now they’re bundling and betting other kinds of debt, like credit card debt, student loans, auto loans, corporate loans — you name it. It’s the same casino games: they make asset-backed securities which turn into CDOs, then come the “naked” credit default swaps, and so on. Once again, people who are not making the loans are betting that those loans won’t be paid off.

And guess what? While everybody was relaxing, the banks figured out a way to do their swaps deals outside of the jurisdiction of Dodd-Frank. They snuck the risky business overseas where the U.S. regulators can’t watch them.

One thing they didn’t move overseas: the risk to you.

The shady scheme went down like this: In 2013, the CFTC put out guidelines about how Dodd-Frank would apply to swaps executed outside the U.S. The CFTC said that “guaranteed” foreign subsidiaries to U.S. bank holding companies that traded swaps were subject to Dodd-Frank regulation. Since the standard swaps agreement for over two decades included a guarantee that the U.S. bank would back the deal if things went south for a foreign subsidiary, there was no reason to worry if risky swaps were traded by that subsidiary. Everybody understood if you were the counterparty to one of these deals, you counted on the bank to stand behind the foreign subsidiary.

So far, so good. Except for the matter of a tiny footnote.

Deep in the fine print of hundreds of footnotes in the CFTC guidelines, the major swaps dealer trade association found a little item saying that in a contract, you could, if you really wanted to, choose not to guarantee deals made in a foreign subsidiary. If you did not guarantee them, then Dodd-Frank would not apply.

The swaps dealers association pounced. They said to their members, like Bank of America and Citigroup: Let’s do it! Just put a note in the contract that you won’t stand behind the subsidiary if it fails. We’ll move as many swaps as we want to our newly “deguaranteed” foreign offices so we can forget all about Dodd-Frank. Under cover of darkness, without notifying the CFTC, they got rolling. The banks got so cocky that some swaps dealers just started doing their deals in New York and then, after they were done, “assigning” them to foreign subsidiaries. Presto! No more pesky regulation.

Some customers wanting to buy swaps complained that this was too risky. But then they said to themselves, wait: if the foreign subsidiary fails and Goldman or JP Morgan won’t cover the loss, does it really matter? After all, we know from 2008 that big banks get big bailouts from U.S. taxpayers if they fail. (Ed Kane, a finance professor at Boston College, has warned about this implicit guarantee, which actually inflates bank stocks and supports prices of their bonds). So the customers shrugged and kept on betting with these foreign subsidiaries.

Greenberger explains that the CFTC caught up to the shenanigans in 2016 and made proposals to stop them. The four biggest banks, JP Morgan Chase, Goldman Sachs, Citigroup, and Bank of America, which do 90% of all the swaps deals in the U.S., argued that it’s really not a problem because if the trades get assigned to London or Frankfurt, for example, the European Union (EU) has lots of regulations to make sure everything is safe and sound.

To this, Greenberger says, “Who are they kidding? Just look at the EU. Deutsche Bank is hanging on by its fingernails. Many Italian banks are failing. Turkey is in terrible trouble. The financial markets in those countries are teetering, and we’re going to rely on them to regulate this stuff?”

There’s another catch: U.S. regulators can’t get information on these “foreign” deals, so nobody knows the full extent of the trading. But you can think in terms of many trillions of dollars. Basically, we’re right back to a non-transparent market with boatloads of money sloshing around everywhere. Just like last time.

The CFTC regulators told the banks that their “deguarantee” argument was baloney and vowed to stipulate that Dodd-Frank applied to these deals. Then Trump got elected.

“Deregulation” is one of Trump’s favorites words, so closing this loophole now is about as likely as a bank CEO going to jail. Not happening.

Consider this: Right now, American students are amassing huge piles of debt. If students stop paying off their loans, there will be a lot of defaults. Actually, it’s already starting to happen. On Wall Street, people have been betting on these defaults and buying naked credit default swaps to guarantee that they will be paid if the students can’t pay.

By the way, wonder why it’s so hard to get out of student debt once you’ve got it? Because the Wall Street casino guys with the naked credit default swaps want their insurance money, that’s why.

