"The past is not dead. In fact, it's not even past."
-- William Faulkner
On Oct. 5, 1930, Alexander D. Noyes, then financial editor of The New York Times, reflected on the American economy a year after the great stock market crashes of October 1929. He began:
We have come to a curious turn in the economic road. Things have happened during the past 12 months in our financial and economic history that we had taught ourselves to believe would never happen again.
It sounds eerily familiar, doesn't it? But it gets better. He continued:
We had contrived new formulas for expanding credit which were to make us independent of the vicissitudes and insecurities of other periods. ... One of the cardinal maxims of the last three years had been that the "business cycle" was abolished; if, indeed, it had not always been a myth.
Sadly, those words strike a chord with us almost 80 years later. Indeed, if you replace Noyes' early 20th-century references with 21st-century ones, you could swear he was writing today.
Those who do not learn from history ...
In the course of those 80 years, multiple generations of Wall Street brokers, analysts, and investors have come and gone. It shouldn't come as a surprise, then, to find that some crucial lessons of the Great Depression were largely forgotten or disregarded by Wall Street -- with tragic consequences.
Despite the fact that our economy has experienced a number of recessions and several periods of volatility since those years, we didn't think we would again see iconic banks like Citigroup
Why? Because we thought we had powerful government agencies and Depression-era legislation to protect us against full-scale financial disaster. We have bond rating agencies like Moody's
Unfortunately, all of these agencies failed us miserably over the past decade, because of either apathy, impotence, ignorance, corruption, or some combination of all four.
We also failed ourselves. As a society, we should have known better than to overleverage our personal finances with mortgages we couldn't afford and overcharge credit cards issued by the likes of Discover Financial
It was no new idea for energetic salesmen to persuade the customer to buy more than he had meant to buy, perhaps more than he thought he could afford. "Intensive salesmanship" is as old as the [18]50's, but it was certainly never carried to the extremes of 1928 and 1929. The picture presented in the three or four year period before last October was of consumers who were taught, with immense success and with great applause from Wall Street, to buy with money which they did not have.
The parallels are becoming clearer and clearer.
... are doomed to repeat it?
When Noyes was writing, the full scope of the Great Depression was yet to befall the country -- but many of the elements in play then look very familiar: rising unemployment, a government struggling to respond, and a financial system in shambles.
Noyes was encouraged, however, that Americans in 1930 had already begun to discard "the dangerous illusions of the past two years and [were] making ready to meet and turn to the American community's advantage whatever realities may be ahead of us."
Something similar seems to be happening today. In fact, in the three months ending in December, American household debt decreased by 2% -- the first decrease on record -- followed by an additional decline of 1.1% in the first quarter of 2009. The personal savings rate is 5.7% -- the highest level since 1995.
That trend is likely to continue regardless of the government's many efforts to get the banks to pump more credit into the hands of consumers. While massive de-leveraging is bad for the economy in the near term, it's what we desperately need if we're to return to healthy economic growth over the long run.
Writing a different future
In the 10 years following Noyes' observations, the stock market remained a roller coaster, and despite some hopeful rallies, it never even came close to the highs of October 1929. Indeed, the market's total return from 1931 to 1940 was essentially zero, despite the significant volatility it endured in the meantime.
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