How does today’s financial crisis compare with that of the 1930s and the beginning of the Great Depression?
—Landon Romano, Johannesburg
Without doubt, you can pick a statistic here and a data point there, lump them together and cook up a case that it’s 1929 all over again.
But you shouldn’t. The current crisis is dire and will certainly worsen. In previous columns, we’ve predicted very tough economic conditions for the next several quarters, as the financial system’s deleveraging is followed by a great consumer deleveraging. But for myriad reasons, we don’t see the second Great Depression looming. In fact, to paraphrase Franklin Delano Roosevelt, the main thing to be pessimistic about today is pessimism itself.
Again, we know that real pain lies ahead. But we also believe that when the pain eases—and it will—the global economy will be stronger and sounder than ever before. We just have to get there, which we will, provided we stop fixating on, well, the exact question posed in your letter.
Not to criticize you for asking! You’re far from alone. And we’re glad to have the opportunity to counter some financial journalists and all-purpose pundits who, like weather forecasters during a hurricane, are becoming somewhat giddy as they forecast the biggest “storm” of their careers. Their excitement is understandable, but perhaps some perspective has been lost in the fray.
Let’s start with all the comparisons to the conditions that surrounded the economy’s prolonged collapse some 80 years ago. Sure, current times hold similarities to the 1929-33 period, but they’re dwarfed by the differences.
In 1930, for instance, the Smoot Hawley Act ushered in a decade of restrictive tariffs and international discord. Today’s crisis is marked by a high degree of free trade and global cooperation. In 1933, the National Industrial Recovery Act encouraged labour and industry cartels. The result was decreased domestic competitiveness—again, hardly the current situation, as US companies have never been in better fighting form.
Finally, a second Great Depression is highly unlikely today because of the very institutions created to prevent one, the most prominent example being the Federal Deposit Insurance Corp., with its authority to insure deposits, which is critical to stabilizing the banking system.
Not all doomsayers are raising the spectre of the Great Depression. Some assert we’re headed into a deep recession like the early 1980s, when the US had negative gross domestic product in five of eight quarters, with the worst quarter being down 7.8%. Inflation approached 15%, the prime rate was at 21.5%, and unemployment peaked at 11%. As noted, our economic indicators are sure to worsen, but such numbers are miles from where we stand today.
Still other doomsayers predict we’re marching straight into French-like socialism. Au contraire. The US government has a long history of handling interventions with a fast-in, fast-out approach. In 1984, to take a recent example, it bought 80% of Continental Illinois Bank, held it for 10 years, then sold it to Bank of America Corp. In 1989, it created the Resolution Trust Co., which cleaned up the savings-and-loans crisis, then quickly closed up shop. The Troubled Asset Relief Program looks to be no exception to this line of attack, as its loan terms give banks operating flexibility and strongly incentivizes them to get free of the government’s investment within five years.
Our bottom line: Managers should stop looking back to find out what the future holds. It’s a pointless exercise given the facts. Worse, it’s counterproductive, if not dangerous. To get through this crisis, as with every crisis, leaders need to talk about reasons for confidence. America is a country filled with energy and creativity; it’s a culture that exalts entrepreneurs, the source of every recovery. Its system of higher education is the envy of the world. The country is filled with thousands of strong companies with sustainable cash flows. And as daunting as the downturn is sure to become, it will also spawn vast opportunity, as people begin to heed Warren Buffett’s famous advice, “Be fearful when people are greedy, and greedy when people are fearful.”
We’re not Pollyannas. It’s the human condition to claim your own difficulties are “the worst of times”. Consider, however, a different take. We’re experiencing a painful but necessary correction, which will eventually result in a healthier, deleveraged society with a renewed focus on productivity, intensified innovation and improved governance. The end is not here. A new beginning awaits.
©2008/BY NYT SYNDICATE
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