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Great Crash to Rival ’29?
The good news, as Allister Heath puts it, is it’s not yet clear whether this is the beginning of a major recession. It could just be a major correction, right? (This debate has the feeling you have when you live in an earthquake-prone area and the ground rumbles. Was that a foreshock? Maybe the earth just relieved a little excess pressure and now it’ll be okay?)
The bad news is that I think he’s right about what would happen if there were another financial crash. I think it would sink capitalism for good and probably liberal democracy with it:
We are too fragile, fiscally as well as psychologically. Our economies, cultures and polities are still paying a heavy price for the Great Recession; another collapse, especially were it to be accompanied by a fresh banking bailout by the taxpayer, would trigger a cataclysmic, uncontrollable backlash.
The public, whose faith in elites and the private sector was rattled after 2007-09, would simply not wear it. Its anger would be so explosive, so-all encompassing that it would threaten the very survival of free trade, of globalisation and of the market-based economy. There would be calls for wage and price controls, punitive, ultra-progressive taxes, a war on the City and arbitrary jail sentences.
For fear of allowing extremist or populist parties through the door, mainstream politicians would end up adopting much of this agenda, with devastating implications for our long-term prosperity. Central banks, in desperation, would embrace the purest form of money-printing: they would start giving consumers actual cash to spend, temporarily turbo-charging demand while destroying any remaining respect for the idea that money needs to be earned.
History never repeats itself exactly, but the last time a recession was met by pure, unadulterated populism was in the Thirties, when the Americans turned a stock market crash and a series of monetary policy blunders into a depression. …
You can read the whole grim thing, which unfortunately I think is exactly right, and tell me whether you agree with his conclusion:
The sorry truth is that there is very little that governments can do at this stage, apart from battening down the hatches and hoping that central banks succeed in kicking our problems even further down the road.
Can you think of a better idea?
And what’s your theory about why the markets are doing this? Everyone has one, but there’s so little way of testing any of them that I’m thinking “animal spirits” is about as good an explanation as any. In other words, The Stock Market Wotan is Angry.
Published in General
We are witnessing the culmination of nearly a decade of poor monetary policy exceeded only in its folly by a restrictive regulatory scheme and fiscal irresponsibility.
We wish to enjoy the fruits of free markets during the boom times while avoiding the necessary cleansing of creative destruction.
Much of what we are seeing since January 1st is driven by the disparity that grew between the Dollar and other currencies while the Fed played violin over the bonfire. Most of the volatility starts in Asia, washes through Europe and our markets are actually sedate during the U.S. trading hours. I think this is why you are more keen to the volatility Claire.
The signs of a deteriorating economy have been evident for months and I wrote about them here. Additionally, the upstream energy sector is far from healed in the U.S.
I had lunch at the largest upstream energy company and conglomerate in Dallas yesterday briefing their treasury officers. The big difference I cautioned is that 8 years ago short-term rates were >5%, the fed could move the needle. With rates targeted 0.25-.5% now, not so much.
“…it would sink capitalism for good and probably liberal democracy with it”
Pretty sure that’s been the hard Left’s plan all along. The question is how do we equip ourselves to resist? It will depend on what kind of people we have in power when we finally run out of road to kick the can down, because the only non-tyrannical option left will be to do nothing and let the market forces finally work themselves out.
It’ll be ugly either way, the outcome will depend on our response.
Yes, that makes sense.
Well, exactly — that’s why everyone’s freaking out. Although it sounds as if people aren’t freaking out in the US. But the freaking out is itself unhelpful, because some of this is just panic. It would be hugely helpful to the world if Bernie and the Donald stopped talking about their economic plans. Some of that mysterious, “I don’t think it’s a good idea to discuss my plans” that Trump’s been doing on foreign policy would be much better than all this talk of tariffs and confiscating capital.
And yet the whole thing is caused by exactly the policies conservatives wish to change, and if one blames capitalism one is on the wrong horse, it is precisely government control and interference that will cause this if it happens, and socialism will only make it infinitely worse.
Well, the doctrinal truly Marxist hard Left doesn’t think you need to plan this; they think it happens on its own. But the Leninist Left could theoretically be that cunning — however, there are many institutions they’d have had to totally infiltrate over many years to pull this off. Like Wall Street, and the Nikkei 225.
This observation from Peggy Noonan in today’s WSJ shows me that the always unthinkable can now become at least a brain fart: coup. And then the destruction is not “creative” as Schumpeter envisioned.
Yes, that’s the irony of it, and we all know it, but welcome to the 1930s. Do you have a better feeling now for why Keynes said, “In the long run, we’re all dead?” I really have so much more empathetic understanding now of all of the actors of that decade.
I continue to believe we will slowdown less than the rest of the world and that the fed will – probably a little late – recognize that it would be better off supplying the world with more dollars when that is necessary as risk aversion rises. I also continue to hope despite the bleak outlook that we can elect people who will unshackle the American economy and make us once again a beacon of capitalist growth. I believe “there is no alternative” to quote someone you are more familiar with than I am. I was reading a review of a new book about Mrs Thatcher in the new criterion and I wondered if Ted Cruz -with his somewhat unfashionable hair- could be somewhat analogous to her? I have not thought of myself as a supporter of his but what do you thin?
