Chapter 5 Martellini Replay of 1929

Chapter 5 Martellini Replay of 1929 - — JUDGMENT CALLS...

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: — JUDGMENT CALLS — Robert J. Samuelson Is This a Replay of 1929? ATCHING THE SLIPPING ECONOMY AND CONGRESS’S EPIC DEBATE over the Treasury’s unprecedented $700 billion financial bailout, it is im- possible not to wonder whether this is 1929 all over again. Even sophisti- cated observers invoke the comparison. Martin Wolf, the chief eco- nomic commentator for the Financial Times, began a recent column: “It is just over three score years and ten since [the end of] the Great Depression.” What’s frightening is not any one event but the prospect that things are slipping out of conncl. Panic—political as well as economic—is the enemy. There are parallels between then and now, but there are also big difl‘erences. Now, as then, Americans borrowed heavily before the crisis—in the 1920s, for cars, radios and appliances; in the past decade, for homes or against inflated home values. Now, as then, the crisis caught people by surprise and is global in scope. But unlike then, the federal government is now a huge part of the economy (20 percent vs. 3 percent in 1929) and its spending—for Social Security, defense, roads—provides greater stabilization. Unlike then, government oflicials have moved quickly, if clumsi- ly, to contain the crisis. We need to remind ourselves that economic slumps—though wrenching and disillusioning for millions— rarely become national nagedles. Since the late 19403, the United States has sufi‘ered 10 recessions. On average, they've lasted 10 months and involved peak monthly unemployment of 7.6 percent; the worst (thoseof1973-75 and 1981-82) both lasted 16 months and had peak unemployment of 9.0 percent and 10.8 percent, respective- ly. We are almost certainly in a recession now, butjoblessness, 6.1 percentin September, would have to rise spectacularly to match post-World War II highs. The stock market tells a similar story. There have been 10 previous postwar bear markets, defined as declines of at least 20 percent in the Standard 8: Poor’s 500 Index. The average decline was 31.5 percent; those 011973-74 and 2000-02 were nearly 50 percent. By contrast, the S&P’s low point so fin- (Fiiday. Oct. 3) was 30 percent below the peak reached in October 2007. The Great Depression that followed the stock market’s col- lapse in October 1929 was a diflerent beast. By the low point in July 1932, stocks had dropped almost 90 percent from their peak. The accompanying devastadon—banlouptcies, foreclosures. bread lines—lasted a decade. Even in 1940, unemployment was almost 15 percent. Unlike postwar recessions, the Depression submitted neither to self-correcting market mechanisms nor government policies. Why? Capitalism’s inherent instabilities were blamed— fairly, up to a point. Overborrowing, overinvestment and speculation chroni- cally govern business cycles. Herbert Hoover was also blamed for being too timid—less fairly. In fact, Hoover initially expanded public works to combat the slump. The real culprit was the Fed- eral Reserve. Depression scholarship changed forever in 1963 when economists Milton Friedman and Anna Schwartz argued. in a highly detailed account, that the Fed had unwittingly trans- formed an ordinary, ifharsh. recession into a calamity by permit- ting a banking collapse and a disastrous drop in the money supply. Horn 1929 to 1933. two fifths of the nation‘s banks failed; depositor runs were endemic; the money supply (basically, cash plus bank deposits) declined by more than a third. People lost bank accounts; credit for companies and consumers shriveled. The process of economic retrenchment fed on itselfand over- whelmed the normal channels of recovery. These mechanisms included surplus inventories being sold so companies could reorder; strong companies expanding as week competitors dis- appeared; high debts being repaid so borrowers could resume normal spending. What we see now is a fi'antic effort to prevent a repetition of this destructive chain reaction by which a disintegrating financial system compounds the economic downturn. It’s said that the $700 billion bailout passed by Congress will rescue banks and other financial institutions by having the Treasury buy their sus- pect mortgage-backed securities. In reality, the Tieasury is bail— ing out the Fed, which has already—through various channels— lent financial insn'nnions roughly $1 trillion against myriad securities. The last increase in federal deposit insurance fi'om $100,000 to $250,000 aims to discourage panicky bank with- drawals (nearly three quarters of deposits will now be insured, up from almost two thirds before). In Europe, governments have taken similar actions; last Unlike during the week, I‘ll-eland guaranteed its run pass banks‘ eposits. tGh t DBP In)?! The cause of the Fed‘s tirnidity e governmo 5 inthe19305remainsamatter now a huge part ofscholarly dispute. Economist of the economyl Barry Eichengreen ofthe Uni- ' fCalifo ' Berke! , And ofl‘lcials have mmgge‘tyst",,fi,fi1,'§§’mofgc moved quickly, gold standard; calla]: Meltzer of Carnegie M on University gocdlldllldflflyl'etgfisis blames the flawed“realbills"doc- trine that, in practice, limited the Fed's lending to besieged banks. Either way, Fed chairman Ben chanke—a student of the Depression—understands the error. The Fed's massive lending and the congressional bailout both aim to prop up the financial system and avoid a ruinous credit contraction. This doesn’t mean the economy won’t get worse. It will. The housing glut endures. With unemployment rising, cautious con- sumers have curbed spending. Economies abroad are slowing, hurling US. exports. Banks and other financial institutions will sufl‘er more losses. But these are all normal symptoms ofreces- sion. Our real vulnerability is a highly complex and interconnect- ed global financial system that might resist rescue and revival. The Great Depression resulted from the perverse mix of a weak economy and government policies that magnified the weakness and that were only partially neutralized by the New Deal. If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedl'y misleading. OCTOBER 13,2008 I NEWSWEEK 35 ...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern