There’s something about hundreds of billions of dollars vanishing overnight that begs a comparison to the 1929 market crash and the Great Depression.
Almost — but not yet.
The United States has seen the destruction of some of its biggest names in finance, thousands of lost jobs and threats to the stability of the world banking system. All in one week.
The losses are staggering, more than $1-trillion in taxpayer dollars pledged by the US government to mop up bad mortgage debt and prop up the financial system. The final tab could be far greater.
To put it in perspective for Wall Street and the world outside, news outlets have latched onto the 1929 crash and the subsequent Great Depression as their historical benchmarks.
Michelle Caruso-Cabrera, a reporter at business news cable network CNBC, told viewers it was ”one of the most historic weeks in financial and American history”.
Hold on a minute, market veterans and scholars say. It’s serious, because it has been preceded by a 13-month credit crisis that has gotten worse despite government efforts to solve it. But it has yet to reach the cataclysmic scale of the Depression.
”I’ve lived through plenty of debacles. Each time you go through it, it seems like the worst since 1929,” said Theodore Weisberg, a New York Stock Exchange member for about 40 years.
”The nomenclature of the word ‘crisis’ has cheapened,” said Roy Smith, a professor at New York University’s Stern School of Business and former partner at Goldman Sachs.
No one disputes that it is a profound crisis, but Depression-level may be overdoing it, said Allan Sloan, Washington Post and Fortune magazine columnist.
”I don’t think so, considering that the Great Depression had thousands of banks failing and people losing their life savings, 25% unemployment and social unrest and tent cities of the poor,” Sloan said.
Black Monday, Tuesday, Thursday
Financial earthquakes that have prompted fearful murmurings of the bad old days include the Asian financial crisis in the late 1990s and and the dot-com bust early in this decade that wiped trillions of dollars of paper wealth off the Nasdaq market.
Then there was October 1987, when stock markets around the world crashed. History books are spotted with numerous references to Black Mondays, Tuesdays and Thursdays.
It is clear that the current financial meltdown that killed Lehman Brothers, sold off Merrill Lynch and forced the US government to take over insurance provider American International Group could radically change nearly a century’s worth of financial policy.
Each faltered on debt and other interrelated, complex financial instruments that ensured a more rapid collapse than Wall Street and regulators could handle.
That is a key similarity to the crash 79 years ago, said Maury Klein, professor emeritus at the University of Rhode Island and author of Rainbow’s End: The Crash of 1929.
”What’s similar in each case is you have a situation where you’re starting to play in ever-larger stakes with things that you don’t understand,” he said.
But today’s overall US economic picture is quite different.
”With just 6% unemployment, we are having a debate as to whether we are even in a recession,” said Richard Sylla, professor of the history of financial institutions and markets at New York University.
Where will it end?
Prominent economic columnist Robert Samuelson wrote a piece in the Washington Post in July titled ”A Depression? Hardly.” He said he would write the same column now, but ”with less conviction”.
That is because there is no telling where the erosion will stop. The bad-bet loans made on homeowners during the recent US housing boom and shady trades could burrow deeper into the financial nervous system than anyone anticipated.
This can hurt regular people too. It may destroy their investments, further degrade home values and cost them their jobs. It may be hard, but not as hard as eating a loaf of bread as their sole daily meal before sleeping under the stars.
”The only question is whether the crisis is so deep that you can’t get at it at all,” said Columbia University professor and Council on Foreign Relations Senior Fellow Jagdish Bhagwati. ”We have instruments like the Federal Reserve coming in. Only the United States could do it in such a big way.”
The fear at the back of everyone’s mind is that the turmoil could spill into the real economy — ”the factories where they actually make things and retail establishments and transportation providers”, said Robert Bruner, dean of the University of Virginia’s Darden School of Business.
Federal Reserve chairperson Ben Bernanke and U.S. Treasury Secretary Henry Paulson are determined to avoid the mistakes of 1929, said Brad DeLong, economics professor at the University of California, Berkeley.
”They want to make their own, new mistakes.” – Reuters