That’s a brilliantly written column. There’s a reason she’s still got that job, don’t you think?
Brent and Claire, my question is if interest rates are used as an incentive to borrow money and the rates are pretty much just above, at, or below (Sweden) zero percent, then would it not be wise to stop trying to flood the market with liquidity and allow the market to digest what has been pumped into it since 2008? This digestion means that some major events will occur, for sure, but wouldn’t that be a good thing in the long run to stabilize the financial system?
I thin Patrick is referring to the Cloward and Piven plan to bring about socialism/Marxism in the United States. Put so much strain on the financial system through massive increases in debt to the point that the current system collapses and then the Marxists get to rebuild that system. Hat tip to Stanley Kurtz on this one, Francis Fox-Piven was one of Obama’s professors at Columbia and an adviser during his first couple of years in the White House.
Good question. She certainly did not make herself loathed by her party before she was elected, and she was able to get a great deal done because she’d already been an extremely able shadow cabinet minister — no need to learn on the job for her, that’s for sure. Although it’s true she was already very polarizing among the electorate. Not nearly as much as she’d later become, of course.
There was certainly an aspect of her election that’s familiar: They elected her as a contemptuous joke. “Let’s elect a woman, she couldn’t possibly screw things up as much as the men have.” It really was the gesture of an electorate that wanted to express its contempt for the political class in the most emasculating and insulting way possible. In that sense Trump is more analogous, but there were good reasons to to expect Thatcher to be spectacularly competent and well-prepared. The only reason she wasn’t viewed that way was because she was a woman — it really was a very different era. She was known for her extraordinary mastery of policy detail and her ability cogently to make the case for conservatism at every level — intellectually, politically, in writing, in her speeches. So … I don’t know, honestly. I’m not seeing Thatcher in any of our candidates, and not seeing anyone waiting in the wings to step in should the hour of need become so dire, either. Are you?
I truly don’t know, because the question is how long, in the long run. And what will these “major events” be. Heath doesn’t take his argument to its natural conclusion, does a little hand-waving about whether history really repeats itself, but the 1930s did indeed lead to the 1940s. And I sure see a world that’s still got that impulse in it, frankly. If I knew how to buy five more years of stability, I’d be tempted to push the button and hope that within five years, at least a few of the geopolitical fires will be burning a bit more dimly. But I’m not sure how you can push that button, now. I share the instinct that you’ve got to make the markets “digest,” in other words “invest” that money, because right now it’s just being circulated from one holding area to another; no one’s got the confidence to do anything with it. But do we know that the markets’ digestive system will do what we expect?
Yes, Peggy is a very good writer, but her support for Obama calls into question her cognitive abilities.
Also, she is a master of the blindingly obvious. For example, people don’t have faith in institutions, maybe this is part of the appeal of Trump.
When do I get my WSJ column?
When you can do that every day. On a deadline, even when you don’t feel like it.
“Patrick is referring to the Cloward and Piven plan to bring about socialism/Marxism in the United States”
Correct. And I’m sure Obama sees this as their last, best chance to light the fuse. I’ve never been part of the tinfoil hat brigade but this guy brings out the worst in me. He embodies a unique blend of incompetence and malevolence, and 2017 cannot get here fast enough.
Thanks. There’s no question that we are teetering on the edge of a precipice. I wish more people would point out that the Trump protectionist approach is in the vein of Smoot-Hawley, and could bring about a second Great Depression.
And once again the lesson is: buy ammo.
It’s long been argued that the Fed’s levers are limited, and when interest rates are already lower than my cat’s swaybelly then they’re completely out of ammo. Even with all the cash infusion from easing, investment in actual capital projects is small, and why? Because demand is small. Incomes are stagnant. You don’t build a new plant to build Gizmo 3.0 when you know the market’s weak and your payback extends into 2080.
You can’t raise taxes and the regulatory burden and then sit back and wonder why the economy’s not taking off. Unless you’re an imbecilic fop, a Socialist, or both. Or Sanders or Obama. If those two clowns had to run a small business for two months they’d actually learn a great deal, but they only want to know what they think they know, because that’s easier.
Which is always the sissy’s way out of anything.
IMHO, the economy actually broke in 07-09 and all the Fed and the other central banks did was paper over it in hopes no one would notice. The economy is broken. We have 5% unemployment (don’t get me started about that stat) yet I know plenty of able people out of work. There is no inflation, yet food and housing costs seem to be moving ever upward. I do think a second crash could lead to very bad outcomes, especially when it becomes obvious the government can’t support everyone currently on the dole.
I think what the Fed and the other central banks have been doing is delaying in hopes that another revolution like the computer revolution arrives to pull us out of the death spiral. Nanotech, Bioengineering, AI all have the potential to do that, however many of the possible developments might also make the economy “worse”, or at least the employment situation. Self driving trucks are going to put a lot of non-college educated men out of work.
