Home » Money » Yes, Not Again – Again

Yes, Not Again – Again

Ahead of both the 6th Anniversary of Barataria and my preparations for a book on the economy today, I have been re-reading old posts.  This one is from 26 March 2008, before the collapse of Lehman and before many people worried about the economy.  It’s important to revisit this point because it explains why many of us were worried back about the last time the DJIA was up where it is now.

This goes to the heart of what makes this a Depression, and why the effects are very long term and big.  I hope you enjoy this little trip through history.  Thanks for reading!

Chrysler_BuildingImagine that a new technology comes along that spawns a whole new industry. Not only is this industry a revolution in how people lead their lives, it’s immensely popular and generates a big pile of cash. The field starts out wide-open with many small entrepreneurs, but gradually they become rich as they are bought out by a few big players. Soon, the industry has consolidated and re-investment slows dramatically. Those who made big money start to put it into real estate, specifically in Midtown Manhattan, Florida, and Los Angeles.

When the technology that started it all starts to slow from its original growth, investment in real estate only escalates. Eventually, that also has seen better days and the soaring prices begin to crash back to earth. Banks start to fail when everything gets tight, and it is revealed that many of these banks relaxed their standards a bit too much in the frenzy. The reverberations are felt as far as Wall Street. Will the stock market take a hit over all this, or will the good times just keep rolling?

If that sounds familiar to you, it should. It’s not only a description of the late 1990s, it’s what happened in the USofA starting in 1918. That time, the new technology was the automobile, and the big players had names like Henry Ford and Walter P. Chrysler.

The situation we find ourselves in right now is remarkably like the one that the stock market was in by the summer of 1929. What most people don’t realize is that bank failures were not caused by the stock market crash – indeed, the rate of about 600 failures per year from 1925-1929 was already double the previous decade. The historic meltdown on Wall Street was one of many symptoms of a massive credit crunch that left the entire nation scrambling for cash. Eventually, without credit, everything ground to a halt. That’s what caused the Depression, when bank failures peaked at 4,000 in 1933.

There are key differences between today and 1929, however. The Federal Reserve was preoccupied with currency swaps back then because the Depression started in foreign markets that started absorbing our gold reserves in a panic. The Fed was also slow to act for other reasons, notably the desire to keep an even hand on the markets. But for all the net positives we can find in 2008 versus 1929, there is one large negative that limits the reach of the Fed – we are in an expensive war, and our spending habits have crashed the US Dollar to new lows against the currencies of all of our trading partners.

Where will our next round of credit come from? As long as the Fed can manage to print more money, they will. But with trillions of dollars in derivatives, the action taken to save the assets of Bear Sterns cannot be duplicated forever. At some point, the market has to function properly by itself. We cannot expect any more money to come into the market until it shows signs of righting itself.

I’ve said this many times, but it bears repeating; it’s my version of Gresham’s Law. Stupid money drives out Smart. What I mean by that is that once a bubble has clearly popped, no one will get back into the market until they are sure that they have a good reason. Those who played the bubble have to ride it all the way down before those who either stayed away or got out will come back.

Where does this leave us? The historical parallels are chilling. We know that the Fed is, appropriately, beginning to panic and take drastic action. That’s a start, and it’s more than happened in 1929. For the present time, however, we can’t do a lot more than try to enjoy the ride.

Hope you enjoyed that “New Economy” thang everyone was so excited about back in 1999, too.

14 thoughts on “Yes, Not Again – Again

  1. Not a bad call from 5 years ago. Everyone else was ignoring what was happening then. So what you are saying is that technology is bad after all?

    • Thank you. Yes, it was weird how the mainstream press completely ignored the many moves by the Fed at that time – I still don’t understand it or how people still claim that “no one saw this coming”. It was bizarre.
      My point is that disruptive change is disruptive. There’s a yin and a yang to it, and yesterday’s “productivity gains” are today’s “unemployment”. This is what fuels long term business cycles (Kondratieff Waves) and there is a downside to it all. The popular myth that disruptive technology is always good is very dangerous (and quite stupid).

  2. Impressive. I see what you mean about how things look different from the long perspective. You actually could see this coming.

    • Many people saw this coming, the bubble was huge. And it was NOT a &*^% “real estate bubble”!
      Sorry, lost in the moment there. 🙂 Seriously, this was important and it is worth noting what a terrible job was done reporting on this at the time – as well as since then.

