Aftershock To Economy Has A Precedent That Holds Lessons

[interestrateripoff]

http://www.nytimes.com/2011/08/13/business/financial-aftershocks-with-precedent-in-history.html?_r=1&ref=business

Like earthquakes, financial crises seem to be accompanied by aftershocks, like the one we’ve been living through this week. They can feel every bit as bad as the crisis itself. But economic history and academic research suggest they can set the stage for a sustainable recovery — and eventual sharp stock market gains.

The events of the last few weeks — gridlock in Washington, brinksmanship over raising the debt ceiling, Standard & Poor’s downgrade of long-term Treasuries, renewed fears about European debt and a dizzying plunge in the stock market — bear an intriguing resemblance to some of the events of 1937-38, the so-called recession within the Depression, with a major caveat: it was a lot worse back then. The Dow Jones industrial average dropped 49 percent from its peak in 1937. Manufacturing output fell by 37 percent, a steeper decline than in 1929-33. Unemployment, which had been slowly declining, to 14 percent from 25 percent, surged to 19 percent. Price declines led to deflation.

“The parallels to what is happening now are very strong,” Robert McElvaine, author of “The Great Depression: America, 1929-1941” and a professor of history at Millsaps College, said this week. Then as now, policy makers were struggling with how and when to turn off the fiscal stimulus and monetary easing that had been used to combat the initial crisis.

The events of the last few weeks — gridlock in Washington, brinksmanship over raising the debt ceiling, Standard & Poor’s downgrade of long-term Treasuries, renewed fears about European debt and a dizzying plunge in the stock market — bear an intriguing resemblance to some of the events of 1937-38, the so-called recession within the Depression, with a major caveat: it was a lot worse back then. The Dow Jones industrial average dropped 49 percent from its peak in 1937. Manufacturing output fell by 37 percent, a steeper decline than in 1929-33. Unemployment, which had been slowly declining, to 14 percent from 25 percent, surged to 19 percent. Price declines led to deflation.

.....

Are we at similar risk today? David Bianco, chief investment strategist for Merrill Lynch Bank of America, told me this week that “the market is collapsing faster than any fundamentals would warrant.” The possibility that the United States faces a recession as bad as 1937’s seems far-fetched. Nonetheless, Mr. Bianco notes that the market is now pricing in an 80 percent chance of recession, one likely to be more severe than in 1991. (He said Merrill Lynch places the odds at 35 percent.) He noted that there had been only three instances when such a steep market decline was not followed by recession: 1966, 1987 (after the October stock market crash) and 1998 (after the implosion of Long Term Capital Management.) “Confidence is shaken and rapidly falling,” he said, a problem worsened by falling stock prices.

.....

Historians can’t know if the 1938 recovery, strong as it was, would have been enough to finally end the Great Depression. World War II intervened.

The end paragraph highlights the slight problem, the depression ultimately ended because of global war.

The 87 crash no one is sure why it happened, the 98 implosion there was a huge bailout of the banking system via IMF loans to Asian countries which helped set the wheels in motion to the current crisis we are in now.

Although I'm certain if you look around you'll find similar patterns to other time points in history.

[The Masked Tulip]

We may yet prevail. That's a... a conceit. But... it's a healthy one. I wonder if the Emperor Honorius watching the Visigoths coming over the seventh hill truly realized that the Roman Empire was about to fall. This is just another page in history, isn't it? Will this be the end of *our* civilization? Turn the page.

Jean-Luc Picard, Captain, USS Enterprise

[wonderpup]

Are these aftershocks or has the real party not quite started yet?

['Bart']

Like earthquakes, financial crises seem to be accompanied by aftershocks, like the one we’ve been living through this week. They can feel every bit as bad as the crisis itself. But economic history and academic research suggest they can set the stage for a sustainable recovery — and eventual sharp stock market gains.

Well, when the financial crisis finally does hit (2008 was merely a warm up), we'll have something to look forward to.

[Flatdog]

Snip:

“the market is collapsing faster than any fundamentals would warrant.”

What, exactly, is a fundamental, and why would it warrant anything?

Gobbledygook, all of it IMHO.

[Enemy of the State]

Well, when the financial crisis finally does hit (2008 was merely a warm up), we'll have something to look forward to.

Yes, they are trying to pass this off as an 'aftershock' to the main event, when in fact it is just a tremor that preludes the main event. Got to keep those public confidence levels up!

[Monkey]

i souldnt way its is like an earthquake, as that would imply the main event was 2008 and things will be bumppy but get better.

i prefer to say its a tsunami, 2008 was the tide going out and we can all see that, and now we are waiting for the mother of all waves to hit land. that has yet to happen

[A.steve]

“the market is collapsing faster than any fundamentals would warrant.”

What, exactly, is a fundamental, and why would it warrant anything?

I think I can define what is meant by that quote. Analysis is divided into two kinds: technical and fundamental. Technical analysis amounts to looking for trends and patterns in price data... it is not concerned at all with the nature of the asset or how it may be influenced by non-price factors. Fundamental analysis is everything else... it involves trying to understand the asset in question; how it relates to trends in popular culture; availability of raw materials; demographic change; effects of climate and politics - etc. etc.

Saying that something is happening faster than fundamentals would warrant, to me, is extremely strong evidence that the wrong fundamentals have been considered. Essentially, it's an admission of utter confusion - the spokesperson hasn't worked out that the reason that prices are falling is because a bubble in debt financing, which emerged because the wrong 'fundamentals' were considered, has burst... pointing to large-scale systemic defaults - of one kind or another.

[interestrateripoff]

Quite. If anyone wants an academic take on the likelihood of roiling sovereign defaults some time after the initial banking crisis need to look no further than Rheinhart and Rogoff's "This Time It's Different".

EDIT: Abstract...

http://www.nber.org/~wbuiter/cr1.pdf

Got that to read, along with several other books. Need to finish cloud atlas first.

However it possible is different this time as I don't think at any other time point have so many nations been utterly screwed.