I think the Feds current course of very slow tightening might have a hope of pulling us back from the brink if it was combined with deregulation and balanced federal and state budgets. Not a snowballs chance in a CAT scanner of that happening.
There is a threat out there, but I think it will come from poor handling of the the after affects of unraveling the strangle hold that is causing economic stagnation. If we don’t undo the strangle hold, high taxes, excessive regulation, and the dead weight of government and organized interests on everything, then it will be stagnation into the foreseeable future. In other words I’m not sure what we’re seeing is recession or the end of recovery. There were dynamic sectors, the high tech where regulations haven’t caught up, but in general there is little new business and modest expansion in old business. We have been living under the false assumptions that government fiscal or monetary policy can stimulate and that we have run out of tools. Those assumptions are just wrong. The government can’t proactively stimulate. The only multiplier we can ever find are ones that count government spending as GNP and don’t count where those resources come come. It’s all nonsense. Monetary policy can’t work if regulations make lending more difficult and if expectations are negative. Stimulus comes by ceasing to do harmful things, but this isn’t appropriately called stimulus. Stop the harm and leave it stopped, but be ready to manage the explosive credit expansion that will result from removing the shackles.
There’s a limit to how many times I can say it without sounding kind of one-note, but I’m doing my best. NB: That’s also the Bernie approach.
Fiscal policy for the past 6-7 years — from Dodd-Frank to Obamacare to the 2013 tax increase to the myriad ways in which governments have introduced new regulatory and tax uncertainty — has been very destructive to output, by discouraging business investment and startup activity. And then there are the demographic factors (in the US and especially globally) that are depressing output and prices simultaneously.
Unfortunately, what you can do with monetary policy is limited. When you try to optimize two variables (output and prices) you need two policy levers. In the absence of good fiscal policy, the Fed has been doing everything it can to use monetary policy to stimulate output.
But as a result, market levels have been driven by policy forecasts rather than economic fundamentals. If you think the Fed will raise rates soon, you sell. If you think they will wait, you buy. The dominance of Fed policy in market pricing has led to a disconnect between market levels and the real economy.
You can paper over the weak economic reality for only so long. The fundamentals are now reasserting themselves, and the Fed is out of bullets.
This reminds me of when my Grandmother was slowly dying of diabetes related complications. The whole family began to break each other apart the longer she lingered in pain without hope. By the time she finally passed, many relationships had become strained beyond any point of them being able to be sustained in any useful form. They were relieved to see her (and their) suffering end. Almost everyone blamed her illness and by extension her for all of it. All I could think of was all the joy these same people always took from the endless pies, cakes, cookies and confections she would make for us at every family function as we cried out for “More, more, more!”.
While I realize this is a heavily-pregnant metaphor, it’s actually a nice way to think about it. Remember the good times and what we loved about them. Rejoice for having had them — everything comes to an end, after all.
Without sounding crass, all digestive systems lead to the same end, but that is a necessary function for healthy living.
I don’t know if I agree with your veiled assertion that the mentality that brought the 30s to the 40s exists today. Something tells me that if we are on the verge of the 40s repeating, that catastrophe is going to be very short given the West’s lack of will. Where those embers are glowing now Claire, they are in areas that cannot really reach us with any tremendous effect. I look at Far East Asia as a likely place for this, but i just don’t know for sure.
SoS is absolutely right here. Demographics have a tremendous effect on economic vitality and the West just has not been replacing its labor force. It has attempted to import a labor force, but the problem is that at the same time it has created a safety couch with which this prospective labor force has taken seat while at the same time artificially increased the cost of keeping jobs in the country for that imported labor force to hold. It’s all about demographics.
The financial media nowadays intentionally creates the same sensationalism that their counterparts do in other news categories. This is not a good thing. And they are assisted by s0-called “experts” who come up with seemingly plausible scenarios of the coming armageddon. However, these prognosticators do this for the sole hope of making money by being able to say “they were right or the first to suggest it” if such a scenario ever played itself out. There is absolutely no downside to them when they are ultimately proven wrong. And no one calls them on it.
This is not even 2008, much less ’29. Good grief! SRSLY?! In 2008, we had Bear Stearns and Lehman go under. Under. Many more national banks (look up the price chart for FITB, focusing on early 2009) like this were on the brink of going under themselves.
What has transpired since that time is a great strengthening in the balance sheets of the companies in our banking system, especially the “too big to fail” ones. Not only the banks, but other corporate earnings, while not great, are treading water and stable. There is no huge “bubble” set to burst like in 2008.
The current malaise is once again due to liberal socialists uncontrolled spending, etc. It could have been worse after seven years of 0bama. The great truth is that there is very little that governments can do to make it worse at this stage. Let the free enterprise system work.
The most prescient comment on the thread courtesy of SoS:
This is the bane of our existence.
Well said. The only thing I take exception to is the sentence I bolded. Quite possibly there is a bubble in government debt (US Treasury but also states, municipalities, European governments, and others). IMO, yields underestimate the likelihood of default. Some of the price appreciation is the result of regulatory approaches to capital and collateral that treat such debt as “risk free” and create artificial demand for it.