Rome Wasn't Burnt In A Day [Housing Debacle III]
So, a friend asks me the other day, Why's everyone so excited? 7% down in one day is bad, but it's not like the market crashed 80%. And then I pulled up that Great Depression graph from the other day, and pointed to the beginning, between '30 and '32. See, here? Financial people are afraid that we're about here on this graph, near the beginning. That scares the crap out of them.
When we were taught about the Depression in high school, most of us got something like this: On October 29th, 1929, the US stock market crashed, the middle class lost of it's savings because of risky bets on the stock markets with borrowed money, and eventually a large fraction of the population was out of work. Herbert Hoover was President, and he didn't do anything, scorned the plight of the public, and it took Franklin Roosevelt ten years of trying to get the economy going again, and really things only took off when World War II started. Banks failed across America because of runs on the bank, and Social Security and our federal labor laws date from the New Deal period, when FDR was trying to get the country working again.
Not the highest level of detail, and unfortunately importantly misleading.
The other fact that is presently making economists and regulators extremely nervous is the experience of Japan in the last two decades. Running up to the late 80s, Japan was on an amazing real estate run-up, which led many in the US to believe that at any moment we would have effectively sold the country to Japan. Then the expansion ran out of easy money, the real estate bubble popped, and suddenly there were a very large number of banks in Japan that were badly underwater. Rather than cause a depression, Japanese regulators allowed banks to avoid the day of reckoning by allowing banks to only very slowly recognize that the loans they had on their books would never be paid back. Japan had a nearly decade-long recession, during which it became very difficult to enter the work-force, and people clung to their jobs for dear life. Japan has only recently begun to grow again, and their experience is one of the great cautionary tales about the results of allowing bad accounting to go unchecked.
When we were taught about the Depression in high school, most of us got something like this: On October 29th, 1929, the US stock market crashed, the middle class lost of it's savings because of risky bets on the stock markets with borrowed money, and eventually a large fraction of the population was out of work. Herbert Hoover was President, and he didn't do anything, scorned the plight of the public, and it took Franklin Roosevelt ten years of trying to get the economy going again, and really things only took off when World War II started. Banks failed across America because of runs on the bank, and Social Security and our federal labor laws date from the New Deal period, when FDR was trying to get the country working again.
Not the highest level of detail, and unfortunately importantly misleading.
- It took almost three years for the crash to happen, and another several years of bank failures. Black Thursday was just one day, but the entire fall took a long enough time that there were even occasional rallies within the long slide, and there is even an entire recession that happened in '37 that we're mostly not aware of anymore.
- Initially, the calls were to let the market sort itself out, that if all of these institutions had made major bad decisions, they should be allowed to fail, to shake out the good firms from the bad. After that had failed badly for a few years in a row, the modern regulatory regime for the financial industry was put into place.
The other fact that is presently making economists and regulators extremely nervous is the experience of Japan in the last two decades. Running up to the late 80s, Japan was on an amazing real estate run-up, which led many in the US to believe that at any moment we would have effectively sold the country to Japan. Then the expansion ran out of easy money, the real estate bubble popped, and suddenly there were a very large number of banks in Japan that were badly underwater. Rather than cause a depression, Japanese regulators allowed banks to avoid the day of reckoning by allowing banks to only very slowly recognize that the loans they had on their books would never be paid back. Japan had a nearly decade-long recession, during which it became very difficult to enter the work-force, and people clung to their jobs for dear life. Japan has only recently begun to grow again, and their experience is one of the great cautionary tales about the results of allowing bad accounting to go unchecked.