Casino games are also rolling with credit card debt. Same thing with auto loans. Corporate-debt, too. We’re talking trillions of dollars in defaults. Sound familiar?

If this continues, what happens to the credit defaults swaps that have been assigned to an office in Frankfurt? Who pays if the foreign subsidiary goes under? Not the citizens of Germany, says Greenberger. You can be sure of that.

This hasn’t happened yet, but there was a red flag back in 2012. The London Whale scandal, which reared its ugly head when a trader at a London subsidiary of JP Morgan lost $6 billion in a swaps deal, came after Dodd-Frank passed, but before it went into effect (and before the loophole was discovered). The bank had enough in cash reserves to take that enormous hit, but most banks would not. JP Morgan CEO Jamie Dimon called it a “tempest in a teapot.” Others were not convinced: Forbes magazine put out an article about it called, “How Jamie Dimon and JPMorgan Chase Endanger the Public Safety.”

(By the way, JP Morgan and other big banks, along with bank-friendly regulators, have been arguing that they should be able to keep less money on reserve).

Greenberger notes that the London Whale was the result of trading by just one guy. If you had ten of these, the banks probably wouldn’t be able to pay off their obligations and the counterparties wouldn’t be able to pay off theirs, either.

It’s 2007 all over again.

Greenberger says that if big financial firms fail because they can’t pay each other off, it’s not going to be a recession, but more like the Great Depression. A worldwide economic meltdown with everybody trying to get their money out of the banks and institutions failing everywhere you turn. The only way to stop it would be to bail the banks out.

But American taxpayers hate that idea. Greenberger doesn’t believe they’d go for it. Even if the Federal Reserve stepped in to do some behind-the-scenes magic like quantitative easing instead of an upfront bailout that Congress would have to approve, he thinks that the public would still mobilize to fight it.

“Besides that,” he notes, “I think we can subjectively say that Trump’s federal regulators are not as skilled as those who handled the last crisis. So it’s going to be total havoc.”

Political Chaos on the Horizon

It would be hard to exaggerate just what a political crisis this would be. The Tea Party, you’ll recall, emerged as a response to anger at the bank bailouts. Bitterness over the injustice of what happened in 2008 may well be a key reason why Trump is president.

“Everybody else went through trauma, except the big banks,” Greenberger observes. “Dick Fuld of Lehman has got houses all over the world, sitting pretty. The head of Merrill Lynch got a golden multi-million dollar parachute. The rest of us were losing jobs or flipping hamburgers at McDonald’s. If something goes wrong again and there’s wind that these four big banks are somehow going to be rescued in spite of their recklessness, there will be political hell to pay for that.”

Remember, another systematic bank failure leaves two ugly possibilities: a bailout or a depression, with perhaps a third of the country out of work.

Faced with this choice, the public might be even more enraged than last time. Trust would break down completely. If you sit down and start thinking about that, you begin to get very, very worried.

A Way Out?

There’s one avenue of relief, says Greenberger. Not an easy one, but a possibility.

State attorneys general have a statutory right to bring actions in federal district court on behalf of their citizens to enforce Dodd-Frank. Because the banks are clearly evading the law, he says it’s an open and shut case: “The law says that if these transactions could imperil the US economy, Dodd-Frank applies wherever they take place.”

The trouble is finding attorneys general with the will to fight. Greenberger says that unfortunately, many of them, while otherwise first rate, just don’t understand the swaps market. “They tremble and panic over the idea that they might have to bring a lawsuit concerning swaps,” he says.

The Democratic Party, he reminds us, is pretty much split between those who are sympathetic to the banks (and enjoy taking political contributions from them) and those who want to fight this stuff out. It’s far from certain that the second group will be heeded.

Trump assures Americans that there’s only smooth sailing ahead. Everybody will be employed and banks will no longer be dangerous. The economy is “the greatest ever,” he claims.

Do you believe it? If so, hopefully you like flipping burgers at MacDonald’s.