Steps to navigating depressions, recessions and recoveries
“The worst financial crisis since the Great Depression” has become standard shorthand for the global financial crash and resulting severe recession. This fall, we mark the 10th anniversary of the 2008 benchmark bankruptcy of investment house Lehman Brothers.
The economic recovery was slow, but far removed from the 1930s environment. The Dow Jones Industrial Average is well above 25,000. In 2012, the 13,000 threshold was reached for the first time since 2008. Unemployment rose and remained frustratingly high, but well below the extraordinary measured level of about 25 percent during the Great Depression.
The 1929 stock market nosedive, which ushered in the economic collapse, was sudden and steep. From a peak of 381.17 on Sept. 3, U.S. stocks lost 25 percent in value over a tumultuous two days, and then drifted down to the historic low of 41.22 in July 1932. During the height of the selling frenzy, stocks were traded in volumes not reached again until the late 1960s.
Stocks did not return to the 1929 peak until 1954, in great contrast to our more rapid rebound. Great public suspicion as well as hostility toward bankers defined American political life for years.
In the recent crash, many banks failed and others were saved only by enormous emergency federal fund infusions. The Federal Deposit Insurance Corporation, established during the New Deal, has remained up to the task of protecting individual depositors.
The principal catalyst of the recent crash was the great volume of high-risk debt centered on real estate, originating in the U.S. but unfolding worldwide. Both funds and fears today can quickly move globally, fueled by electronic transfer networks. The G-20 major nations, in particular central bankers, now engage in continuing coordination of national policies.
The U.S. central bank provided leadership in aggressive bond buying. Traditionally, the money supply and interest rates have been principal financial tools. The Fed today controls a relatively small share of total dollars. At the same time, the global reserve role of the currency has facilitated the radical bond purchase initiative.
Commercial banks are more regulated again, with capital requirements raised along with their rescue. In 2010, the comprehensive Dodd-Frank Act became law, including the important initiative of Paul Volcker to separate commercial from investment banking funds.
Recovery predictably has brought political mischief. Bank lobbyists work hard to reverse the new bank regulations, with some success. Republican tax cuts mean our federal deficit and national debt are growing rapidly.
There is more subtle evidence of long-term dangers. Major investment banks collapsed with Lehman. They generally survived the Great Depression. Investment bankers ain’t what they used to be.
During the 1930’s, humorist Will Rogers became enormously popular. His homespun rural homilies contrasted with big-city financiers. Inspired by Rogers, here are three direct, down-toearth guidelines:
❚ First, as a worker, take pride. The United States – you and me - has the most productive and largest economy in the world. Our estimated gross domestic product now totals roughly $20 trillion.
❚ Second, as a citizen, be active and alert. Government reforms reflect public pressures. There must be serious, sustained public oversight of financial activities.
❚ Third, as an investor, do homework. A good guide is “Security Analysis” by Benjamin Graham and David Dodd, first published in 1934 during the Great Depression, revised and republished regularly since.
You can read the book while the TV and Internet are on, but why not turn them off ?
Arthur I. Cyr is Clausen Distinguished Professor at Carthage College and author of “After the Cold War.” Contact acyr@carthage.edu.