  3. Did you read about the Mobil oil spill in Arkansas? It is getting very little coverage, there is a no fly zone over the effected area. The oil pipe was carrying a load 50% bigger than it was originally designed for, it was carrying tar sands and the product was flowing from north to south which was the reverse of it prior destination. It seems to have only been covered much on public outlets NPR and PBS. I wonder if this is a case where they thought computer sensors could make up for the under capacity of the old aging infrastructure.
    By the way good article. I still think part of the root cause was concentration of real (not housing) wealth. The Guardian has had a number of good articles as the Tory austerity cuts are really starting to hurt. Of course being a modern dangerous Tory party the rich see a gain. George Montibout (sp?) stated his article with the statement ” I think the world over people are basically decent and honest” “it is our current leaders I fear the most” he goes on to write about the legacy of poverty and slavery even amongst the downtrodden whites. He puts forth the idea of a minimum income and a land evaluation tax (which they apparently have in parts of Pennsylvania).
    Anyways good luck with your book. Part of me thinks you should write a primary one that is dumbed down a bit with a lot of data visualizations. And then a second one that is more wonkish.

    • Thanks! I am thinking about what needs to be written, and there are two books in here at least. The main point is that all this stuff over 6 years should be organized into a linear story that makes sense.
      The popular press baffles me sometimes. How they can miss very obvious stories and still spend so much time on Kardashians, etc. really escapes me. I don’t watch much teevee nooze so I really don’t know what the average person who relies on that is getting. It seems to me that you’d have to scan a lot of channels to know what is being portrayed across all of them – unless it’s quite uniform. I haven’t seen local news in decades.

  4. Not much to add but this is hard to argue with. Not every tech does create a bubble however right? So what was special about the internet or cars or whatever created the depression before 1929? I do like this in story form but if you do put this in a book you could devote a whole chapter on this, I would like that. When I read about the Fed did this or the market did that what I never have is context and that seems to be your strong suit, esp here.

    • Thanks! So many questions. 🙂
      Not every new tech creates a bubble, no. There seem to be more requirements than just tech – for example, it seems that advances in transportation and communication (which are closely linked) are the ones most likely to create bubbles – probably has to do with once disparate markets evening out. Also, there is a matter of timing – the market has to be in the mood to create a bubble. A question I have is “Why didn’t jet airplanes create a bubble around 1960?” and the answer seems to be that they came in at the end of a recession and had limited impact on both communication and cargo – but I’m thinking about it.
      What was before cars? Railroads, in the late 1870s. Tying together diverse markets into one continent-wide one created a huge bubble!
      I am thinking about bubbles, depressions, and what matters the most. It’s never quite the same thing twice, although they do seem to run through the economy in a similar way.
      I agree that context is always what is missing in daily reporting, and that’s why so many of my posts start at ground zero and explain the background. It’s setting the scene in storytelling. 🙂 Good training all around. I worry that I am a bit insulting when I go over what people might already know, so I try to make it both brief and somewhat amusing in its own right (such as putting in a joke or pithy comment).
      The problem I have with the news is the lack of rigor and discipline. I see so many stories that just don’t even come close to answering the who, what, when, where, and why that reporters should have.

  5. Pingback: “Who should I blame next for the results of my actions?” – The Devil | power of language blog: partnering with reality by JR Fibonacci

  6. I agree it seems like we are repeating everything all over again like Groundhog Day. We never seem to learn from history.

    • Yes, that is a good analogy. Except in Groundhog Day Bill Murray’s character learned something each time. 🙂 It’s starting to seem very obvious to me that basic wisdom is missing from our world, which is quite chilling.

  7. The reason that airlines did not create a bubble is that there was a Kenysian concensus in the 1960’s. Also I think electricity had more disruptive power than the automobile, factories and even farms went from labor intensive to being less so. Still all in all the most disruptive technology responsible for doubling the world’s population was the commercial creation of nitrogen.
    Oh and by the way Scientific American had a good article on the Arkansas oil spill. Apparently the new product (tar sands) in an old pipe requires higher temperatures and increased pressure. In a perfect world/political system I would be against the XL pipeline and frankly I am not sure The new pipes will have new expoxy and increased surveillance and the bad alternative of trains etc is worse. This debate reminds me a bit of the run up to the Iraq War. Most people who live paycheck to paycheck are energy poor and fuel costs have a big impact. With the way our suburbs are designed I think we are kinda doomed.

    • Good point on airlines. Electricity did not create a bubble and that may be because it was less transforming. But that is a good one to look into, you are right. Why not?
      I think you are right on the tar sands – higher pressure means more trouble. I have never been against the Keystone for most of the reasons given (seriously, we will continue to burn hydrocarbons for a long time) but that is a good reason to be against it.
      And yes, I think suburban design spells doom, too. It’s not a matter of a little more space between houses, it’s a matter of many miles to any kind of real “center”. Some of that can be retro-fixed but it will be expensive and require a lot of coordination. Some of that is going on, though!

  8. Pingback: Gold Down for the Long Run? | Barataria - The work of Erik Hare

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